A month has gone by since the last earnings report for W.W. Grainger (GWW Quick QuoteGWW - Free Report) . Shares have added about 4.1% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is W.W. Grainger due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Grainger Q2 Earnings and Revenues Surpass Estimates

Grainger reported second-quarter 2020 adjusted earnings per share (EPS) of $3.75, which beat the Zacks Consensus Estimate of $3.48 by 8%. However, the bottom line declined 19% year over year primarily on account of lower operating earnings that were partially offset by lower average shares outstanding.

During the second quarter, Grainger recorded a $109 million pretax loss from the sale of the Fabory business. Including this, earnings came in at $2.10 in the reported quarter. The figure plunged 55% from the year-ago quarter’s $4.67.

Grainger’s revenues declined 2% to $2.84 billion from the prior-year quarter figure of $2.89 billion. The top line surpassed the Zacks Consensus Estimate of $2.75 billion.

Daily sales for the quarter decreased 1.9% compared with the prior-year quarter. The decline in sales was primarily due to volume decreases including unfavorable product mix from heightened levels of pandemic-related sales, and decreased volume of non-pandemic products. Foreign exchange had an unfavorable impact of 10 basis points.

Operational Update

Adjusted cost of sales increased 3% year over year to $1,821 million. Gross profit was down 9% year over year to $1,016 million. Gross margin contracted to 35.8% in the quarter under review from 38.7% in the prior-year quarter primarily due to pandemic-related impacts, including product mix and increased freight expense, particularly in the U.S. segment. The continued business unit mix impact from faster growth in the lower-margin endless assortment businesses was also instrumental in lower gross margins.

Grainger’s adjusted operating income in the second quarter declined 16% to $315 million from the $377 million in the prior-year quarter. Adjusted operating margin contracted 190 bps year over year to 11.1% in the quarter, mainly due to lower gross margins.

Financial Position

The company had cash and cash equivalents of $1,603 million at the end of second-quarter 2020, significantly up from $360 million at 2019 end. Cash provided by operating activities increased to $476 million in the first half of 2020 from the year-ago comparable figure of $450 million.

Long-term debt was $3,301 million as of Jun 30, 2020, compared with $1,914 million as of Dec 31, 2019. The company returned $86 million to shareholders through dividends in the quarter. Earlier, Grainger had announced that it is pausing share repurchases in the wake of the coronavirus pandemic.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 11.94% due to these changes.

VGM Scores

At this time, W.W. Grainger has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, W.W. Grainger has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.