01—Abstract
Summary
Summary of the 10-K filed February 26, 2018. Cited figures are marked; the original filing is the authoritative source.
W.W.
Grainger's fiscal 2017 was a year of top-line growth paired with margin compression and lower earnings. Net sales rose 3% to $10.42 billiona, driven by volume gains in the U.S. business and strong growth at single channel online businesses such as Zoro and MonotaRO, while price deflation from the U.S. pricing actions (roughly 4% company-wide) absorbed much of the benefit. Gross margin fell 1.3 points to 39.3%, operating earnings declined 6% to $1.05 billion, and net earnings attributable to Grainger fell 3% to $586 million, or $10.02 diluted EPS.
Excluding restructuring, gains, and other charges, adjusted EPS was $11.46b versus $11.58 in 2016, a 1% decline. eCommerce reached 51% of total sales, up from 47%, which is the central strategic signal in the filing. The balance sheet and capital allocation shifted meaningfully. Grainger issued $400 million of 4.20% notes in May 2017, and long-term debt rose to about $2.25 billion, with total debt to capitalization at 56.2% versus 54.1% a year earlier.
Share repurchases totaled roughly $605 millionc, and the company continued to pay its dividend ($5.06 per share, up from $4.83). Operating cash flow was steady at $1.06 billion. Management is restructuring the business: 113 Canadian branches are slated for closure, the U.S. contact center network is consolidating into three national centers, and the Canada business is undergoing a broader reset.
The 2018 outlook calls for 3% to 7% sales growth and EPS of $12.95 to $14.15d after guidance was raised for the lower U.S. corporate tax rate, though the company also flagged incremental digital investment and a 23% to 26% effective tax rate. Key risks for investors include continued price deflation from the pricing strategy, the margin pressure from a shift toward larger, lower-margin customers, the Canada turnaround (its goodwill headroom was only about 31%), and the Cromwell UK unit (about 15% headroom). Execution on the digital and restructuring agenda will determine whether revenue growth converts into earnings growth.
02—Key points
Key Highlights
- Net sales rose 3% to $10.42 billion, with volume up 8% offset by price down 4% and a 1% divestiture drag; eCommerce reached $5.28 billion, or 51% of sales (up from 47%).
- Gross margin contracted 1.3 points to 39.3%, driven primarily by U.S. pricing actions, while operating earnings fell 6% to $1.05 billion.
- Diluted EPS was $10.02 (reported) versus $9.87, helped by a lower share count; excluding charges, EPS was $11.46 versus $11.58, down 1%.
- Net charges of $84 million for 2017 included roughly $102 million of restructuring tied to branch closures, the contact center consolidation, and the wind-down of Colombia, partly offset by tax benefits and gains.
- Balance sheet leverage increased: long-term debt reached $2.25 billion, total debt to capitalization was 56.2% (vs. 54.1%), and the company repurchased about $605 million of stock while paying $5.06 per share in dividends.
- 2018 guidance calls for 3% to 7% sales growth and EPS of $12.95 to $14.15, raised from prior guidance of $10.60 to $11.80 due to tax reform and the lower clean energy benefit, with capex expected at $290 million to $330 million.
- Canada's goodwill cushion is only about 31% and Cromwell's about 15% above carrying value, leaving these reporting units exposed if the turnaround stalls.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, W.W. Grainger kept $0.06.
- Revenue$10.43B100.0%
- Cost of revenue−$6.33B60.7%
- Gross profit$4.10B39.3%
- Operating costs−$3.06B29.4%
- Operating income$1.03B9.9%
- Interest, other & tax−$449.0M4.3%
- Net income$586.0M5.6%
Where FY2017 revenue went
$10.43B- Cost of revenue: $6.33B, 61% of revenue
- SG&A: $3.06B, 29% of revenue
- Net income: $586.0M, 5.6% of revenue
- Interest, other & tax: $449.0M, 4.3% of revenue
Kept 5.6% as net incomeNet income $586.0M · 5.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 26, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $10.43B$10.14B | +2.8% |
| Cost of Revenue | $6.33B$6.02B | +5.1% |
| Gross Profit | $4.10B$4.12B | −0.4% |
| SG&A Expenses | $3.06B$3.00B | +2.0% |
| Operating Income | $1.03B$1.11B | −7.0% |
| Interest Expense | $89.00M$76.00M | +17.1% |
| Net Income | $586.00M$606.00M | −3.3% |
| EPS (Basic) | $10.07$9.94 | +1.3% |
| EPS (Diluted) | $10.02$9.87 | +1.5% |
| Shares Outstanding (Basic) | 57.70M60.43M | −4.5% |
| Shares Outstanding (Diluted) | 58.00M60.84M | −4.7% |
05—Questions
Frequently Asked Questions
Why did gross margin decline in 2017 even though sales grew?
The primary driver was price deflation from the U.S. business's pricing actions, implemented in the first and third quarters of 2017, which included adjusting list prices and introducing lower web prices across the assortment. Those price reductions drove volume and share gains, with volume up 8% company-wide, but price down 4% more than offset the benefit to gross profit. Mix shift toward larger, lower-margin customers and higher freight costs in Canada also contributed.
How did the Tax Cuts and Jobs Act affect Grainger's results and outlook?
Grainger recorded a net provisional tax benefit of $3.2 million in 2017, with the 2017 effective tax rate at 33.5% versus 37.9% in 2016. The company expects a 2018 effective tax rate of 23% to 26%, reflecting the reduction in the U.S. federal corporate rate from 35% to 21%. This was a major factor in raising the 2018 EPS guidance to $12.95 to $14.15, though some of the benefit was offset by a lower clean energy tax credit and incremental digital investment.
Is Grainger's eCommerce growth translating into profit growth?
Not yet at the consolidated level. eCommerce sales grew 11% to $5.28 billion and now represent 51% of sales, and the single channel online businesses (Zoro and MonotaRO) drove much of the growth. However, the U.S. business's operating earnings fell 5% and its adjusted operating earnings fell 9%, as price reductions offset gains. Other businesses improved, with operating earnings rising to $56 million, but total operating earnings declined 6%.
What are the main risks to watch in the Canada and international businesses?
Canada posted an operating loss of $77 million in 2017, versus a $65 million loss in 2016, and management is executing a business model reset that includes closing 113 branches. The company's Canada reporting unit has about 31% headroom above carrying value and Cromwell in the U.K. about 15%, so underperformance could trigger goodwill impairments. Fabory and Colombia already produced impairments and wind-downs in prior periods, and the company still reports negative foreign operating results on a pre-tax basis.
06—Continue