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Grainger Misses Earnings, Sales In Line

Zacks Equity Research

W.W. Grainger, Inc. ( GWW) reported fourth-quarter 2013 earnings per share of $2.59, up 7% from adjusted earnings of $2.42 per share in the year-ago quarter. Earnings fell within the company’s guided range of $2.53 to $2.73 but were short of the Zacks Consensus Estimate of $2.63. Shares of this leading broad line supplier of maintenance, repair and operating ( MRO) products slipped 4.54% in pre-market trading as it trimmed its fiscal 2014 guidance.


During the reported quarter, Grainger recorded non-cash impairment charges to the tune of 29 cents per share, of which 18 cents per share pertained to the business in Brazil and the balance 11 cents per share was related to Grainger Lighting Services in the United States  In addition the company incurred restructuring charges of 10 cents per share.


In the prior-year quarter, Grainger had recorded impairment and restructuring charges of 25 cents per share. Including these, earnings per share in the fourth quarter of 2013 was $2.20, up 1.4% from $2.17 in the prior-year quarter.


Operational Update


Revenues in the quarter were $2.377 billion, up 7% from $2.226 billion in the year-ago quarter and in line with the Zacks Consensus Estimate. Revenues came within the company’s guided sales growth 6% to 8% year over year, which translated to revenues of $2.36 billion to $2.40 billion.


Sales improved on the back of volume growth (5 percentage points), acquisitions (4 percentage point) and sales of seasonal products (1 percentage point), offset by a negative currency impact of 2 percentage point and 1 percentage point from sales related to Hurricane Sandy in 2012.


Gross profit increased 4% year over year to $1,006 million. Gross margin contracted 130 basis points to 42.3%, affected by lower gross margins from the acquired businesses and increased growth of lower margin customers.


Adjusted operating income in the quarter increased 3% to $292 million from the $282 million in the prior-year quarter, driven by sales growth and operating expense leverage, as expenses grew at a slower rate than sales. Operating margin contracted 40 basis points to 12.3% on an adjusted basis in the quarter.


Segment Performance


Revenues from the United States segment increased 10% year over year to $1,871 million, driven by favorable volume, acquisitions, sales of seasonal products. However, it was somewhat offset by decline in price and unfavorable comparison to sales related to Hurricane Sandy in 2012. Solid growth was witnessed in the manufacturing, retail, natural resources, and commercial end markets. Operating income rose 6% to $292 million driven by higher sales growth, positive expense leverage. However, lower gross margins had a deterring effect.


Revenues from the Acklands-Grainger business in Canada dipped 3% to $272 million as unfavorable foreign exchange offset increase in volume. However, in local currency, sales went up 3%. Among the end-markets, growth was witnessed in commercial, transportation, light manufacturing and forestry end markets. Operating income in Canada declined 10% (down 5% in local currency) to $26.8 million, hurt by lower gross profit margins, unfavorable foreign exchange and negative expense leverage.


Revenues from Other businesses (which include Asia, Europe and Latin America) increased 3% to $273 million. Growth from volume and price (11 percentage points) was compensated by an 8 percentage point dip due to unfavorable foreign exchange. Improved performance in Zoro Tools and the Mexico business contributed to the increase. Furthermore, increase in sales in Japan was offset by the weakness in the Japanese yen versus the U.S. dollar. 


The segment reported an adjusted operating profit of $3 million, flat year over year, as strong results at Zoro Tools offset lower performance from other businesses. Also, business in Japan generated strong earnings growth in local currency which was more than offset by unfavorable foreign exchange.


Fiscal 2013 Performance


Grainger reported adjusted earnings per share of $11.52, up 10.5% from $10.43 in the prior fiscal but fell short of the Zacks Consensus Estimate of $11.55. Adjusted earnings was within the company’s guidance ranging between $11.45 and $11.65 a share. Including one-time items, earnings stood at $11.13, compared with $9.52 in fiscal 2012. 


Revenues increased 5.4% year over year to $9.4 billion, in line with the Zacks Consensus Estimate. Grainger’s annual growth guidance was in the range of 5% to 6% which translated to revenues of $9.4 billion to $9.5 billion.


Financial Position


Grainger had cash and cash equivalents of $431 million as of Dec 30, 2013, compared with $452 as of Dec 31, 2012. The company generated cash flow from operating activities of $986 million during fiscal 2013, up from $816 million in the prior year. During the quarter, Grainger paid dividends worth $67 million and spent $159 million to buy back 0.6 million shares. Long-term debt was $446 million as of Dec 30, 2013, compared with $467 million as of Dec 31, 2012.


Other Updates


During the year, Grainger invested an incremental $132 million to drive growth and scale, primarily in the United States. Grainger crossed the $3 billion mark in e-Commerce sales in 2013, accounting for 33% of total company sales. The company also transitioned to a new web platform, launched a Spanish website and introduced innovative mobile solutions.


Grainger added 180 new sales representatives in the United States in 2013. It added more than 300,000 new products, bringing its total number of online products to more than 1.2 million. In Canada, Acklands, Grainger announced the addition of 200,000 products to its online offering. A broader product line enables customers to increase productivity by consolidating their supplier base. 


Grainger also enhanced its distribution center network in North America to accommodate growth and increase scale. The company opened a 1 million square-foot highly automated distribution center in Illinois that serves as the company's new central stocking facility. Grainger also began construction on a 500,000 square-foot distribution center in the Toronto area. 




Citing a weaker Canadian dollar in recent months and the divestiture of a number of the direct marketing Specialty Brands that were sold on December 31, 2013, Grainger narrowed its earnings per share ( EPS) guidance to the range of $12.10–$12.85 per share for fiscal 2014, from the prior guidance of $12.25–$13.00 per share. Grainger tweaked its sales growth guidance to a new range of 5% to 9%, as against the prior guidance of 6% to 10%.


Our Take


Grainger is expected to benefit in the long term from its incessant focus on expanding its sales force, product offerings and strengthening its businesses across all operating regions, mainly in Asia and Latin America, as well as continued investment in e-Commerce — its most profitable channel.


Furthermore, Grainger’s sound balance sheet, low debt level and cash flow allow the company to 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 carries a short-term Zacks Rank #4 (Sell). Some better-ranked stocks in the sector include Graco Inc. ( GGG), Gorman-Rupp Co. ( GRC) and Hudson Technologies Inc. ( HDSN). All of these hold a Zacks Rank #2 (Buy).

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