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Neutral on Grainger

Zacks Equity Research

On Apr 26, we maintained our Neutral recommendation on distributor of facilities maintenance, repair and operating supplies, W.W. Grainger Inc. ( GWW), based on expectations of growth opportunities through product and geographic expansion and e-commerce; partially offset by the recent slowdown in sales and impending pressure on margins. 


Why Reiterated?


Grainger reported first-quarter 2013 earnings of $2.94 per share, up 14% year over year from $2.57, ahead of the Zacks Consensus Estimate of $2.73. Total revenue was $2.28 billion, up 4% from $2.19 billion in the year-ago period but missed the Zacks Consensus Estimate of $2.3 million.


Grainger increased its EPS guidance in the range of $11.30-$12.00 per share for fiscal 2013, up from the prior guidance of $10.85-$12.00 per share. Grainger, however, increased its sales growth guidance to a new range of 5% to 9%, up from the prior projection of 3% to 9%.


We appreciate Grainger’s focus on expanding its product offerings as well as gaining traction for its private label products. Grainger expects to increase its product count from the current 413,000 to 500,000 products by 2015. In April, Acklands-Grainger, Grainger's Canadian business, announced the largest ever product expansion with the addition of 2,00,000 new products to its online site in the coming months, more than doubling Canada's online offering to over 300,000. The company has historically seen annual growth of approximately 2% on sales from products added through the program. 


The company continues to expand its businesses across its operating regions, mainly in Asia and Latin America. Grainger also continues to invest in e-commerce, as it is reportedly growing two fold compared to other channels and is deemed to be its most profitable channel. In 2012, e-commerce sales represented 30% of the total company sales. Grainger’s target is to increase it up to 50% by 2015. This channel also carries higher margins as it requires lower selling, general and administrative costs.


On the flipside, Grainger's overall sales growth continued to show a downward trend. In 2012, after enjoying a double digit run till August, sales growth has remained in the single digits before plunging to the lowest level of 2% in December. Even though sales growth recovered to 8% in Jan 2013, it again dipped to 6% in February and 3% in March. The deterioration in March was due to the timing of the Easter holiday and customer spending pullbacks related to sequestration within the Government end market


Grainger has increased its investment spending for 2013 to $160 million from the previous projection of $135 million. Even though these initiatives will lead to additional share gains in the future, it will weigh on margins in the short term.


Other Stocks to Consider


Grainger retains a short-term Zacks Rank #2 (Buy). Other industrial product makers with favorable Zacks rank are Insteel Industries Inc. ( IIIN), Graco Inc. ( GGG), and EnPro Industries, Inc. ( NPO) with a Zacks Rank #1 (Strong Buy),

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Read the Full Research Report on NPO

Read the Full Research Report on IIIN

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