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Grainger (GWW) Beats on Q1 Earnings & Sales, Cuts View

W.W. Grainger, Inc.’s GWW first-quarter 2016 adjusted earnings per share of $3.18 increased 3% from the prior-year figure of $3.10. Earnings also comfortably surpassed the Zacks Consensus Estimate of $2.86.

Including one-time items, earnings from continuing operations of $2.98 per share decreased 3% year over year. Earnings for the quarter include restructuring costs of 20 cents per share compared with 3 cents in the year-ago quarter.

Operational Update

Revenues of $2.51 billion went up 3% from $2.44 billion in the year-ago quarter and came just ahead of the Zacks Consensus Estimate of $2.50 billion. There were 64 selling days in the reported quarter, one more than the prior-year period.

The sales increase for the quarter included a 4 percentage point contribution from acquisitions and a 1 percentage point reduction from foreign exchange. Excluding acquisitions and foreign exchange, organic sales declined 2% due to a 3 percentage point reduction in price and a 1 percentage point drop in sales of seasonal products, partially offset by a 2 percentage point increase from higher volume.

Cost of sales increased 8.6% year over year to $1.46 billion. Gross profit decreased 4.5% to $1.05 billion from $1.09 billion in the year-ago quarter. Gross margin expanded 600 basis points to 50.8%.

Grainger’s adjusted operating income in the quarter went down 5% to $336.6 million from $353.3 million the prior-year quarter. Operating margin declined to 13.4% in the quarter from 14.5% in the prior-year quarter.

Segment Performance

Revenues for the United States segment remained flat year over year at $1.97 billion. Adjusted operating income for the segment declined 4.9% year over year to $348.3 million.

Revenues of $178.8 million from the Canadian Acklands-Grainger business decreased 24% in U.S. dollars and 17% in local currency, from the year-ago quarter. The segment reported an adjusted operating loss of $0.93 million against an operating income of $0.94 million in the year-ago quarter.

Revenues from Other businesses (which include Asia, Europe and Latin America) increased 49% year over year to $445 million. The segment’s adjusted operating profit improved significantly to $21.8 million from $11.5 million in the prior-year quarter.

Financial Position

Grainger had cash and cash equivalents of $279.9 million at the end of the first quarter of 2016 compared with $290 million at the end of 2015. Cash flow from operations came in at $154 million in the reported quarter as against $156 million in the year-ago quarter.

At quarter end, Grainger’s long-term debt remained flat with the end 2015 level, at $1.39 billion. During the first quarter, the company returned $245 million in cash to shareholders in the form of share repurchases and dividends.

Guidance

Grainger cut its outlook for 2016 sales growth to 0% to 6% from negative 1% to growth of 7%. The company also revised its earnings per share outlook to $11.00–$12.80 from $10.80–$13.00.

Grainger has successfully implemented SAP in Canada in early Feb 2016, which will drive better service and increased productivity. The company also remains optimistic about strong growth in single channel businesses. However, it will continue to see price and gross margin pressure primarily owing to the low inflation economic environment and faster growth from lower gross margin customers. Despite the current short-term uncertainty, Grainger will continue to invest in the business to drive long-term results.

W.W. Grainger is a leading North American distributor of material handling equipment, safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, cleaning and maintenance supplies, forestry and agriculture equipment, building and home inspection supplies, vehicle and fleet components, and various aftermarket components.

Grainger currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the sector include AptarGroup, Inc. ATR, Briggs & Stratton Corporation BGG and Avery Dennison Corporation AVY. All these stocks carry a Zacks Rank #2 (Buy).

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