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Grainger (GWW) Q4 Earnings: Disappointment in the Cards?

Zacks Equity Research

W.W. Grainger, Inc. GWW is scheduled to report fourth-quarter 2016 results on Jan 25, before the opening bell.

Last quarter, the company posted a positive earnings surprise of 1.32%. Further, Grainger’s earnings outpaced the Zacks Consensus Estimate in the past four quarters, with an average beat of 3.71%.

Let’s see how things are shaping up prior to this announcement.

W.W. Grainger Inc. Price and EPS Surprise


W.W. Grainger Inc. Price and EPS Surprise | W.W. Grainger Inc. Quote

Factors at Play

For fourth-quarter 2016, Grainger is projecting sales growth of -1–3%, while earnings per share will range between $2.27 and $2.57. For 2016, the company maintained its sales growth forecast of 1.5–2.5% and its earnings per share guidance of $11.40–$11.70. The guidance reflects the performance of the company in the prior three quarters of 2016, along with the expectation of consistent modest sales growth in the fourth quarter.

For 2016, Grainger estimates gross margins to be down 170–180 basis points (bps). The company continues to witness gross profit pressure due to unfavorable price cost spread for the businesses in the U.S. and Canada, along with faster growth of the lower-margin single channel businesses. Gross margin pressure is likely to remain in the fourth quarter.

For the full year, operating margins are projected at 12.3–12.5%, down 100–120 bps year over year. Grainger’s Canada segment continues to underperform as a result of a challenging environment and operational issues related to a SAP implementation. Due to service gaps stemming from the systems transition, the company has been unable to pass on price hikes to customers this year. This has been putting pressure on gross margins.

For the fourth quarter, Grainger anticipates operating expenses to increase as a percentage of sales compared with the third quarter due to the loss of a selling day, three months of depreciation for the new distribution center in New Jersey versus two months in the third quarter and the hiring of 30 inside sales representatives in the fourth quarter.

In addition, multiple branches in the Southeast and the company’s Jacksonville, FL distribution center were closed due to the Hurricane Matthew. This is likely to affect the fourth-quarter sales. Moreover, weak demand, gross margin pressure and unfavorable operating expenses are also anticipated to hurt Grainger’s results.

Share Price Performance

In the last six months, Grainger has outperformed the Zacks classified Industrial Services subindustry with respect to price performance. The stock has gained 13.4%, more than the industry’s gain of 10.3%, over the same time frame.


Earnings Whispers

Our proven model does not conclusively show that Grainger is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. However, that is not the case here, as you will see below.

Zacks ESP:  Grainger has an Earnings ESP of -0.42%. That is because the Most Accurate estimate is $2.35, while the Zacks Consensus Estimate is pegged at $2.36. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Grainger’s Zacks Rank #3 increases the predictive power of ESP. However, the company’s negative ESP makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Deere & Company DE has a positive Earnings ESP of 9.80% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

iRobot Corporation IRBT has an Earnings ESP of +2.56% and a Zacks Rank #3.

Johnson Controls International plc JCI has an Earnings ESP of +1.96% and a Zacks Rank #3.

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