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Grainger Q1 Earnings Beat Estimates

GraingerCHICAGO — Grainger today reported results for the 2018 first quarter ended March 31, 2018. Sales of $2.8 billion increased 9 percent versus $2.5 billion in the first quarter of 2017. There were 64 selling days in the 2018 first quarter, the same as the 2017 first quarter. Net earnings for the quarter of $232 million were up 32 percent versus $175 million in 2017. Earnings per share of $4.07 increased 39 percent versus $2.93 in 2017.

“Results for the quarter were strong, led by increased volume in our U.S. business with both large and medium customers, supported by a strong demand environment. Performance in Canada has improved although we are still in the early stages of the turnaround. Our single channel and international businesses also contributed to the strong performance,” said DG Macpherson, Chairman and Chief Executive Officer. “We remain confident that the strategic actions we are executing in the United States and Canada are helping us create a stronger business. Based on the encouraging results we’re seeing,” Macpherson concluded, “we are increasing our sales and EPS guidance for the year.”

As a result, the company raised its 2018 sales and earnings per share guidance for the year and now expects sales growth of 5 to 8 percent and earnings per share of $14.30 to $15.30. The company’s previous 2018 guidance, communicated on Jan. 24, 2018, was sales growth of 3 to 7 percent and earnings per share of $12.95 to $14.15.

Company
Sales increased 9 percent in the 2018 first quarter versus the prior year, driven by an 8 percentage point increase from volume, 2 percentage points from foreign exchange and 1 percentage point from higher sales of seasonal products, partially offset by a 1 percentage point decline in price and a 1 percentage point decline from the divestiture of a specialty business.

Company operating earnings of $335 million for the 2018 first quarter increased 14 percent versus $293 million in the 2017 quarter. The increase was driven by higher sales and strong expense leverage.

The company has two reportable business segments, the United States and Canada, which represented approximately 79 percent of company sales for the quarter. The remaining operating businesses are located in Europe, Asia, and Latin America. The single channel online businesses are included in Other Businesses and are not reportable segments.

United States
Sales for the U.S. segment increased 8 percent versus the 2017 first quarter. The increase was driven by 9 percentage points from volume growth, 1 percentage point from intercompany sales and 1 percentage point from higher sales of seasonal products, partially offset by a 2 percentage point decline in price and a 1 percentage point decline from the divestiture of a specialty business. Sales to customers in the Retail and Contractors end markets led the sales performance in the quarter.

Operating earnings for the U.S. segment increased 15 percent in the quarter, driven by higher sales and improved expense management. Gross profit margins for the quarter declined 1.0 percentage point driven by the company’s strategic price initiatives, partially offset by positive customer mix. The lower gross profit margin includes a 0.6 percentage point decline from implementation of the Financial Accounting Standards Board’s new revenue recognition standard that primarily reclassifies certain costs related to KeepStock services from operating expenses to cost of goods sold. In the 2018 first quarter, operating expenses were down 1 percent.

Canada
First quarter 2018 sales for Canada decreased 2 percent in U.S. dollars and 6 percent in local currency. The 6 percent decrease consisted of a 13 percentage point decline in volume, partially offset by 7 percentage points from higher price.

The business in Canada posted a $20 million operating loss in the 2018 first quarter versus a $17 million operating loss in the prior year, primarily driven by higher restructuring expenses. The gross profit margin in Canada increased 3.3 percentage points versus the prior year largely due to price increases that began in late 2017. Operating expenses increased 12 percent, driven by costs related to the business model reset. Reported results include $10.9 million of restructuring costs. Excluding those charges, operating expenses were down 3 percent and the operating loss was $9 million.

Other Businesses
Sales for the Other Businesses increased 18 percent versus the prior year, consisting of 12 percentage points of growth from volume and price and 6 percentage points from foreign exchange. The performance was driven by 24 percent sales growth for the single channel online businesses.

Operating earnings for the Other Businesses were $36 million in the 2018 first quarter versus $32 million in the prior year. This performance included strong results from MonotaRO in Japan and Zoro in the United States and improved performance from the international businesses.

Other
Other income and expense was a net expense of $28 million in the 2018 first quarter versus a net expense of $22 million in the 2017 first quarter. This increase was primarily due to interest expense from the $400 million in additional long-term debt the company issued in 2017. For the quarter, the effective tax rate in 2018 was 21.6 percent versus 32.4 percent in 2017. The decrease was primarily due to the 2017 tax legislation. The company is currently projecting an effective tax rate of 23 to 26 percent for the year 2018. The first quarter tax rate was below the full year range primarily due to the benefit from stock-based awards. Future tax benefits from stock-based awards are not estimated in the full year projection.

Cash Flow
Operating cash flow was $147 million in the 2018 first quarter versus $181 million in the 2017 first quarter. The company used the cash generated during the quarter to invest in the business and return cash to shareholders through share repurchase and dividends. Capital expenditures in the 2018 first quarter were $49 million. In the quarter, Grainger returned $245 million to shareholders through $72 million in dividends and $173 million to buy back 668,000 shares of stock.

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