Grainger (GWW) to Grow on Sales Initiatives, Risks Linger - Analyst Blog
On Apr 21, 2015, we issued an updated research report on W.W. Grainger Inc. GWW. This leading broad-line supplier of maintenance, repair and operating (MRO) products reported first-quarter 2015 earnings per share of $3.10, falling short of the Zacks Consensus Estimate of $3.14.
Citing slower macroeconomic growth, lower-than-expected sales from the Canadian multichannel model and increased investment spending, Grainger lowered its 2015 guidance and now expects sales growth in the range of 1% to 4% and earnings per share of $12.25 to $12.95. The company previously projected 3% to 7% sales growth and earnings per share of $12.60 to $13.60.
Grainger also announced plans to buy back $3 billion worth of stock over the next three years. Year to date, the company has repurchased $150 million of shares. In 2015, the company will buy back an incremental $1 billion of stock, higher than the previous target of $400 million. The incremental share repurchases are expected to be accretive to 2015 earnings in the range of $0.08 to $0.12 per share.
The devaluation of the Canadian dollar in the quarter along with a deteriorating macroeconomic environment has pressured the company’s Canadian business. Moreover, the recent plunge in oil prices will affect the segment’s results as about 20% of the Canadian business is directly tied to the oil and gas markets.
Grainger’s gross margin continues to be under pressure due to large account customer growth and a continued low inflationary environment. Management expects gross margin in 2015 to remain essentially flat with that in 2014. It is to be noted that large customers and single-channel online business, carry lower gross margins.
Nevertheless, Grainger is focused on expanding its product offerings, sales force and the share of its private label products, which will lead to long-term growth. Acquisitions will also remain a key growth driver. Management has increased the estimated 2015 investment spend to $150 million from the prior estimate of $130 million.
Grainger now plans to add 400 new sales representatives -- double the prior target. However, this will create expense headwinds in the near-term in addition to lower expense leverage on lower sales volume.
We believe Grainger is poised to benefit from its new strategy in key international markets. In Europe, it restructured its Fabory business and launched a single channel Zoro model, replicating its earlier success. The company also continues to invest in eCommerce, one of Grainger’s most efficient channels as it is reportedly growing twice as fast as other channels and is deemed its most profitable channel.
Grainger currently carries a Zacks Rank #3 (Hold).
Key Picks from the Sector
Some better-ranked stocks within this sector include RBC Bearings Inc. ROLL, AO Smith Corp. AOS and Codexis, Inc. CDXS. While RBC Bearings sports a Zacks Rank #1 (Strong Buy), AO Smith and Codexis carry a Zacks Rank #2 (Buy).
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