Grainger Targets Long-Term Growth

W.W. Grainger, Inc. (GWW - Analyst Report) reported daily sales decline of 15% and 10%, respectively, for the first two months of 2Q09. The company is experiencing weak demand in all the customer end-markets and geographies. The economic slowdown is driving Grainger’s customers to idle or close facilities and delay purchases, thereby affecting the company’s top-line growth. The company expects to post lower sales in 2009, compared to the 2008 level.

However, the current economic conditions are not deterring the company from investing in long-term growth. Despite a weakening economy, Grainger continues to concentrate on increasing market share through its market expansion and product-line expansion programs.

In June 2009, the company announced its plans to acquire full ownership of its joint venture in India and to become a 53% majority owner of MonotaRO, a direct marketer of maintenance, repair and operating (MRO) supplies in Japan. Management believes the acquisitions will expand Grainger’s foot-print in these high potential MRO markets. Even in the domestic market, the company sees huge potential for expanding its market share as the small local and regional players are struggling to survive due to significant limited access to capital.

Given the company’s strong balance sheet (cash and cash equivalents of $258 million) and the ability to generate positive cash flow (operating cash flow of $531 million in 2008 and $42 million in 1Q09), we believe Grainger has adequate financial flexibility to pursue additional opportunities.

We maintain our Hold recommendation on GWW.