01—Abstract
Summary
Summary of the 10-K filed February 20, 2020. Cited figures are marked; the original filing is the authoritative source.
W.W.
Grainger's FY2019 10-K shows a company that grew sales modestly while absorbing a sizable non-cash impairment at its UK Cromwell business. Net sales rose 2.5% to $11.486 billiona, driven primarily by volume gains in the U.S. business from market share and double-digit growth in the lower-margin endless assortment businesses (Zoro and MonotaRO). Gross margin slipped 0.5 points to 38.3%, reflecting that mix shift.
Reported operating earnings rose 9% to $1.262 billionb, but this comparison is flattered by lower 2019 restructuring and impairment charges. Excluding those items, adjusted operating earnings grew 3% to $1.388 billion, and adjusted diluted EPS rose 4% to $17.29 versus $16.70. Reported diluted EPS was $15.32, up 12%.
The balance sheet and cash generation remain solid but are being used heavily for shareholder returns. Operating cash flow was $1.042 billionc, roughly flat, while the company repurchased $700 million of stock and paid $328 million in dividends, which pushed financing outflows to $1.023 billion and reduced cash to $360 million. Total debt was about $2.4 billion, and the debt-to-capitalization ratio rose to 54.3% from 51.5%.
Both rating agencies keep Grainger at investment grade (A3/A+). Management also signaled a February 2020 refinancing into a $1.25 billiond revolving credit facility. For investors, the key tension is between a U.S. core that is taking share but growing slowly and a Canada business in turnaround with a sharp sales decline.
Growth is increasingly reliant on the endless assortment model, which is dilutive to margins, and the Cromwell write-down raises questions about the returns on past acquisitions. Shareholders should watch whether adjusted earnings growth can keep pace with the buyback-supported EPS gains, and whether the company can hold gross margin as its mix shifts.
02—Key points
Key Highlights
- Net sales rose 2.5% to $11,486 million, led by U.S. volume growth of 2.0% from market share gains and double-digit growth at the endless assortment businesses (Zoro and MonotaRO).
- Gross margin declined 0.5 points to 38.3%, mainly from the lower-margin endless assortment businesses growing faster than the rest of the company.
- Reported operating earnings rose 9% to $1,262 million, but adjusted operating earnings (excluding restructuring and impairments) grew a more modest 3% to $1,388 million.
- Reported diluted EPS was $15.32 (up 12%); adjusted diluted EPS was $17.29 (up 4%), helped by lower average share count after buybacks.
- A $120 million non-cash intangible impairment at the UK Cromwell business was recorded in 2019, following a $139 million charge in 2018.
- Canada net sales fell 19% to $529 million due to deliberate branch footprint reductions, though operating earnings turned slightly positive at $3 million.
- Shareholder returns were heavy: $700 million of share repurchases and $328 million of dividends, pushing total debt-to-capitalization up to 54.3% from 51.5%; cash fell to $360 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, W.W. Grainger kept $0.07.
- Revenue$11.49B100.0%
- Cost of revenue−$7.09B61.7%
- Gross profit$4.40B38.3%
- Operating costs−$3.13B27.3%
- Operating income$1.26B11.0%
- Interest, other & tax−$413.0M3.6%
- Net income$849.0M7.4%
Where FY2019 revenue went
$11.49B- Cost of revenue: $7.09B, 62% of revenue
- SG&A: $3.13B, 27% of revenue
- Net income: $849.0M, 7.4% of revenue
- Interest, other & tax: $413.0M, 3.6% of revenue
Kept 7.4% as net incomeNet income $849.0M · 7.4%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 20, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $11.49B$11.22B | +2.4% |
| Cost of Revenue | $7.09B$6.87B | +3.1% |
| Gross Profit | $4.40B$4.35B | +1.1% |
| SG&A Expenses | $3.13B$3.19B | −1.7% |
| Operating Income | $1.26B$1.16B | +9.0% |
| Net Income | $849.00M$782.00M | +8.6% |
| EPS (Basic) | $15.39$13.82 | +11.4% |
| EPS (Diluted) | $15.32$13.73 | +11.6% |
| Shares Outstanding (Basic) | 54.70M56.10M | −2.5% |
| Shares Outstanding (Diluted) | 54.90M56.50M | −2.8% |
05—Questions
Frequently Asked Questions
Why did reported EPS grow faster than adjusted operating performance in 2019?
Reported 2019 results benefited from a smaller restructuring and impairment burden than 2018 ($126 million versus $186 million). Adjusted operating earnings grew 3% and adjusted diluted EPS grew 4%, while reported diluted EPS rose 12%. The gap reflects both the lower charges and a reduced share count from repurchases.
What is driving the lower gross margin, and is it likely to persist?
The decline to 38.3% from 38.7% was driven primarily by the endless assortment businesses (Zoro and MonotaRO), which carry lower margins and are growing faster than the core. Management also cited contract renegotiations and customer mix in the U.S. As these businesses keep growing faster, mix pressure is likely to continue unless margins in those businesses improve.
What happened with the Cromwell business and why does it matter?
Cromwell, a UK business within other businesses, suffered declining operating performance and accelerated customer attrition, prompting a 2019 impairment of about $120 million covering its fully written-down trade name and impaired customer relationships. A $139 million charge was also taken in 2018. The write-downs raise questions about the returns on that acquisition and the risk of further impairments, including for the Canadian goodwill of $126 million, which the auditors flagged as a critical audit matter.
How is Grainger funding its shareholder returns, and is the balance sheet under strain?
Operating cash flow of $1.042 billion covered capital spending of $221 million and dividends of $328 million, but the remaining buybacks of $700 million were funded partly by cash on hand and debt. Cash dropped to $360 million and debt-to-capitalization rose to 54.3%. Leverage remains manageable with investment-grade ratings (A3/A+), but the trend is worth monitoring if buybacks continue at this pace.
What is the outlook for 2020 and what risks should investors monitor?
Management's priorities for 2020 are to gain share in the U.S. through sales and service, return Canada to volume growth after its turnaround, and grow the international high-touch and endless assortment businesses. Planned 2020 capital spending is about $250 million. Key risks disclosed include competitive pricing pressure, commodity and tariff-driven cost increases, supply chain disruption (the filing specifically cites the coronavirus), cybersecurity, currency exposure, and the Cromwell and Canada goodwill impairment risk.
06—Continue