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Grainger's Earnings Beat in 1Q

GWW

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W.W. Grainger, Inc. (GWW - Analyst Report) reported earnings per share of $2.94 for the first quarter of 2013, up 14% year over year from $2.57 and ahead of the Zacks Consensus Estimate of $2.73.

Operational Update

Revenues in the quarter were $2,280 million, up 4% from $2193 million in the year-ago period but missed the Zacks Consensus Estimate of $2,300 million. On a daily basis, sales improved 6% on volume growth, pricing, acquisitions and increase in sales from seasonal products, offset by a negative currency impact. On a daily basis, sales increased 8% in January, 6% in February and 3% in March.

Daily sales growth deteriorated in March compared with the prior months due to the timing of the Easter Holiday, which reduced daily sales growth by 2 percentage points. Uncertainty in the United States surrounding sequestration also led to a decline in sales to the government end market during the month.

Operating income in the quarter increased 13% to $343 million, primarily driven by higher sales volume, improved gross margins and operating expense leverage as expenses grew at a slower rate than sales. Operating margin expanded 120 basis points to 15.1% in the quarter.

Segment Performance

Revenues from the United States segment increased 4% year over year to $1.77 billion, driven by favorable volume, price growth and acquisitions. Solid growth was witnessed in the light and heavy manufacturing, natural resources, commercial and contractor end markets. On a daily basis, sales improved 7% in January and February and 4% in March. Operating income rose 11% to $331 million, driven by higher sales, higher margins and positive expense leverage.

Revenues from the Acklands-Grainger business in Canada climbed 4% to $283 million, led by strong growth in the commercial, construction, oil and gas, forestry, and light manufacturing end markets. On a daily basis, segment sales improved 8% in January and February and 3% in March. Operating income in Canada was up 11% to $32.8 million, helped by higher sales and positive expense leverage.

Revenues from Other businesses (which include Asia, Europe and Latin America) increased to $247.9 million from $238.9 million in the year-ago quarter, driven by strong growth in Japan and acquisitions in Brazil. The segment reported an operating profit of $8.2 million, down from $10.7 million in the year-ago quarter. Operating losses in Brazil and lower earnings in some of the smaller businesses in Asia and Latin America led to the decline, somewhat offset by strong earnings growth in Japan and operating earnings growth in Europe.

Financial Position

Grainger had cash and cash equivalents of $485 million as of Mar 31, 2013 compared with $452 as of Dec 31, 2012. Long-term debt stood at $454.5 million as of Mar 31, 2013, compared with $467 million as of Dec 31, 2012.

The company generated cash flow from operating activities of $176.4 million during the quarter, up from $106 million in the prior-year quarter. Grainger expended $43 million in capital expenditures during the quarter compared with $41 million in the prior-year quarter. Grainger paid dividends worth $57 million in the quarter and spent $70 million to buy back 3.15 million shares. The company has approximately 5 million shares remaining in its share repurchase authorization.

Outlook

Grainger reaffirmed its EPS guidance in the range of $11.30-$12.00 per share for fiscal 2013, up from the prior guidance of $10.85-$12.00 per share. Grainger, however, increased its sales growth guidance to a new range of 5% to 9%, up from the prior 3% to 9%.

Our Take

Grainger continues to expand its product portfolio and 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. Additionally, it focuses on expansion programs for strengthening 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 its most profitable channel. Grainger’s target is to increase e-commerce sales from the current 30% to 50% by 2015. This channel also carries higher margins as it requires lower selling, general and administrative costs.

However, the recent slowdown in sales is a concern. Grainger has an incremental $160 million of growth spending in the pipeline for 2013. Even though these initiatives will lead to additional share gains in the future, it will weigh on margins in the short term.

Grainger is a leading North American distributor of material handling equipment, safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, cleaning and maintenance supplies, forestry and agriculture equipment, building and home inspection supplies, vehicle and fleet components, and various aftermarket components.

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

Grainger’s peers such as Codexis, Inc. , Hudson Technologies Inc. (HDSN), and TMS International Corp. , are yet to announce their first quarter earnings results.

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