Grainger Beats, Focuses on Growth

W.W. Grainger, Inc. (GWW - Analyst Report) reported third-quarter EPS of $1.88 per share. This includes a one-time gain of 37 cents per share from the step-up of its investment in MonotaRO Co. Ltd. after Grainger became a majority owner in September.

Excluding the one-time gain, Grainger’s third quarter EPS was $1.51, which was above the Zacks Consensus Estimate of $1.34, but 15% down from last year’s EPS of $1.77. The company has surpassed market expectations for the seventh consecutive quarter.

The company posted revenue of $1.6 billion, down 13.6% from $1.8 billion in the third quarter of 2008. GWW is experiencing weak demand as the economic slowdown is driving Grainger’s customers to idle or close facilities and delay purchases.

In the United States segment, Grainger witnessed a 14% drop in sales as demand remained weak in all its customer end-markets. After increasing marginally in the second quarter, sales to the government segment declined in the reported quarter, reflecting weakness among state agencies owing to budget cuts.

In the Canada (Acklands-Grainger) segment, sales were down 13%, an improvement compared to the 19% decline in the previous quarter. Sales were down 10% in local currency due to continued weakness in the forestry and natural gas industries, partially offset by growth in the oil and utilities markets.
 
Sales from Grainger’s other businesses increased 11% during the quarter, primarily due to the incremental sales from India, along with higher sales in China and Panama. Sales in Mexico, which represent 50% of the segment’s revenue, fell 21% due to the unfavorable impact of foreign exchange translation. Mexican sales were up 2% in local currency.
 
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.
 
Grainger recently increased its stake in MonotaRO to 53%. MonotaRO, which started as a joint venture between Grainger and Sumitomo Corp. in 2000, is a direct marketer of maintenance, repair and operating (MRO) supplies to businesses in Japan, the second largest industrial market in the world. This investment along with the acquisition of full ownership of Asia Pacific Brands India Private Limited, Grainger’s joint venture in India, reflects the company’s commitment to expand its presence in the global markets.
 
Also, the company remains focused on expanding its product offering and targets having almost 300,000 products in its 2010 catalog. The company said that the product-line expansion contributed $251 million in sales in the third quarter.
 
Given the company’s strong balance sheet (cash and cash equivalents of $672 million) and the ability to generate positive cash flow (operating cash flow of $508 million in the first nine months), we believe Grainger has adequate financial flexibility to pursue additional growth opportunities.
 
Acquisition
 
In a separate announcement, Grainger disclosed an all cash acquisition of Imperial Supplies, LLC from American Capital, Ltd. (ACAS - Analyst Report). The company did not disclose the terms of the deal, but said that the acquisition will be accretive to its 2010 earnings by 3-5 cents a share, including product and transportation cost savings.

Imperial, which had sales of $67 million in 2008, is a national distributor of quality maintenance products and aftermarket components for the vehicle and fleet industry.