W.W. Grainger Inc. (GWW) delivered record
earnings per share (EPS) of $2.18 in its fiscal 2011 first quarter
ended March 31, 2011, up 58% from an adjusted EPS of $1.38 in the
year-ago period. Earnings were way ahead of the Zacks Consensus
Estimate of $1.79.
The impressive results were driven by expanding product lines,
providing new services complementing Grainger’s products,
investments in eCommerce and enhancement of sales force. These
efforts have helped gain market share in North America as well as
penetration in the high growth, emerging markets.
The prior-year quarter’s EPS excluded a 15 cent per share
expense related to the tax treatment of retiree healthcare benefits
following the passage of the Patient Protection and Affordable Care
Act, and an 8 cent per share benefit from changes to the company's
paid time off policy. Including these items, EPS in the first
quarter of fiscal 2010 was $1.31. When considering this as the base
comparison, EPS climbed a massive 66%.
Revenues in the quarter were $1,883.6 million, a 12.6% jump from
$1,672.3 million in the year-ago period and above the Zacks
Consensus of $1,837 million. On a daily basis, sales increased 11%
in the quarter with January, February and March posting increases
of 10%, 11% and 12%, respectively.
Volumes contributed 7 percentage points and pricing added
another 2 percentage point benefit. Foreign exchange and
acquisitions added one percentage point each to the growth in the
quarter.
As a percentage of revenue, the cost of merchandise improved 180
basis points to 56% and warehousing, marketing and administrative
expenses as a percentage of revenue decreased 120 basis points to
30.1%. Consequently, gross margin expanded 180 basis points to 44%
and operating margin widened 300 basis points to 13.9% in the
quarter.
Segment Performance
Revenues from the United States segment increased 9% (a 7%
increase on a daily basis) year over year to $1,537.7 million as
all the end markets showed improvement, led by heavy manufacturing.
Volumes added 5 percentage points while pricing added 2 percentage
points to the increase. Monthly sales showed an upward trend with
daily sales increasing 6% in January and 8% in February and March
alike.
Operating income for the segment upped 27% (33% excluding the
change in the paid time off policy in the year-ago quarter) to
$256.4 million, driven by sales growth, improved gross profit
margins and operating expenses increasing at a slower rate than
sales. Segment operating margin expanded 240 basis points to
16.7%.
Revenues from the Acklands-Grainger business in Canada leaped
25% to $242.4 million. On a daily sales basis, revenues increased
23%. Strong growth, especially from customers in the agriculture
and mining, oil and gas, heavy manufacturing, forestry,
transportation and government sectors, culminated in the increase.
On a daily basis, sales were up 18% in January, 16% in February and
16% in March.
Operating income in Canada increased an impressive 279% (260% in
local currency) to $23.9 million driven by strong sales and a 380
basis point improvement in gross margin. The gross margin expansion
was spurred by less price discounting and better customer mix. On
top of this, product cost deflation tied to the strength of the
Canadian dollar, along with price increases and positive operating
expense leverage due to tight cost controls contributed to the
improvement.
Revenues from the other businesses (which include Japan, Mexico,
India, Puerto Rico, China and Panama) were up 44% to $116.9 million
ascribed to incremental sales from the Japanese, Mexican and
Colombian businesses, combined with sales growth in other
international businesses.
Operating earnings of $6.4 million for the Other Businesses were
a stark contrast to the loss of $0.82 million in the year-ago
period given strong earnings growth in Japan and Mexico, coupled
with lower operating losses in China and India.
Financial Position
Grainger had cash and cash equivalents of $334.7 million as of
March 31, 2011, up from $313.4 million as of December 31, 2010 and
down from $548.5 million as of March 31, 2010.
The company generated net cash from operating activities of
$118.4 million in the reported quarter, up from $113.2 million in
the year-ago quarter. Capital expenditures for the quarter were $33
million versus $14 million in the year-ago period. Grainger
returned approximately $89 million to shareholders through the
repurchase of 376,000 shares of common stock and dividend
payments.
The debt-to-capitalization ratio was 17.0% as of March 31, 2011
compared with 17.9% as of December 31, 2010 and 18.0% as of March
31, 2010.
Outlook
Based on the upbeat first quarter results, Grainger upped its
fiscal 2011 guidance, which it had declared at its analyst meeting
in November. The company now expects sales growth in the range of
7% to 10% compared with the prior guidance range of 5% to 9%. The
company forecasts fiscal 2011 EPS to range between $8.10 and $8.60
in place of its prior expected range of $7.15 to $7.90.
Our Take
Grainger remains focused on expanding its product offering and
growing the share of its private label products. It launched a
multi-year product line expansion program in 2006 and has since
added approximately 234,000 new products. Grainger has a long-term
vision to expand the count to 500,000 products. The continued
success of this program is expected to drive sales growth in 2011
and beyond.
Grainger’s balance sheet remains strong and, given its cash
position, we believe Grainger can further invest in growth
opportunities, increase dividends and reinvest capital through
share repurchases. The company has been rewarding shareholders with
an uninterrupted streak of increased dividends for 39 consecutive
years.
A Quick Look at Peers
Fastenal Co. (FAST) reported first quarter EPS
of 54 cents, a 42.1% jump from 38 cents a year ago, beating the
Zacks Consensus Estimate of 51 cents. Net sales for the quarter
totaled $640.6 million, up 23% year over year, driven by an
improvement in sales to the company’s manufacturing as well as
non-residential construction customers. Grainger’s other
competitors – Applied Industrial Technologies Inc.
(AIT) and WESCO International Inc. (WCC) – are yet
to declare their first quarter results.
Illinois-based 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.
The company’s services comprise inventory management and energy
efficiency solutions.
APPLD INDL TECH (AIT): Free Stock Analysis Report
FASTENAL (FAST): Free Stock Analysis Report
GRAINGER W W (GWW): Free Stock Analysis Report
WESCO INTL INC (WCC): Free Stock Analysis Report
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