Grainger 3Q Earnings Miss, Reiterates Outlook

CHICAGO — Grainger today reported results for the 2019 third quarter. Sales of $2.9 billion in the quarter increased 4 percent versus the 2018 third quarter. On a daily basis, sales were up 2.5 percent. The third quarter had one more selling day than the prior year period. Foreign exchange had no impact on total company sales.

“While the global demand environment continued to weaken, our U.S. and endless assortment businesses gained share as we made solid progress on our key growth initiatives and were diligent in managing expenses,” said DG Macpherson, Chairman and Chief Executive Officer. “We remain confident in our ability to achieve results within our 2019 total company guidance ranges as provided in our second quarter earnings release.”

2019 Third Quarter Financial Summary

Revenue
Daily sales for the quarter increased 2.5 percent. Sales were primarily composed of a 2.5 percentage point increase in volume. Price inflation and the impact from foreign exchange were both flat.

Gross Profit Margin
Reported and adjusted gross profit margin for the third quarter were 37.3 percent versus 38.1 percent in the 2018 third quarter due primarily to performance in the U.S. segment and Other businesses. Year to date 2019 reported and adjusted gross profit margin were 38.4 percent versus 38.8 percent in the 2018 year to date period due to performance in Other businesses.

Earnings
Reported operating earnings for the 2019 third quarter of $338 million were up 78 percent versus $189 million in the 2018 third quarter. Reported earnings in the 2018 third quarter included $143 million in restructuring and non-cash impairment charges, which were primarily related to the Cromwell business in the U.K. On an adjusted basis, operating earnings for the quarter of $339 million were up 2 percent versus $332 million in the 2018 quarter.

Reported operating margin of 11.4 percent increased 480 basis points in the third quarter of 2019 versus the prior year quarter. Adjusted operating margin of 11.5 percent in the quarter declined 20 basis points versus the prior year quarter. The decline in operating margin was due primarily to investments in Zoro. Year to date 2019 reported operating margin of 12.5 percent increased 225 basis points versus the 2018 year to date period. Year to date adjusted operating margin of 12.5 percent increased 30 basis points versus the 2018 year to date period due primarily to the U.S. segment and Canada.

Reported earnings per share of $4.25 in the third quarter was up 134 percent versus $1.82 in the 2018 third quarter. Adjusted earnings per share in the quarter of $4.26 increased 2 percent versus $4.19 in the 2018 third quarter. The improvement in adjusted earnings per share was due primarily to higher operating earnings and lower average shares outstanding, partially offset by higher taxes due to lower tax benefits from stock based compensation.

Tax Rate
For the 2019 third quarter, the company’s reported tax rate was 24.2 percent versus 32.7 percent in the 2018 third quarter. The higher tax rate in the prior year quarter was driven primarily by Cromwell impairment charges, which were not tax deductible.

Excluding net restructuring and impairment charges in both periods, the adjusted tax rates were 24.2% and 20.0% for the three months ended September 30, 2019 and 2018, respectively. The increase in effective tax rate was primarily driven by lower tax benefit from stock-based compensation and the absence of the Company’s clean energy tax benefits in 2019 as the Company concluded these investments in 2018.

Cash Flow
Operating cash flow was $320 million in the 2019 third quarter compared to $348 million in the 2018 third quarter. The decline in operating cash flow was primarily the result of timing related to supplier payments. The company used the cash generated during the quarter to invest in the business and return cash to shareholders through share repurchases and dividends. Grainger returned $279 million to shareholders through $79 million in dividends and $200 million used to buy back approximately 725,000 shares in the third quarter of 2019.

2019 Company Guidance:
The company is reiterating 2019 guidance at the total Company level. These metrics reflect the updated guidance provided in the Q2 2019 earnings release.