01—Abstract
Summary
Summary of the 10-K filed February 27, 2015. Cited figures are marked; the original filing is the authoritative source.
W.W.
Grainger's 2014 10-K shows a company that grew sales 6% to $9.96 billiona, with diluted EPS up 3% to $11.45 on a reported basis. Adjusted for $0.81 per share of charges (Brazil shutdown, European pension transition and restructuring, and a Colombia goodwill impairment), diluted EPS was $12.26, up 6%. Growth was led by the United States business, where sales rose 7% to $7.9 billion and segment operating earnings rose 11% to $1.44 billion.
Volume growth of 5%b was the main driver, with acquisitions and price each contributing about 1-2 points. Gross margin slipped 0.5 point to 43.3% because of lower-margin acquired businesses and mix shift toward large customers, while operating expenses grew 4% as management kept investing in eCommerce, sales reps, supply chain and inventory management. The Canadian business was the clear weak spot.
Sales fell 3% in reported dollars, though they rose 4% in local currency. Segment operating earnings dropped 32% to $88 millionc, pressured by a weak Canadian dollar, resource-sector softness and the WFS acquisition. Management cut 2015 guidance on January 26, 2015, lowering EPS guidance to $12.60-$13.60 from $12.90-$13.80 and sales growth to 3-7% from 5-9%, citing foreign exchange and the Canadian economy.
Other businesses (Zoro, Japan, Mexico, Europe) grew sales 14%, but posted an operating loss of $38 milliond after one-time charges and start-up costs. Brazil is being closed during 2015. Cash generation remained solid.
Operating cash flow was $960 million, capital expenditures rose to $387 million, and the company returned $816 million to shareholders through dividends ($4.17 per share, up 16%) and buybacks ($525 million). Net debt is modest, with total debt at 12.9% of capitalization.
The filing also shows a large new DC build-out in New Jersey and Toronto, and a 2015 capex plan of $375-425 million. The main investor questions are whether the Canadian slump persists, whether Zoro and eCommerce growth can keep margins stable, and how much of the 2014 margin pressure is structural.
02—Key points
Key Highlights
- Net sales rose 6% to $9.96 billion in 2014, with volume contributing 5 points, while diluted EPS was $11.45 (up 3%) and adjusted diluted EPS was $12.26 (up 6%) excluding $0.81 per share of charges
- U.S. segment was the growth engine: sales up 7% to $7.9 billion and operating earnings up 11% to $1.44 billion, with eCommerce revenue reaching $2.8 billion (up 13%)
- Canada segment deteriorated: sales fell 3% in USD (up 4% in local currency), and operating earnings dropped 32% to $88 million due to FX, resource-sector weakness and integration of WFS
- Gross margin fell 50 bps to 43.3% due to acquired-business mix, faster growth with lower-margin large customers and closure costs, partly offset by price exceeding cost inflation
- 2015 guidance was lowered on January 26, 2015: EPS to $12.60-$13.60 (from $12.90-$13.80) and sales growth to 3-7% (from 5-9%), driven by FX and weak Canadian economy
- Strong cash returns: operating cash flow of $960 million, dividends per share up 16% to $4.17, and $525 million of share repurchases, with total debt at 12.9% of capitalization
- Brazil business is being shut down (operations cease in 2015), and Europe/Colombia saw restructuring and a $12 million goodwill impairment, while Fabory's $118 million goodwill has only 31% fair value headroom
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, W.W. Grainger kept $0.08.
- Revenue$9.96B100.0%
- Cost of revenue−$5.65B56.7%
- Gross profit$4.31B43.3%
- Operating costs−$2.97B29.8%
- Operating income$1.35B13.5%
- Interest, other & tax−$545.4M5.5%
- Net income$801.7M8.0%
Where FY2014 revenue went
$9.96B- Cost of revenue: $5.65B, 57% of revenue
- SG&A: $2.97B, 30% of revenue
- Net income: $801.7M, 8.0% of revenue
- Interest, other & tax: $545.4M, 5.5% of revenue
Kept 8.0% as net incomeNet income $801.7M · 8.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 27, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $9.96B$9.44B | +5.6% |
| Cost of Revenue | $5.65B$5.30B | +6.6% |
| Gross Profit | $4.31B$4.14B | +4.3% |
| SG&A Expenses | $2.97B$2.84B | +4.5% |
| Operating Income | $1.35B$1.30B | +3.9% |
| Interest Expense | $10.09M$13.22M | −23.7% |
| Net Income | $801.73M$797.04M | +0.6% |
| EPS (Basic) | $11.59$11.31 | +2.5% |
| EPS (Diluted) | $11.45$11.13 | +2.9% |
| Shares Outstanding (Basic) | 68.33M69.46M | −1.6% |
| Shares Outstanding (Diluted) | 69.21M70.58M | −1.9% |
05—Questions
Frequently Asked Questions
Why did Grainger's reported EPS growth (3%) lag its adjusted EPS growth (6%)?
The gap comes from $0.81 per share of one-time or non-cash items in 2014, including a $0.40 Brazil shutdown charge, a $0.15 European pension transition charge, a $0.15 European restructuring charge, and a $0.11 goodwill impairment. In 2013 these items totaled $0.39 per share, so the year-over-year comparison looks weaker on a reported basis. Investors should judge the core business on the adjusted figure, while recognizing that restructuring charges have recurred in both years.
How serious is the Canadian business weakness, and how much of it is currency-driven?
Currency explains much of the reported decline. Canadian sales fell 3% in U.S. dollars but rose 4% in local currency, and foreign exchange cost about 7 points. Segment operating earnings, however, fell 27% even in local currency, reflecting weaker resource-sector demand (agriculture, mining, oil and gas), higher freight costs, lower supplier rebates and dilution from the WFS acquisition. The 2015 guidance cut was attributed to the weak Canadian economy as well as FX, so investors should watch whether the margin pressure persists into 2015.
What is driving the decline in gross margin, and is it likely to continue?
Gross margin fell 0.5 point to 43.3%, mainly from lower margins at newly acquired businesses, faster growth with large, discount-priced customers and charges tied to Brazil and European restructuring. Management says price increases exceeded cost inflation, which partly offset these pressures. The risk factors indicate that continued growth with large customers will keep pressuring margins, so further compression is plausible unless mix improves or pricing keeps outpacing costs.
How is Grainger funding its growth investments and shareholder returns?
Operating cash flow of $960 million covered capital expenditures of $387 million and about $816 million in dividends and buybacks. The gap was funded partly by debt repayment and a Canadian revolving facility. Management expects 2015 capex of $375-425 million, funded from operating cash, and total debt fell to 12.9% of capitalization. The company's debt covenants are standard and not restrictive, which provides financial flexibility.
What are the main growth drivers and key risks for the next few years?
Growth drivers include eCommerce (about 36% of 2014 revenue), the Zoro single-channel business, KeepStock inventory management (over 18,000 customers), and new distribution centers in New Jersey (2016) and Toronto (opened early 2015). Key risks include Canadian economic weakness, currency volatility, supplier and supply chain disruptions, information security breaches, and goodwill impairment risk at Fabory, where fair value exceeded carrying value by only 31%.
06—Continue