01—Abstract
Summary
Summary of the 10-K filed February 28, 2017. Cited figures are marked; the original filing is the authoritative source.
W.W.
Grainger's fiscal 2016 was a year of margin pressure and restructuring rather than growth. Net sales rose 2% to $10.14 billiona, but gross margin fell 1.8 points to 40.6% on price deflation exceeding cost deflation and unfavorable customer mix. Operating earnings fell 14% to $1.12 billion, and diluted EPS dropped 15% to $9.87.
Excluding roughly $1.71b per share of charges (restructuring, a $52 million goodwill and intangible impairment at Other Businesses, an unclaimed property adjustment, and a GSA contingency), adjusted diluted EPS was $11.58, down 3% from $11.94. The non-GAAP figures are management's, not audited measures. The growth engine is digital.
U.S. eCommerce sales reached $3.7 billionc, up 12% and 46% of U.S. revenue, and consolidated eCommerce was 47% of total sales. Cromwell (U.K.) added about 3 points of growth. Offsetting this, the Canadian business shrank 18% on the Alberta oil slowdown and an ERP transition, and the U.S. business declined 1% as it closed 55 branches in 2016 and 49 in 2015.
Management has guided to 2-6% sales growth and $11.30d-$12.40 EPS for 2017, and expects Canada to reach break-even by the end of 2017. Balance sheet and capital allocation shifted noticeably. Total debt rose to 54.1% of total capitalization from 45.8%, and Debt/EBITDA reached 1.7x, above the 1.0-1.5x target.
In response, Grainger plans to cut 2017 share repurchases to $600 million from the $800 million originally planned and to pay down short-term debt. Operating cash flow was steady at about $1.0 billion, and the dividend rose to $4.83 per share, though cash dividends paid still consumed roughly 30% of operating cash flow.
02—Key points
Key Highlights
- Net sales up 2% to $10.14B; gross margin down 1.8 points to 40.6% due to price deflation and unfavorable customer mix
- Operating earnings down 14% to $1.12B; reported diluted EPS of $9.87 included about $1.71/share of net charges
- Adjusted diluted EPS (non-GAAP) of $11.58, down 3% from $11.94 in 2015
- eCommerce sales reached $4.76B, up 15% and 47% of total sales; U.S. eCommerce up 12% to $3.7B
- Canada sales fell 18% to $734M on oil-driven weakness in Alberta and ERP disruption; segment swung to a $65M operating loss
- Total debt rose to 54.1% of capitalization; Debt/EBITDA of 1.7x exceeds the 1.0-1.5x target, prompting a cut to 2017 buybacks ($600M vs. $800M planned)
- 2017 guidance: 2-6% sales growth and EPS of $11.30-$12.40, reiterated January 25, 2017
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, W.W. Grainger kept $0.06.
- Revenue$10.14B100.0%
- Cost of revenue−$6.02B59.4%
- Gross profit$4.12B40.6%
- Operating costs−$3.00B29.6%
- Operating income$1.11B11.0%
- Interest, other & tax−$507.0M5.0%
- Net income$606.0M6.0%
Where FY2016 revenue went
$10.14B- Cost of revenue: $6.02B, 59% of revenue
- SG&A: $3.00B, 30% of revenue
- Net income: $606.0M, 6.0% of revenue
- Interest, other & tax: $507.0M, 5.0% of revenue
Kept 6.0% as net incomeNet income $606.0M · 6.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 28, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $10.14B$9.97B | +1.6% |
| Cost of Revenue | $6.02B$5.74B | +4.9% |
| Gross Profit | $4.12B$4.23B | −2.8% |
| SG&A Expenses | $3.00B$2.93B | +2.4% |
| Operating Income | $1.11B$1.30B | −14.4% |
| Interest Expense | $76.00M$33.57M | +126.4% |
| Net Income | $606.00M$769.00M | −21.2% |
| EPS (Basic) | $9.94$11.69 | −15.0% |
| EPS (Diluted) | $9.87$11.58 | −14.8% |
| Shares Outstanding (Basic) | 60.43M65.16M | −7.3% |
| Shares Outstanding (Diluted) | 60.84M65.77M | −7.5% |
05—Questions
Frequently Asked Questions
Why did reported EPS fall 15% in 2016?
Reported diluted EPS fell to $9.87 from $11.58, mainly because of about $105 million in net charges (about $1.71 per share). These included a $52 million goodwill and intangible impairment in Other Businesses (mostly Fabory), $23 million after tax for an unclaimed property adjustment covering 2008-2012, $26 million in net restructuring, and a $7 million Canadian inventory adjustment. Excluding these items, adjusted diluted EPS declined 3% to $11.58.
Is Grainger's growth coming from its digital channels?
Largely, yes. Consolidated eCommerce sales grew 15% to $4.76B, with the U.S. business up 12% to $3.7B. Management's stated growth priorities are larger, complex customers, medium-sized customers, and eCommerce for smaller customers. Price deflation and a shift toward lower-margin customers, however, have pressured gross margins, and the Canadian business has been a drag.
How concerning is the increase in leverage?
It warrants attention. Total debt rose to 54.1% of capitalization from 45.8%, and the company ended 2016 at 1.7x Debt/EBITDA, above its own 1.0-1.5x target. This followed the 2015 Cromwell acquisition and the $1.8B debt plan tied to the $3B buyback. Management is responding by cutting 2017 repurchases to $600M, and says improved 2017 earnings should bring leverage back toward target. Investors should watch whether that happens.
What is the outlook for the Canadian business?
Canada is in a turnaround. Sales fell 18% in 2016, with volume down 10%, and the segment posted an operating loss of $65M including restructuring. Management says the 2016 branch closures and ERP investments should support growth in 2017 and return the business to break-even by the end of 2017. Oil prices and the Canadian dollar remain external risks.
Are there any unusual legal or regulatory items?
A few. Acklands-Grainger pleaded guilty in December 2016 to two ozone-depleting-substance violations and agreed to a C$500,000 fine. A TCPA class action over 2009 fax marketing is set for trial in February 2018, and the company is defending about 480 asbestos and silica claims. Management says none is expected to have a material adverse effect, though the unclaimed property charge shows that compliance-related costs can surface unexpectedly.
06—Continue