10-QPeriod: Q1 FY2016

W.W. GRAINGER, INC. Quarterly Report for Q1 Ended Mar 31, 2016

Filed April 28, 2016For Securities:GWW

Summary

W.W. Grainger, Inc. reported a decrease in net earnings for the first quarter of 2016 compared to the prior year, with diluted EPS falling to $2.98 from $3.07. This decline was primarily driven by a 4% decrease in gross profit, stemming from price deflation exceeding cost deflation and changes in vendor funding. Despite a 3% increase in net sales to $2.51 billion, largely due to the acquisition of Cromwell Group and growth in e-commerce, the company faced headwinds in its core U.S. market and a significant contraction in its Canadian segment due to a challenging economic environment, particularly in the oil and gas sector. To navigate these conditions, Grainger is undertaking restructuring efforts, including the planned closure of 55 U.S. branches, which incurred $16 million in costs during the quarter. The company also revised its 2016 guidance downwards, anticipating continued gross profit pressure and increased operating expense favorability. While the acquisition of Cromwell and e-commerce growth provided some uplift, the overall performance reflects a challenging operating landscape characterized by economic uncertainty and competitive pressures.

Financial Highlights

52 data points
Beta

Revenue

$2.51B

41.7% Gross Margin

Net Income

$186.71M

7.4% Net Margin

EPS (Diluted)

$2.98

Total Assets

$5.96B

Cash & Equivalents

$279.91M

Free Cash Flow

$108.84M

Financial Statements
Beta
Revenue$2.51B
Cost of Revenue$1.46B
Gross Profit$1.05B
SG&A Expenses$727.96M
Operating Income$317.09M
Interest Expense$13.72M
Net Income$186.71M
EPS (Basic)$3.00
EPS (Diluted)$2.98
Shares Outstanding (Basic)61.67M
Shares Outstanding (Diluted)62.10M

Key Highlights

  • 1Net sales increased by 3% to $2.51 billion, primarily driven by the Cromwell acquisition and e-commerce growth.
  • 2Diluted Earnings Per Share (EPS) decreased by 3% to $2.98 from $3.07 in the prior year's quarter.
  • 3Gross profit declined by 4%, with the gross profit margin shrinking to 41.7% from 44.8% due to price deflation, vendor funding changes, and sales mix.
  • 4Operating expenses decreased by 2% to $728 million, benefiting from restructuring initiatives which included $16 million in costs related to branch closures and reorganization.
  • 5The Canadian segment experienced a significant sales decline of 24% due to weak oil prices impacting key customer markets.
  • 6The company revised its 2016 sales growth guidance to a range of 0% to 6% and EPS guidance to $11.00 - $12.80.
  • 7E-commerce sales represented 45% of total sales, increasing by 15% year-over-year.

Frequently Asked Questions

The decrease in net earnings and EPS was primarily driven by a decline in gross profit. This was attributed to price deflation outpacing cost deflation, changes in the classification of vendor funding for trade shows, and an unfavorable sales mix, including increased sales to lower-margin customers. Additionally, restructuring costs incurred in the current period impacted profitability.

The Cromwell acquisition, completed in September 2015, contributed to a 3% increase in net sales. Restructuring efforts, including the planned closure of 55 U.S. branches, led to $16 million in costs during the quarter but are expected to provide operating expense favorability in the future. These initiatives are part of the company's strategy to manage costs and improve efficiency in a challenging economic environment.

The Canadian segment experienced a significant sales decrease of 24% year-over-year. This decline is largely due to the persistent weakness in oil and gas prices and other commodity prices, which negatively impact sales across most customer end markets, particularly in the Alberta region. This economic weakness, coupled with SAP implementation issues and foreign exchange rates, significantly impacted the segment's results.

Grainger revised its full-year 2016 guidance downwards, now expecting sales growth between 0% and 6% and diluted EPS in the range of $11.00 to $12.80. This revision reflects anticipated continued gross profit pressure for the year, offset by expected operating expense favorability driven by pricing strategies and ongoing cost savings initiatives.