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Grainger May Sales Rise 6%, Shares Fall on Canada Sales Dip

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The leading broad line supplier of maintenance, repair and operating (MRO) products W.W. Grainger, Inc. (GWW) reported a 6% year-over-year increase in sales in May 2014. The growth has exceeded the prior-month increase of 5% and is also up from the growth rate of 5% achieved in the same period last year.

However, Grainger’s shares fell over 3% and closed at $260.21 on Jun 12,  primarily due to decline in daily sales in Canada which continues to affect Grainger’s sales.

May 2014 had 21 selling days, compared with 22 last year. The gain in May sales stemmed from positive contribution from acquisitions (2 percentage points), partly offset by a 1 percentage point decline due to foreign currency fluctuations primarily related to the weakness in the Canadian dollar.

On an organic basis, sales improved 5% on volume growth (6 percentage points), partially offset by a decline of 1 percentage point from lower sales of seasonal products.

Geographically, daily sales in the U.S. rose 8%, aided by higher volume (7 percentage points) and acquisitions (2 percentage points), and a decline of 1 percentage point from lower sales of seasonal products.

Heavy manufacturing sales rose in the high single-digits, followed by mid single-digits gain in light manufacturing, natural resources, commercial and government. Retail sales were up in the low double digits. Reseller was up in the low single-digits. Contractor sales were down in the mid single-digits.

Daily sales in Canada declined 7% in U.S. currency and 1% in local currency, impacted by flat volume and lower sales of seasonal products. Growth in Commercial, Utilities, Heavy Manufacturing, Forestry and Transportation clientele were offset by declines in the Oil and Gas, Construction, Light Manufacturing, Agriculture, Government, Retail and Reseller consumers.

Daily sales at Grainger’s other businesses, which include operations in Asia, Europe and Latin America, climbed 16% as higher volume and favorable pricing (18 percentage points) were offset by negative foreign currency translation (2 percentage points). Majority of the growth came from online businesses, MonotaRO in Japan and Zoro in the U.S.

Reflecting on last year’s sales growth figures, we notice an inclination toward upper single digits till December. The momentum slowed with softer-than-expected sales growth in the first two months of this year. However, a sales growth of 5% was recorded in Apr 2014.

According to Grainger, daily sales gain in June is expected to be line with what was achieved in May. June will have 21 selling days, one more than June of last year.

Grainger, in its first-quarter earnings call, maintained its earnings per share guidance in the range of $12.10–$12.85 per share for fiscal 2014. Its sales growth guidance is expected to range between 5% and 9%.

Grainger is expecting minimal gross margin expansion compared with 2013 due to lower gross margins from the acquired businesses. Operating margin is expected to expand 10 to 40 basis points during the full year, reflecting negative mix from acquisitions.

Grainger’s business in Canada continues to face a sluggish macroeconomic environment and unfavorable currency exchange. The weakness in the Canadian economy is due to lower commodity prices and a reduction of Canadian exports. Sales in the 2014 first quarter decreased 10% and were down 2% in local currency.

Given the pacing of projects and lower-than-expected spending in the first quarter, the company is anticipating full-year incremental growth spending of approximately $115 million. This is down from the previous guidance of $130 million and actual spending of $132 million in 2013.

However, Grainger remains focused on expanding its product offerings, sales force as well as shares of its private label products. In the United States, Grainger added 180 new sales representatives in 2013.

In line with this, Grainger announced the purchase of 96 acres of land in Bordentown Township, NJ, on Jun 13, 2014.  The company plans to build a 1.3 million square-foot distribution center, which will allow getting more products to customers. The distribution center is scheduled to open in 2016.

Grainger also continues to grow through acquisitions. The company funded $154 million worth of acquisitions in 2013. In a move to grow stronger in the manufacturing arena and boast metalworking experts, Grainger acquired E&R Industrial Sales, Inc. in Aug 2013.

In addition, Grainger’s sound balance sheet, low debt level and cash flow characteristics allow the company to further invest in growth opportunities, raise dividends and reinvest capital through share repurchases.

Lake Forest, IL-based 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 holds a short-term Zacks Rank #4 (Sell).

Better ranked stocks in the same sector are Harsco Corporation (HSC), Kubota Corporation (KUBTY) and HollySys Automation Technologies, Ltd. (HOLI). All of these stocks sport a Zacks Rank #1 (Strong Buy).

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Read the Full Research Report on HSC
Read the Full Research Report on KUBTY
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