Grainger Reports 2Q Revenue Up, But Net Earnings Way Down

CHICAGO — Grainger today reported results for the 2017 second quarter ended June 30, 2017. Sales of $2.6 billion increased 2 percent versus $2.6 billion in the second quarter of 2016. There were 64 selling days in the 2017 second quarter, the same as the 2016 second quarter. Net earnings for the quarter of $98 million were down 43 percent versus $173 million in 2016. Earnings per share of $1.67declined 40 percent versus $2.79 in 2016. 

    Ron Jadin

“The second quarter was in line with our expectations, as we saw continued volume growth from our strategic pricing initiatives in the United States. We remain on schedule to roll out web prices on our entire assortment on Aug. 1,” said Chief Executive Officer DG Macpherson. “Outside the United States, we took aggressive action to streamline our portfolio and focus on profitable businesses, as we announced the wind-down of the business in Colombia and previously announced the closing of 59 branches in Canada this year. Based on our confidence from what we are seeing, we are reiterating our guidance for the year,” Macpherson concluded.

The company reiterated its 2017 sales and earnings per share guidance of sales growth of 1 to 4 percent and adjusted earnings per share of $10.00 to $11.30. The company's previous 2017 guidance was communicated on April 18, 2017.

Ron Jadin, Senior Vice President and Chief Financial Officer, announced today that he will be retiring at year-end. Jadin joined Grainger in 1998 and has served in various financial roles including as CFO since 2008. The company and the Board of Directors thank Jadin for his many contributions during his tenure. An external search has been launched to identify his successor. 

The second quarter contained the following restructuring items:

In the U.S. segment, gains from the sale of assets were essentially offset by restructuring costs. The Canadian business announced plans to close 59 branches in 2017 as part of restructuring to return to profitable growth. The company also announced the wind-down of its business in Colombia. In total, the restructuring items represented $1.07 per share in charges. Excluding restructuring, net earnings decreased 10 percent and earnings per share decreased 5 percent.

Company 
Sales increased 2 percent in the 2017 second quarter versus the prior year, driven by an increase of 7 percentage points from volume, partially offset by declines of 3 percentage points in price, 1 percentage point from foreign exchange and 1 percentage point from the timing of the Easter holiday.

Company operating earnings of $232 million for the 2017 second quarter declined 24 percent versus $306 millionin the 2016 quarter. The decline was driven primarily by charges from the company's restructuring costs.  Excluding restructuring in both years, operating earnings were down 9 percent. 

The company has two reportable business segments, the United States and Canada, which represented approximately 80 percent of company sales for the quarter. The remaining businesses, which include the single channel online businesses, are included in Other Businesses and are not reportable segments. 

United States
Sales for the U.S. segment were up 1 percent versus the 2016 second quarter. The increase was driven by a 5 percentage point increase from volume and 1 percentage point from inter-company sales, partially offset by a 4 percentage point decline in price and a 1 percentage point decline from the timing of the Easter holiday. Sales to customers in the Retail and Natural Resources end markets led the sales performance in the quarter.   

Operating earnings for the U.S. segment declined 11 percent in the quarter driven by lower gross profit and higher operating expenses. Gross profit margins for the quarter declined 1.3 percentage points driven by the strategic price initiatives. In the 2017 second quarter, operating expenses were up 4 percent, which included a $13 million benefit from the gain on sale of branches and $14 million of restructuring charges. 

Canada
Second quarter 2017 sales for the Canada segment decreased 3 percent in U.S. dollars and increased 2 percent in local currency. The 2 percent increase consisted of 2 percentage points from volume and a 2 percentage point benefit from the favorable comparison related to the Alberta wildfires in 2016, partially offset by 1 percentage point from lower price and a 1 percentage point decline from the timing of the Easter holiday.  

The business in Canada posted a $28 million operating loss in the 2017 second quarter versus a $28 million operating loss in the prior year. Current year performance was primarily driven by improved gross margin offset by lower sales and restructuring charges. The gross profit margin in Canada increased 4.1 percentage points versus the prior year largely due to a favorable comparison related to an inventory reserve adjustment in the prior year. Operating expenses increased 8 percent. The 2017 second quarter contained $20 million of restructuring charges related to facility and headcount reductions.

Other Businesses
Sales for the Other Businesses increased 11 percent versus the prior year, consisting of 14 percentage points of growth from volume and price, partially offset by a 3 percentage point decline from foreign exchange, primarily attributable to weakness in the British pound. The performance was driven by 23 percent sales growth for the single channel online businesses.

The Other Businesses posted an operating loss of $14 million in the 2017 second quarter versus $30 million of operating earnings in the prior year. This performance included the charges from the wind-down of the business in Colombia and was partially offset by strong results from Zoro in the United States and Monota RO in Japan. Excluding restructuring, operating earnings for the Other Businesses were $27 million. 

Other
Other income and expense was a net expense of $25 million in the 2017 second quarter versus a net expense of $23 million in the 2016 second quarter. This increase was primarily due to interest expense from the additional debt the company issued in May 2017 and expected losses from the company's investments in clean energy. For the quarter, the effective tax rate in 2017 was 48.4 percent versus 36.6 percent in 2016. The increase is primarily due to the wind-down of the business in Colombia. The company is currently projecting an effective tax rate of 35.0 to 36.0 percent for the year 2017.

Cash Flow
Operating cash flow was $191 million in the 2017 second quarter versus $182 million in the 2016 second quarter. The company used the cash generated during the quarter and proceeds from the debt offering to invest in the business, pay down short-term debt and return cash to shareholders through share repurchase and dividends. Capital expenditures were $52 million in the 2017 second quarter versus $54 million in the second quarter of 2016. In the 2017 second quarter, Grainger returned $234 million to shareholders through $80 million in dividends and $154 million to buy back 780,000 shares of stock. 

Year-to-Date
For the six months ended June 30, 2017, sales of $5.2 billion increased 2 percent versus $5.1 billion in the six months ended June 30, 2016. There were 128 selling days in the first six months of both years. Net earnings decreased 24 percent to $273 million versus $359 million in the first half of 2016. Earnings per share for the six months decreased 20 percent to $4.61 versus $5.77 in the first half of 2016.

The first six months contained the following restructuring items:

Excluding the items noted in the table, net earnings declined 12 percent and earnings per share declined 7 percent.