(GWW) W.W. Grainger Earnings Preview

W.W. Grainger (GWW) is scheduled to announce its second quarter fiscal 2012 results on July 18, 2012. The current Zacks Consensus Estimate is $2.63 for the quarter, projecting year-over-year growth of 14.9%. The estimates in the current Zacks Consensus range between a low $2.57 and a high of $2.74 a share. The Zacks Consensus Revenue Estimate is $2.27 billion for the quarter under discussion.

With respect to earnings surprise, over the trailing four quarters, Grainger outperformed the Zacks Consensus Estimate. The average earnings surprise was 3.95%, implying that the company has surpassed the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Previous Quarter Recap

Grainger’s first quarter 2012 earnings per share increased 19% year over year to $2.57 per share, exceeding the Zacks Consensus Estimate of $2.51. The improvement was due to expansion in its product line as well as in the international markets, eCommerce and inventory management services.

Revenues in the quarter were $2.193 billion, up 16% from $1.884 billion in the year-ago period. Revenues also surpassed the Zacks Consensus Estimate of $2.179 billion. The improvement in revenue in the quarter was attributed to volume growth, favorable pricing and also acquisitions, partly offset by the negative impact of lower sale of seasonal products in U.S. and Canada and unfavorable foreign exchange.

Following the first quarter results, the company reported year-over-year sales growth of 12% in April 2012 and 13% in May 2012. However, growth trailed the levels attained in March (15%), February (18%) and January (17%) this year.

Looking Forward

For 2012, the company envisions sales growth in the range of 12% to 14% and earnings per share between $10.40 and $10.80.

Estimate Revision Trend  

For the second quarter as well as fiscal 2012, 4 out of the 13 analysts covering Grainger have reduced their estimates over the past 30 days. This was driven by disappointing sales growth in April and May and the entry of Amazon.com Inc. (AMZN) in the maintenance, repair & operations (MRO) space. There has been no movement in estimates for the second quarter of fiscal 2012 in the past 7 days.

Magnitude of Estimate Revisions

The consensus earnings estimate for the second quarter of fiscal 2012 decreased a cent to $2.64 in the last 30 days following Grainger’s May results. In the last 7 days the estimate has slipped another cent to $2.63. For fiscal 2012, the estimate had gone up 4 cents to $10.72 following the upbeat first quarter results.

However, in the past 30 days the consensus slid down 3 cents to $10.69 over the past 30 days. In the past 7 days, the estimate has gone down another 3 cents to reach $10.66.

Our View

Grainger remains focused on expanding its product offerings and growing the share of its private label products. The company’s most recent catalog, issued in February 2012, offers about 413,000 facilities maintenance and other products, up from 350,000 products listed in the February 2011 issue.

It 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 jumped 104% year-over-year in first-quarter 2012, reflecting strong growth in Japan and Mexico and the Fabory acquisition.

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 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”
Read the full analyst report on “AMZN”
Read the full analyst report on “WCC”
Read the full analyst report on “AIT”
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