CHICAGO — Grainger today reported results for the 2018 second quarter ended June 30, 2018. Sales of $2.9 billion increased 9.4 percent versus $2.6 billion in the second quarter of 2017. Operating earnings for the quarter of $344 million were up 50 percent versus $229 million in the 2017 second quarter. Earnings per share of $4.16 increased 149 percent versus $1.67 in the 2017 second quarter. Adjusted earnings per share of $4.37 increased 59 percent versus $2.74 in the 2017 second quarter. The improvement in earnings was driven mostly by higher sales, operating expense leverage, a lower tax rate and a lower share count.
“The second quarter exceeded our expectations, with strong growth from U.S. large and medium customers, gross profit that was better than anticipated and meaningful operating expense leverage. We continue to gain share across both large and medium customers and acquire medium customers amid a strong economy. In Canada, we are on schedule with the business turnaround. And the single channel and international businesses also improved operating performance,” said DG Macpherson, Chairman and Chief Executive Officer. “Based on our performance and momentum, we are raising our sales and earnings per share guidance for the year.”
The company raised its 2018 sales and earnings per share guidance for the year and now expects sales growth of 5.5 to 8.5 percent and earnings per share of $15.05 to $16.05. The company’s previous 2018 guidance, communicated on April 19, 2018, was sales growth of 5 to 8 percent and earnings per share of $14.30 to $15.30.
Sales increased 9.4 percent in the 2018 second quarter versus the 2017 second quarter, driven by a 9 percentage point increase from volume and 1 percentage point from foreign exchange, partially offset by a 1 percentage point decline from the divestiture of a specialty business.
Reported gross profit margin for the quarter was 38.8 percent vs. 39.8 percent in the 2017 second quarter. Adjusted gross profit margin for the quarter was 38.9 percent vs. 39.9 percent in the prior year. The lower gross profit margin includes a 0.5 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 and a 0.2 percentage point decline from the timing of the company’s annual sales meeting. When normalized for the impact of the revenue recognition standard and the timing of the sales meeting, gross profit margin for the 2018 second quarter was 39.2 percent, a decline of 0.3 percentage points versus the 2017 second quarter.
Company operating earnings of $344 million for the 2018 second quarter increased 50 percent versus $229 million in the 2017 second quarter. Adjusted operating earnings of $359 million increased 23 percent versus $291 million in 2017. The improvement in earnings was driven by higher sales and strong operating expense leverage. Reported operating margin for the quarter was 12.0 percent, an increase of 3.2 percentage points versus the prior year. Adjusted operating margin was 12.6 percent, an increase of 1.5 percentage points versus the prior year.
For the second quarter, the effective tax rate in 2018 was 23.4 percent versus 48.4 percent in the 2017 second quarter. The decrease was primarily due to the 2017 U.S. tax legislation and the 2017 impact from the wind-down of the Colombia business. The company is currently projecting an effective tax rate of 23 to 26 percent for the year 2018. The second quarter contained a benefit from the tax treatment of stock-based awards. Estimated tax benefits from stock-based awards are not included in the full year projected tax rate.
Due to strong operating performance, operating cash flow was $248 million in the 2018 second quarter versus $191 million in the 2017 second quarter, representing a 30 percent increase versus the 2017 second quarter. Free cash flow in the quarter was $211 million versus $160 million in the prior year, representing a 32 percent increase. 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 second quarter were $54 million. In the quarter, Grainger returned $111 million to shareholders through $83 million in dividends and $28 million to buy back 96,000 shares of stock.