It has been about a month since the last earnings report for W.W. Grainger, Inc. GWW. Shares have lost about 10.5% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to their next earnings release, or is the stock due for a breakout? 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 Lags Q1 Earnings, Sales, Trims '17 Outlook
Grainger’s first-quarter 2017 adjusted earnings per share of $2.88 declined 9% from the prior-year figure of $3.18, owing to the adverse effect of strategic pricing initiatives in the U.S. Earnings also missed the Zacks Consensus Estimate of $3.01.
Including one-time items, earnings came in at $2.93 per share in the reported quarter, down 2% from $2.98 in the year-ago quarter.
Grainger reported revenues of $2,541 million, up 1% from the prior-year quarter figure of $2,507 million, driven by a 5 percentage point (pp) increase from volume growth, partially offset by a 3 pp decline in price, and a 1 pp decline from lower sales of seasonal products. However, the figure marginally fell short of the Zacks Consensus Estimate of $2,563 million. There were 64 selling days in the reported quarter, same as first-quarter 2016.
Cost of sales increased 4% year over year to $1,522 million. Gross profit decreased 2.5% to $1,019 million from $1,045 million recorded in the year-ago quarter. Gross margin contracted 170 basis points to 40%, driven by strategic price initiatives.
Grainger’s adjusted operating income in the quarter decreased 14% to $290.3 million from $336.6 million in the prior-year quarter. Operating margin fell to 11.4% in the quarter from 13.4% in the prior-year quarter.
Revenues for the U.S. segment edged down 1% year over year to $1,953 million, resulting from a 4 pp decline in price and a 1 pp decline from lower sales of seasonal products, partially offset by a 4 pp increase from volume growth. Adjusted operating income for the segment decreased 12% year over year to $306 million.
Revenues of $186 million from the Canada segment were up 4% in U.S. dollars and 1% in local currency from the year-ago quarter. The segment reported an adjusted operating loss of $15.6 million compared to a loss of $9.3 million in the prior-year quarter.
Revenues from Other businesses (which include Asia, Europe and Latin America) increased 12% year over year to $497.4 million. The segment’s adjusted operating profit surged 44.5% to $31.5 million from $21.8 million recorded in the prior-year quarter.
Grainger had cash and cash equivalents of $238.8 million at the end of first-quarter 2017 compared with $274 million at the end of 2016. Cash flow from operations came in at $180.9 million in the reported quarter as against $160.6 million in the year-ago quarter.
As of quarter end, Grainger’s long-term debt increased to $1,848 million compared with $1,841 million at the end of 2016. During the first quarter, the company returned $231 million in cash to shareholders through $72 million in dividends and $159 million to buy back 646,000 shares of stock.
Grainger lowered its 2017 sales and earnings per share guidance for 2017 due to unfavorable strategic pricing actions in the U.S. The company now guides sales growth of 1–4%, down from the earlier guidance of 2–6%. It also expects earnings per share to be in the range of $10.00–$11.30 compared to the previous band of $11.30–$12.40.
Grainger is anticipated to benefit from its key initiatives, including sales force effectiveness and vertical alignment of the sales force in the U.S., medium-sized customer acquisition and growth of the online model globally. The company remains focused on creating value for customers, delivering a seamless customer experience and reducing costs in 2017. However, fluctuation in oil prices and gross margin pressure will weigh on the company’s performance. Additionally, the underperforming Canada segment remains a concern.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been seven downward revisions for the current quarter. In the past month, the consensus estimate also shifted downward by 11.4% due to these changes.
W.W. Grainger, Inc. Price and Consensus
W.W. Grainger, Inc. Price and Consensus | W.W. Grainger, Inc. Quote
At this time, Grainger's stock has a great Growth Score of 'A', though it is lagging a lot on the momentum front with a 'C'. Following the exact same course, the stock was allocated also 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.
Based on our scores, the stock is more suitable for growth investors than value and momentum investors.
Estimates have been broadly trending downward for the stock. The magnitude of these revisions also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #5 (Strong Sell). We are expecting a below average return from the stock in the next few months.
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