Grainger Falls on Harsh Industrial Economy: Time to Dump?
Shares of W.W. Grainger, Inc. GWW fell over 6% following its third-quarter conference call on Oct 16 as its Senior Vice President of Communications and Investor Relations, Laura Brown, pointed out that volatile oil and gas prices, strong U.S. dollar and China’s economic slowdown has severely impacted its performance so far in 2015 and will continue to do so through rest of the year. This decline was the maximum in a day’s trade, over the past 30 days.
The distributor of maintenance, repair, and operating (MRO) supplies posted an 8% year-over -year decline in earnings per share to $3.30 in the quarter, impacted by challenging industrial economy in North America. Sales decline, lower gross margins and increase in operating expenses also hurt earnings.
Total sales for the quarter were down 1%. By month, daily sales declined 1% in July, 2% in August and were flat in September. Grainger’s gross margin contracted 110 basis points to 41.9% primarily due to faster growth with lower gross margin customers, fall in supplier rebates tied to lower-than-expected volume and decline in prices as against marginal cost inflation.
Coming to the segments, U.S. segment which accounted for 78% of total company revenues in the quarter were flat. Throwing some light on the segments performance, Brown pointed out that commercial, light manufacturing, retail and government were up in the low single digits, while contractor was down in the low single digits. Heavy manufacturing and reseller were down in the mid-single digits and natural resources were down in the high teens. She also stated that low oil prices continue to affect the company’s natural resources and heavy manufacturing customers.
Sales in Canada segment decreased 23% in the quarter and 8% in local currency. The 8% sales decrease consisted of 17 percentage points decline from volume, partially offset by 4 percentage points from acquisitions and 5 percentage points from price.
Sales performance in Canada was hurt by declines in the construction, oil and gas, retail, commercial, transportation, government and heavy and light manufacturing end markets. By month, daily sales in local currency declined 4% in July, 7% in August and 13% in September.
The company's slack results is in line with the recent weakness in key indicators. The ISM purchasing managers index was 50.2 in September, down from last year, indicating an economy no longer in expansion mode overall. The industrial production index has fallen for most of the year as well. The Canadian dollar has fallen 21%, copper prices are down 22%, cold roll steel prices are down 25%, and crude oil prices are down 60%.
Owing to a sluggish industrial market and difficult economic environment, Grainger has lowered its 2015 guidance. The company now expects sales growth of (0.5%) to +0.5% compared with the prior projection of 0% to 2%. The company has also slashed its earnings per share expectation to the range of $11.60 to $11.80 from the previous band of $12.00 to $12.50.
Grainger has bore the brunt of drop in the price of raw materials, which underscores the weak demand environment and oversupply of commodities. Moreover, companies like Codexis, Inc. CDXS, Barnes Group Inc. B and HD Supply Holdings, Inc. HDS, which also belong to the same sector where Grainger operates, will face significant headwinds due to harsh industrial economy.
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GRAINGER W W (GWW): Free Stock Analysis Report
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