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W.W. Grainger (GWW - Analyst Report) delivered sales growth of 11% for the month of July 2012 compared with a sales growth of 21% in July last year.
Acquisitions added 5 percentage points to growth. Organic sales increased 8% with higher volume and pricing contributing 4 percentage points each. However, the growth was partially offset by a 2 percentage point dip from unfavorable foreign exchange.
Despite the hot weather experienced in many regions during the month, the company stated that the sales of seasonal products did not contribute to sales growth for the period.
Geographically, daily sales in the U.S. increased 6% with volume contributing 2 percentage points and price adding 4 percentage points. Among the end-markets, Heavy and Light Manufacturing increased in the high single-digits, while Retail and Commercial went up in the mid single-digits. Government and Natural Resources upped in the low single-digits and Reseller and Contractor remained flat.
Canada saw an increase of 10%, driven by a 14 percentage point increase in volume and 2 percentage point rise in price, partially offset by negative foreign exchange impact of 6%. In local currency, sales increased 16%, driven by growth in the Commercial, Construction, Oil and Gas, Retail/Wholesale, Forestry and Utilities end-markets.
Daily sales at the company's Other businesses, which include operations in Europe, Japan, Mexico, India, Puerto Rico, China, Dominican Republic and Panama, increased 71%, primarily driven by solid businesses in Europe and Brazil, which were acquired over the last 12 months. Excluding acquisitions, sales increased 17%, driven primarily by strong growth in Japan.
The company also benefited from an extra selling day in July 2012 compared with July 2011. Looking forward, August will have 23 selling days, the same as last year while the third quarter of fiscal 2012 will have 63 selling days, one day less than the prior-year quarter.
Grainger reported revenues of $2.25 billion in the second quarter of 2012, up 12% from $2 billion in the year-ago period. Revenues fell short of the Zacks Consensus Estimate of $2.26 billion. The improvement in revenue in the quarter was attributed to volume growth, favorable pricing and also acquisitions, partly offset unfavorable foreign exchange.
The July sales growth rate is the lowest so far this year. Grainger’s sales growth has trailed from the highest level of 18% in February to record 12% in April, 13% in May and 12% in June. For 2012, the company maintained its forecast of sales growth in the range of 12% to 14%
Grainger remains focused on expanding its product offerings and growing the share of its private label products. The company currently offers 413,000 products and has a long-term vision to expand the product count to 500,000 by 2015. The company has historically seen annual sales growth of approximately 2% from products added through the program.
Grainger also focuses on expansion programs for strengthening its businesses across its operating regions, mainly in Asia and Latin America. Revenues from Other businesses continue its solid growth run, reflecting strong growth in Japan and Mexico and acquisitions.
However, the recent slowdown in the sales growth rate raises our concern. Margins are expected to remain under pressure due to Grainger’s accelerated investments in product line expansion, sales force expansion, eCommerce, inventory services, distribution centers and international expansion.
Furthermore, Amazon (AMZN - Analyst Report) has recently launched www.AmazonSupply.com, a website offering more than 500,000 parts/supplies to business, industrial, scientific and commercial customers at competitive prices. Grainger, so long a dominant player in industrial maintenance, repair & operations distribution, would face pricing pressure with the entry of Amazon.
The company currently retains a Zacks #3 Rank (short-term Hold recommendation).
Illinois-based Grainger is a leading North American distributor of material handling equipment including safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, etc. The company’s services comprise inventory management and energy efficiency solutions. The company competes with Applied Industrial Technologies Inc. (AIT - Snapshot Report) and WESCO International Inc. (WCC - Analyst Report).