It has been about a month since the last earnings report for W.W. Grainger (GWW). Shares have added about 13.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is W.W. Grainger due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Grainger Misses on Q1 Earnings, Suspends '20 Outlook
Grainger reported first-quarter 2020 adjusted earnings per share of $4.24, which missed the Zacks Consensus Estimate of $4.42, resulting in a negative surprise of 4%. The bottom line also declined 6% year over year primarily on account of lower operating earnings that were partially offset by lower average shares outstanding in the current year period.
Including one-time items, such as restructuring and other charges, earnings came in at $3.19 in the reported quarter. The figure plunged 29% from the year-ago quarter’s $4.48.
Grainger’s revenues improved 7% to $3 billion from the prior-year quarter figure of $2.8 billion. Daily sales for the quarter increased 5.5%. Volumes were up 7% while price and mix headwinds were at around 2%. Foreign exchange had an unfavorable impact of 0.2%. Further, the top line surpassed the Zacks Consensus Estimate of $2.9 billion.
Adjusted cost of sales increased 10% year over year to $1,880 million. Gross profit was up 2% year over year to $1,121 million. Gross margin contracted to 37.4% in the quarter from 39.2% in the year-ago quarter. Higher growth in the lower margin carrying endless assortment businesses, headwinds in the U.S. segment related to customer and product mix stemming from the COVID-19 pandemic primarily led to the drop in gross margins.
Grainger’s adjusted operating income in the first quarter declined 6% to $343 million from the $365 million in the prior-year quarter. Adjusted operating margin contracted 160 bps year over year to 11.4% in the quarter, mainly due to lower gross margins.
The company had cash and cash equivalents of $1,492 million at the end of first-quarter 2020, significantly up from $360 million at 2019 end. Cash provided by operating activities increased to $244 million in the first quarter from the year-ago quarter figure of $127 million, driven by favorable working capital in first-quarter 2020.
Long-term debt was $3,303 million as of Mar 31, 2020, compared with $1,914 million as of Dec 31, 2019. The company returned $178 million to shareholders through $78 million in dividends and $100 million in share repurchases. Grainger announced that it is pausing share repurchases in the wake of the coronavirus pandemic.
Suspends 2020 Guidance
The company has suspended guidance for 2020 citing the uncertainty stemming from the coronavirus pandemic and its impact on the overall economy.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -13.03% due to these changes.
At this time, W.W. Grainger has a strong Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. It's no surprise W.W. Grainger has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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