(GWW) W.W. Grainger Posts Record Earnings

W.W. Grainger, Inc. (GWW) reported record earnings per share (EPS) for the second quarter 2012, which increased 18% year over year to $2.63 per share, in line with the Zacks Consensus Estimate.

Including a 2 cents per share benefit from the settlement of tax examinations, EPS in the prior year quarter was $2.34. Compared to this, EPS in the current quarter posted a climb of 12%.

Operational Update

Revenues in the quarter were $2.25 billion, up 12% from $2 billion in the year-ago period. Revenues fell short of the Zacks Consensus Estimate of $2.26 billion. The improvement in revenue in the quarter was attributed to volume growth, favorable pricing and also acquisitions, partly offset unfavorable foreign exchange. On a daily basis, sales improved 12% in April, 13% in May and 12% in June.

Operating earnings in the quarter improved 18% to $314 million, primarily driven by higher sales volume and gross margins and positive operating leverage.

Segment Performance

Revenues from the United States segment increased 7% year over year to $1.70 billion, driven by favorable volume and price growth. On a daily basis, sales increased 7% in April, 8% in May and 7% in June. Operating income in the segment rose 15% to $310.7 million, mainly due to higher sales and gross margins and positive leverage in expenses from the region.

Revenues from the Acklands-Grainger business in Canada climbed 9% to $279.6 million, due to improvements in the commercial services, oil and gas, contractor and utilities end markets. On a daily basis, segment sales increased 13% in April, 14% in May and 14% in June. Operating income in Canada expanded 15% to $33.5 million as a result of strong sales, improvement in gross margins as well as positive leverage in operating expense.

Revenues from Other businesses (which include Asia, Europe and Latin America) jumped 84% year over year to $249 million, driven by strong growth in Japan and increase in sales from the Fabory and AnFreixo acquisitions. Sales for Other Businesses increased 21% excluding the effect of the acquisitions. Operating earnings increased 30% to $11.2 million brought about by the strong earnings growth in Japan and Mexico.

Financial Position

Grainger had cash and cash equivalents of $249.7 million as of June 30, 2012, compared with $338.8 million as of March 31, 2012. Long-term debt was worth $473.5 million as of June 30, 2012 compared with $191.6 million as of March 31, 2012. Change in the long-term debt was due to the refinancing of an existing bank term loan.

The company generated net cash of $132 million from operating activities in the reported quarter, up from $191 million in the prior-year quarter. Grainger expended $56 million as capital expenditures in the second quarter of 2012 compared to $52 million in the year-ago quarter.

Grainger paid dividends worth $58 million in the reported quarter and expended $149 million for the buyback of 760,000 shares. The company has approximately 6 million shares remaining on its share repurchase authorization.


For 2012, the company maintained its forecast of sales growth in the range of 12% to 14% and raided its EPS guidance range to $10.50 and $10.80 from the previous guidance between $10.40 and $10.80.

Our Take

Grainger remains focused on expanding its product offerings and growing the share of its private label products. The company currently offers 413,000 products and has a long-term vision to expand the product count to 500,000 by 2015. The company has historically seen growth of approximately 2% per year on sales from products added through the program.

Grainger also focuses on expansion programs for strengthening its businesses in each of its operating regions, mainly in Asia and Latin America. Revenues from Other Businesses continue its solid growth run, reflecting strong growth in Japan and Mexico and acquisitions.

However, the recent slowdown in the sales growth rate raises our concern. Margins are expected to remain under pressure due to Grainger’s accelerated investments in product line expansion, sales force expansion, eCommerce, inventory services, distribution centers and international expansion.

Furthermore, Amazon (AMZN) has recently launched www.AmazonSupply.com, a website offering more than 500,000 parts/supplies to business, industrial, scientific and commercial customers at competitive prices. Grainger, so long a dominant player in industrial maintenance, repair & operations distribution, would face pricing pressure with the entry of Amazon.

The company currently retains a Zacks #3 Rank (short-term Hold recommendation).

Illinois-based Grainger is a leading North American distributor of material handling equipment including safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, etc. The company’s services comprise inventory management and energy efficiency solutions. The company competes with Applied Industrial Technologies Inc. (AIT) and WESCO International Inc. (WCC).

Read the full analyst report on “GWW”
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Read the full analyst report on “WCC”
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