How did Grainger perform in the fourth quarter of 2023?

Net sales rose 5.1% to $4.0 billion (5.5% on a daily, organic constant currency basis). Reported operating margin was 13.9%, down 40 basis points, while adjusted operating margin rose 80 basis points to 14.6%. Adjusted diluted EPS was $8.33, up 16.7%, and reported EPS was $7.89, up 4.7%.

Why do reported and adjusted results differ?

Adjusted results exclude a $26 million pre-tax ($22 million after-tax) loss on the divestiture of E & R Industrial Sales, Inc., completed in Q4 2023. Prior-year adjusted results excluded a $21 million gain from the 2022 divestiture of Cromwell's enterprise software business.

What is the 2024 outlook?

Guidance calls for net sales of $17.2–$17.7 billion, daily organic constant currency sales growth of 4.0%–7.0%, adjusted gross margin of 39.1%–39.4%, adjusted operating margin of 15.3%–15.8%, and adjusted diluted EPS of $38.00–$40.50. Operating cash flow is expected at $1.9–$2.1 billion, with $0.9–$1.1 billion in share repurchases. Reported sales growth is higher than organic growth partly because 2024 has two more selling days than 2023.

Is Grainger generating enough cash to fund its shareholder returns?

Yes. In 2023 the company generated $2.0 billion in operating cash flow and $1.6 billion in free cash flow, after $445 million in capital expenditures. It returned $1.2 billion through dividends and share repurchases, which was covered by free cash flow. Cash on the balance sheet rose to $660 million by year-end.

What are the main risks to margins and growth?

Gross margin pressure from negative price/cost spread and unfavorable product mix at Zoro was the key headwind in Q4. The safe harbor statement also cites inflation, competitive pricing pressure, loss of major customers, supply disruption, macroeconomic and geopolitical conditions, tariffs, currency fluctuations, and cybersecurity risks.

GWW 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed February 2, 2024. Cited figures are marked; the original filing is the authoritative source.

W.W.

Grainger reported fourth-quarter and full-year 2023 results on February 2, 2024, capping a year of record annual sales and earnings. Q4 net sales rose 5.1% to $4.0 billion^a (5.5% on a daily, organic constant currency basis). Reported operating margin fell 40 basis points to 13.9%, but adjusted operating margin (excluding a $26 million pre-tax loss on the divestiture of E & R Industrial Sales) rose 80 basis points to 14.6%.

Reported diluted EPS was $7.89^b, up 4.7%, and adjusted EPS was $8.33, up 16.7%. Gross margin declined 50 basis points to 39.1% in the quarter, reflecting price/cost pressure and product mix at Zoro. Full-year sales reached $16.5 billion, up 8.2% (9.5% organic constant currency), and reported diluted EPS rose 20.5% to $36.23.

Full-year cash generation was strong. Operating cash flow was $2.0 billion^c, up 52.4%, and free cash flow was $1.6 billion. Grainger returned $1.2 billion to shareholders through dividends and buybacks, and year-end cash rose to $660 million.

Long-term debt declined modestly to $2.27 billion, and shareholders' equity increased to $3.44 billion^d. For 2024, management guided to sales of $17.2 to $17.7 billion (4.3% to 7.3% reported growth), adjusted operating margin of 15.3% to 15.8%, and adjusted diluted EPS of $38.00 to $40.50. Guidance also calls for operating cash flow of $1.9 to $2.1 billion and $0.9 to $1.1 billion in share repurchases.

Growth is supported by two additional selling days in 2024 versus 2023, which management excluded from its organic growth figure. The company also announced a new 1.2 million square-foot distribution center near Houston, Texas, planned for 2026.

02—Key points

Key Highlights

Q4 2023 sales of $4.0 billion rose 5.1% (5.5% daily, organic constant currency), with High-Touch Solutions N.A. up 4.7% and Endless Assortment up 6.0%.
Q4 adjusted operating margin expanded 80 basis points to 14.6% on SG&A leverage, while reported operating margin declined 40 basis points to 13.9% due to the E & R Industrial Sales divestiture loss.
Q4 diluted EPS was $7.89 reported (+4.7%) and $8.33 adjusted (+16.7%); full-year reported EPS was $36.23 (+20.5%) and adjusted EPS $36.67 (+23.6%).
Gross margin pressure: Q4 gross profit margin fell 50 basis points to 39.1%, driven by negative price/cost spread and Zoro product mix, though full-year gross margin rose 100 basis points to 39.4%.
Strong cash flow: FY 2023 operating cash flow of $2.0 billion (+52.4%) and free cash flow of $1.6 billion, with $1.2 billion returned to shareholders.
2024 guidance calls for sales of $17.2–$17.7 billion, adjusted operating margin of 15.3%–15.8%, and adjusted diluted EPS of $38.00–$40.50.
Announced a new 1.2 million square-foot distribution center near Houston, Texas, planned to open in 2026.

03—Questions

Frequently Asked Questions

How did Grainger perform in the fourth quarter of 2023?
Net sales rose 5.1% to $4.0 billion (5.5% on a daily, organic constant currency basis). Reported operating margin was 13.9%, down 40 basis points, while adjusted operating margin rose 80 basis points to 14.6%. Adjusted diluted EPS was $8.33, up 16.7%, and reported EPS was $7.89, up 4.7%.
Why do reported and adjusted results differ?
Adjusted results exclude a $26 million pre-tax ($22 million after-tax) loss on the divestiture of E & R Industrial Sales, Inc., completed in Q4 2023. Prior-year adjusted results excluded a $21 million gain from the 2022 divestiture of Cromwell's enterprise software business.
What is the 2024 outlook?
Guidance calls for net sales of $17.2–$17.7 billion, daily organic constant currency sales growth of 4.0%–7.0%, adjusted gross margin of 39.1%–39.4%, adjusted operating margin of 15.3%–15.8%, and adjusted diluted EPS of $38.00–$40.50. Operating cash flow is expected at $1.9–$2.1 billion, with $0.9–$1.1 billion in share repurchases. Reported sales growth is higher than organic growth partly because 2024 has two more selling days than 2023.
Is Grainger generating enough cash to fund its shareholder returns?
Yes. In 2023 the company generated $2.0 billion in operating cash flow and $1.6 billion in free cash flow, after $445 million in capital expenditures. It returned $1.2 billion through dividends and share repurchases, which was covered by free cash flow. Cash on the balance sheet rose to $660 million by year-end.
What are the main risks to margins and growth?
Gross margin pressure from negative price/cost spread and unfavorable product mix at Zoro was the key headwind in Q4. The safe harbor statement also cites inflation, competitive pricing pressure, loss of major customers, supply disruption, macroeconomic and geopolitical conditions, tariffs, currency fluctuations, and cybersecurity risks.

04—Continue

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