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On Sep 24, we maintained our Neutral recommendation on distributor of facilities maintenance, repair and operating supplies, W.W. Grainger Inc. (GWW - Analyst Report), based on expectations of growth opportunities through product and geographic expansion and e-commerce; partially offset by the recent slowdown in sales and impending pressure on margins.

Why Reiterated?

We appreciate Grainger’s focus on expanding its product offerings as well as gaining traction for its private label products. Grainger expects to increase its product count from the current 413,000 to 500,000 products by 2015. The company has historically seen annual growth of approximately 2% on sales from products added through the program.

The company continues to expand its businesses across its operating regions, mainly in Asia and Latin America. Grainger also continues to invest in e-commerce, as it is reportedly growing two fold compared to other channels and is deemed to be the company’s most profitable channel. In 2012, e-commerce sales represented 30% of the total company sales. Grainger’s target is to increase it up to 50% by 2015. This channel also carries higher margins as it requires lower selling, general and administrative costs.
On the flipside, Grainger's overall sales growth continued to show a downward trend. Sales growth has remained choppy in 2013, ranging from 8% in Jan and Apr 2013 to 3% in March. Growth in July and August remained at 4%, close to the year's slowest growth rate of 3% reported in March. According to Grainger, daily sales growth in the U.S. in September is trending above August level. However, sales is reportedly lower than August outside the U.S. due to slowing sales in local currency and unfavorable foreign exchange. Thus, overall September sales growth so far is in line with August.

Grainger has projected incremental growth-related spending of $150 million. Even though these initiatives will lead to additional share gains in the future, it will weigh on margins in the short term.

Other Stocks to Consider

Grainger retains a short-term Zacks Rank #4 (Sell). Other industrial product makers with favorable Zacks Rank are EnPro Industries, Inc. (NPO - Snapshot Report) and Gorman-Rupp Co. (GRC - Snapshot Report), both carrying a Zacks Rank #1 (Strong Buy), and Codexis, Inc. , which carry a Zacks Rank #2 (Buy).

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