Grainger (GWW) Lags Q1 Earnings, Sales, Trims '17 Outlook

W.W. Grainger, Inc.’s (NYSE:GWW) first-quarter 2017 adjusted earnings per share of $2.88 declined 9% from the prior-year figure of $3.18, owing to the adverse effect of strategic pricing initiatives in the U.S. Earnings also missed the Zacks Consensus Estimate of $3.01.

Including one-time items, earnings came in at $2.93 per share in the reported quarter, down 2% from $2.98 in the year-ago quarter.

Operational Update

Grainger reported revenues of $2,541 million, up 1% from the prior-year quarter figure of $2,507 million, driven by a 5 percentage point (pp) increase from volume growth, partially offset by a 3 pp decline in price, and a 1 pp decline from lower sales of seasonal products. However, the figure marginally fell short of the Zacks Consensus Estimate of $2,563 million. There were 64 selling days in the reported quarter, same as first-quarter 2016.

Cost of sales increased 4% year over year to $1,522 million. Gross profit decreased 2.5% to $1,019 million from $1,045 million recorded in the year-ago quarter. Gross margin contracted 170 basis points to 40%, driven by strategic price initiatives.

Grainger’s adjusted operating income in the quarter decreased 14% to $290.3 million from $336.6 million in the prior-year quarter. Operating margin fell to 11.4% in the quarter from 13.4% in the prior-year quarter.

Segment Performance

Revenues for the U.S. segment edged down 1% year over year to $1,953 million, resulting from a 4 pp decline in price and a 1 pp decline from lower sales of seasonal products, partially offset by a 4 pp increase from volume growth. Adjusted operating income for the segment decreased 12% year over year to $306 million.

Revenues of $186 million from the Canada segment were up 4% in U.S. dollars and 1% in local currency from the year-ago quarter. The segment reported an adjusted operating loss of $15.6 million compared to a loss of $9.3 million in the prior-year quarter.

Revenues from Other businesses (which include Asia, Europe and Latin America) increased 12% year over year to $497.4 million. The segment’s adjusted operating profit surged 44.5% to $31.5 million from $21.8 million recorded in the prior-year quarter.

Financial Position

Grainger had cash and cash equivalents of $238.8 million at the end of first-quarter 2017 compared with $274 million at the end of 2016. Cash flow from operations came in at $180.9 million in the reported quarter as against $160.6 million in the year-ago quarter.

As of quarter end, Grainger’s long-term debt increased to $1,848 million compared with $1,841 million at the end of 2016. During the first quarter, the company returned $231 million in cash to shareholders through $72 million in dividends and $159 million to buy back 646,000 shares of stock.

Guidance

Grainger lowered its 2017 sales and earnings per share guidance for 2017 due to unfavorable strategic pricing actions in the U.S. The company now guides sales growth of 1–4%, down from the earlier guidance of 2–6%. It also expects earnings per share to be in the range of $10.00–$11.30 compared to the previous band of $11.30–$12.40.

Grainger is anticipated to benefit from its key initiatives, including sales force effectiveness and vertical alignment of the sales force in the U.S., medium-sized customer acquisition and growth of the online model globally. The company remains focused on creating value for customers, delivering a seamless customer experience and reducing costs in 2017. However, fluctuation in oil prices and gross margin pressure will weigh on the company’s performance. Additionally, the underperforming Canada segment remains a concern.

Share Price Performance

In the last one year, Grainger underperformed the Zacks classified Industrial Services sub-industry with respect to price performance. The stock lost around 3.1%, while the industry incurred a loss of 2.3% over the same time frame.

Zacks Rank

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

Some better-ranked stocks in the same sector are ACCO Brands Corporation (NYSE:ACCO) , Casella Waste Systems, Inc. (NASDAQ:CWST) and Deere & Company (NYSE:DE) . All the three stocks boast a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

ACCO Brands has an average positive earnings surprise of 24.74% for the trailing four quarters. Casella Waste generated an outstanding average positive earnings surprise of 165.21% in the past four quarters, while Deere has an average positive earnings surprise of 60.50% for the last four quarters.

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