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Acquisitions Benefit Grainger, Soft Monthly Sales Still a Drag

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We issued an updated research report on W.W. Grainger, Inc. (GWW - Free Report) on Jun 24, 2016. The company is set to benefit from acquisitions and focus on restructuring activities. Weakening monthly sales, lower oil and gas prices, currency headwinds and weak macroeconomic conditions in Canada will weigh on near-term results.

Grainger’s primary areas of focus are sales and earnings growth in the existing markets, selective expansion into new markets and ongoing development of the global infrastructure. In 2015, Grainger acquired Cromwell Group (Holdings) Limited, along with its subsidiaries. Cromwell's product strength and customer relationships, when combined with Grainger's expertise in supply chain and eCommerce, will accelerate growth in the latter’s business while allowing it to grow the online MRO model in the U.K.

Grainger thus sees the opportunity to grow its MRO online model in the U.K., much like its previous successes with MonotaRO in Japan and Zoro in the U.S. Additionally, this acquisition will enable the company to accelerate the profitability of its single-channel online business – Zoro Germany.

Further, Grainger reiterated its plans to close an additional 55 branches in 2016 in an effort to realign the business with current demand. In first-quarter 2016, the company closed 5 branches in the U.S. and expects to close 50 more during the remainder of the year. It anticipates gains on sales of restructuring-related assets to be $5–$10 million pretax over the rest of the year.

However, Grainger reported a meager 1% increase in monthly sales in May following a 4% rise in April. According to the company, daily sales gain in June will be about the same as the sales results reported for May. This does not bode well for second-quarter revenues.

Grainger cut its outlook for 2016 sales growth to 0%–6%, which reflects increased gross profit pressure as well as higher operating expense. The company now expects price to be a little worse, down 2% and foreign exchange to be down 1% – both for the full year. Given the deflationary environment, Grainger remains cautious on gross margins and lowered its gross margin expectations.

Weakness in the oil and gas industries continues to affect sales to Canadian customers, given that about 20% of the business is directly linked to these markets. Further, strength in the U.S. dollar and weak economy in Canada remain headwinds for the company. Moreover, operating results in Canada will remain under pressure for much of 2016.

Grainger currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the same sector are Ashtead Group plc (ASHTY - Free Report) , Neff Corp. and Harsco Corp. . While Ashtead Group and Neff Corp. sport a Zacks Rank #1 (Strong Buy), Harsco carries a Zacks Rank #2 (Buy).

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