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Why Is Grainger (GWW) Down 2.5% Since the Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for W.W. Grainger, Inc. GWW. Shares have lost about 2.5% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it 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 drivers.

Grainger Tops Q4 Earnings, Sales; Affirms 2017 View

Grainger's fourth-quarter 2016 adjusted earnings per share of $2.45 declined 2% from the prior-year figure of $2.49. However, earnings beat the Zacks Consensus Estimate of $2.36.

Including one-time items, earnings were $1.01 per share in the reported quarter, down significantly from $2.30 in the year-ago quarter.

Operational Update

Grainger reported revenues of $2,471 million, down 0.3% from the prior-year quarter figure of $2,478 million. However, it marginally beat the Zacks Consensus Estimate of $2,446 million. There were 63 selling days in the reported quarter, one fewer than in the 2015 quarter.

On a daily basis, total company sales were up 1% for the quarter. The sales increase for the quarter included a 1 percentage point (pp) increase from volume and a 1 pp increase from the timing of the holidays in December, offset by a 1 pp reduction in price.

Cost of sales inched up 0.3% year over year to $1,481 million. Gross profit decreased 1.3% to $989.7 million from $1,002 million in the year-ago quarter. Gross margin contracted 30 basis points to 40.1% due to unfavorable customer mix and price deflation exceeding product cost deflation.

Grainger’s adjusted operating income in the quarter went down 2.5% to $274.8 million from $281.9 million in the prior-year quarter. Operating margin fell to 11.1% in the quarter from 11.4% in the prior-year quarter.

Segment Performance

Revenues for the U.S. segment dipped 1.3% year over year to $1,897 million. Adjusted operating income for the segment decreased 2.7% year over year to $300.3 million.

Revenues of $181.4 million from the Canadian Acklands-Grainger business were down 11% in U.S. dollars and local currency from the year-ago quarter. The segment reported an adjusted operating loss of $10.7 million, against an operating income of $7.9 million in the prior-year quarter.

Revenues from Other businesses (which include Asia, Europe and Latin America) increased 11% year over year to $483.5 million. The segment’s adjusted operating profit soared 63% to $16.7 million, from $10.2 million in the prior-year quarter.

Financial Position

At the end of 2016, Grainger generated cash and cash equivalents of $274 million, which declined from $290 million at the end of 2015. Cash flow from operations came in at $1,003 million for the fiscal 2016 compared with $989.9 million in the prior fiscal

At the end of 2016, Grainger’s long-term debt increased to $1,841 million, compared with $1,388 million at the end of 2015. During the year, the company returned $1.1 billion in cash to its shareholders in the form of share repurchases and dividends

2016 Performance

Grainger reported adjusted earnings per share of $11.58 in 2016, down 3% from $11.94 per share recorded in the prior year. Earnings outpaced the Zacks Consensus Estimate of $11.50 per share. Including one-time items, the bottom line came in at $9.87, down 15% from $11.58 recorded in 2015.

Revenues grew 2% year over year to $10.1 billion from $10 billion in 2015. Revenues came in line with the Zacks Consensus Estimate.

Guidance

Grainger reaffirmed its sales growth guidance of 2–6% for full-year 2017 and earnings per share of $11.30–$12.40

Grainger will progress on key initiatives, including sales force effectiveness and vertical alignment of the sales force in the U.S., the 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.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.

W.W. Grainger, Inc. Price and Consensus

 

W.W. Grainger, Inc. Price and Consensus | W.W. Grainger, Inc. Quote

VGM Scores

At this time, Grainger's stock has a nice Growth Score of 'B', though it is doing a bit better on the momentum front with a 'A'. Following a similar course, 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.

Based on our scores, the stock is more suitable for momentum investors than those looking for value and growth.

Outlook

The stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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