By Susan Bloom
In its Q3 2016 financial release issued on October 18, W.W. Grainger revealed that while its global net sales were up 3 percent over the prior year (largely driven by growth outside of the U.S. and Canada), net earnings were down by the same amount, the result of a range of internal restructuring activities and mix/margin shifts.
Image courtesy of W.W. Grainger, Inc.
“We continue to operate in a challenging economic environment,” stated DG Macpherson, Grainger’s Chief Executive Officer, adding in the release that “we expect fourth quarter demand to remain challenged.”
Though a media spokesperson for Grainger declined to comment further on the company’s Q3 performance and the specifics of the current and future economic environment confronting the distribution giant, stating that “we would not speculate in general nor as it relates to a specific product category,” several industry analysts responded to tED magazine’s request for insights into the current economic landscape facing Grainger and the electrical products industry.
According to Deane Dray, CFA, Managing Director of the Electrical Equipment & Multi-Industry Sector for RBC Capital Markets, LLC in New York City, and his firm’s Equity Report on Grainger, issued on October 18, “Distributors have been under pressure given the sluggish general macro environment that is keeping inflation low and preventing the typical pricing increases distributors are accustomed to passing through. This has negative implications for margins in the near-term, particularly within the highly fragmented industrial MRO distribution market.” RBC’s report on Grainger stated that the company’s increasing shift away from bricks-and-mortar outlets in favor of more commerce through its online platform has exacted downward pressure on profitability. Specifically, “the lower gross margin nature of online has added to the gross margin issues at the company, and we expect this trend to persist in the near-to-medium term,” RBC’s report stated.
Overall, the report continued, “Grainger has little pricing power in [the current] low-inflation environment and is vulnerable at negative inflection points in the economy, given its short-cycle, no-backlog distribution model. With U.S. GDP slugging along in the low-single digits, it is difficult for Grainger to produce consistently strong growth numbers.”
Industry expert Rob Haslehurst, Managing Director of L.E.K. Consulting, a 30+-year-old strategy consulting firm with offices in Boston, Chicago, Los Angeles, New York, San Francisco, and other locations worldwide, largely agreed. “While it’s true that overall GDP growth has dropped back a bit, I’m not sure I see a specifically ‘tough’ economic environment — our overall models on residential and commercial construction are still generally positive, although new home starts remain at the low ‘new normal’ levels after the bubble of a decade ago,” Haslehurst shared with tED magazine. “However,” he noted, “the underlying channel shift to online as well as competition from mass and particularly online pure-plays is putting pressure on traditional distribution, and it’s very hard to out-compete Amazon online,” a reality which he suspects is part of Grainger’s issue.
Wells Fargo Securities’ Equity Research arm concurred, sharing that they remain cautious on Grainger’s near/intermediate outlook based on the company’s “disintermediation of medium-sized U.S. customers and replacement with lower margin international single channel online sales.”
According to RBC research, Lake Forest, IL-based Grainger offers nearly 1.4 million products to over two million customers through 709 branches, 33 distribution centers, and 23,741 employees.
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