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E-commerce, Favorable Markets Drive Growth at Grainger (GWW)

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We issued an updated research report on W.W. Grainger, Inc. (GWW - Free Report) on Aug 14. The company is expected to benefit from continuous investments in e-commerce and digital capabilities, focus on strengthening its large and mid-sized customer base as well as the latest tax reform.
Sound Q2 Results
Grainger’s recently reported sound second-quarter 2018 results wherein adjusted earnings per share of $4.37, improving 9% year over year. Grainger reported revenues of $2,860 million, up 9% from the prior-year quarter figure of $2,615 million.  Grainger’s second-quarter performance was driven by operating expense leverage, lower tax rate and share count.
Upbeat Guidance
Backed by second-quarter 2018 performance, Grainger raised 2018 sales and earnings per share guidance. The company now expects sales to be up 5.5-8.5% year over year. Volume growth is anticipated to outpace the market by 300-plus basis points this year. Further, the outlook for earnings per share is now $15.05-$16.05. Operating margin is expected to range between 11.5% and 11.9%, higher than the prior year by 50 to 90 basis points. Grainger expects price mix to improve and 50 basis points of COGS deflation for the year, driven by its internal product cost initiatives. Moreover, as a result of the U.S. tax reform, Grainger expects an effective tax rate of 23 to 26% for the year 2018.
E-commerce to be a Catalyst
Grainger’s e-commerce sales, representing around 51% of total sales in 2017 continues to improve. Sales were primarily buoyed by the launch of and other electronic purchasing platforms in the United States and across all single channel online businesses. The company is focused on improving the end-to-end customer experience by making investments in e-commerce and digital capabilities and executing continuous improvement initiatives within its supply chain. Notably, it intends to continue to reduce cost base.
Improving Markets Bode Well
Grainger generates revenues from the distribution of MRO (Maintenance, Repair and Operating) supplies and products and related services. In the United States, business investment and exports are two major indicators of MRO spending. Business investment is likely to remain strong in 2018, supported by expanding global markets, lower capital costs and an improving regulatory environment. Further, exports and business non-residential investment are expected to improve. This bodes well for Grainger and other players like Harsco Corporation (HSC - Free Report) , Codexis, Inc. (CDXS - Free Report) and HD Supply Holdings, Inc. (HDS - Free Report) which fall under the same industry.
Focus on Consumer Growth to Boost Sales
Further, Grainger will continue its efforts to strengthen relationships with both large and mid-sized customers. The company has been witnessing increasing volumes across all customer groups lately. Large customer volume in the United States increased 9% in the second quarter from the prior-year quarter and also surpassed management’s expectations. Mid-size customer volume also surpassed expectations with growth of 29% in the quarter. Volume and the number of transactions per customer are increasing and the company is also witnessing increased traffic in all branches. Grainger continues to re-engage lapsed customers and acquire new ones.
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