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Grainger's 2Q Earnings Beat, Revs Miss

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W.W. Grainger, Inc. (GWW - Free Report) reported second-quarter 2013 earnings per share of $3.03, up 15% year over year from $2.63 and ahead of the Zacks Consensus Estimate of $2.96.

Operational Update

Revenues in the quarter were $2,381 million, up 6% from $2,249 million in the year-ago period. However, revenues missed the Zacks Consensus Estimate of $2,392 million. Sales improved 6% on the back of volume growth (4 percentage points), pricing (2 percentage points) and acquisitions (1 percentage points), offset by a negative currency impact of 1 percentage point. On a daily basis, sales increased 9% in April, 6% in May and 6% in June.

Looking at the customer end market in the United States, sales to light manufacturing increased in the high-single digits and sales to heavy manufacturing, commercial, contractor, and natural resources were up in the mid-single digits. Government and Retail were up in the low-single digits, while reseller was down in the low-single digits.

Gross profit increased 7% to $1,047 million year over year. Gross margin expanded 50 basis points to 44%, primarily driven by Canada and the Other Businesses. Operating income in the quarter increased 11% to $350 million, primarily driven by higher sales volume, improved gross margins and operating expense leverage. Operating margin expanded 70 basis points to 14.7% in the quarter.

Segment Performance

Revenues from the United States segment increased 7% year over year to $1.86 billion, driven by favorable volume, price growth and acquisitions. Solid growth was witnessed in the light and heavy manufacturing, natural resources, and commercial and contractor end markets. Operating income rose 9% to $339 million, driven by higher sales and positive expense leverage.

Revenues from the Acklands-Grainger business in Canada climbed 3% to $289 million driven by higher volume, favorable timing of the Easter holiday and incremental sales of flood-related products, partially offset by unfavorable foreign exchange.

By end-markets, growth was witnessed in construction, forestry and light manufacturing. Operating income in Canada was up 11% to $37.3 million, helped by higher sales and gross margins.

Revenues from Other businesses (which include Asia, Europe and Latin America) increased to $261.3 million from $249.1 million in the year-ago quarter, driven by strong growth in Mexico and acquisitions in Brazil. The segment reported an operating profit of $12.8 million, up from $11.2 million in the year-ago quarter, driven by earnings growth in the businesses in Japan and Europe.

Financial Position

Grainger had cash and cash equivalents of $489 million as of Jun 30, 2013 compared with $452 as of Dec 31, 2012. Long-term debt stood at $452 million as of Mar 31, 2013, compared with $467 million as of Dec 31, 2012.

The company generated cash flow from operating activities of $387 million during the first half of fiscal 2013, up from $238 million in the prior-year comparable period.

During the second quarter, Grainger paid dividends worth $67 million and spent $133 million to buy back 0.5 million shares. The company has approximately 4.5 million shares remaining in its share repurchase authorization.


Grainger increased its EPS guidance to the range of $11.40-$12.00 per share for fiscal 2013, up from the prior guidance of $11.30-$12.00 per share. However, Grainger tweaked its sales growth guidance to a new range of 5% to 8% as against the prior guidance of 5% to 9%.

Grainger expects foreign exchange to negatively impact the full-year sales by 1 percentage point. The company expects 4 to 10% daily sales growth for the remainder of the year.

Grainger projects gross margin expansion of 30 to 40 basis points for 2013. Grainger added that it is not planning any interim price increases for the remainder of the year owing to the low-inflation environment for commodities. Operating margin expansion is projected at 35 to 65 basis points for the full year.

Our Take

Grainger will continue to benefit from its focus on expanding its sales force, product offerings and strengthening its businesses across all operating regions, mainly in Asia and Latin America, as well as continued investment in e-commerce - its most profitable channel.

Furthermore, Grainger’s sound balance sheet, low debt level and cash flow allow the company to further invest in growth opportunities, raise dividends and reinvest capital through share repurchases. The company has been rewarding shareholders with consistent dividend hikes over the last 42 years, a record that only 3% of the S&P 500 companies can boast.

However, the recent slowdown in sales is a concern. Grainger has an incremental $150 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 ScanSource, Inc. (SCSC - Free Report) , Hudson Technologies Inc. (HDSN - Free Report) and TMS International Corp. are yet to announce their quarterly results.

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