Distributors

Grainger Sales Up, Net Earnings Down

CHICAGO — Grainger today reported results for the 2017 third quarter ended September 30, 2017. Sales of $2.6 billion increased 2 percent versus the third quarter of 2016. There were 63 selling days in the 2017 third quarter, one fewer than the 2016 third quarter. On a daily basis, sales increased 3 percent versus the prior year. Net earnings for the quarter of $162 million were down 13 percent versus $186 million in 2016. Earnings per share of $2.79 decreased 9 percent versus $3.05 in 2016.

“Our U.S. business had strong volume in the quarter driven by our strategic pricing initiatives and an improving demand environment. We saw a solid response from digital marketing activities that began in mid-August, particularly from our mid-sized customers. We continued to streamline our portfolio with the divestiture of a noncore U.S. specialty business, which affected sales in the quarter,” said Chairman and Chief Executive Officer DG Macpherson. “Our single channel online businesses continued their strong sales growth and improved profitability. Our Canadian business continues to be challenged as we execute our turnaround strategy.

“Our third quarter performance gives us the confidence to maintain the midpoint of our 2017 earnings per share guidance despite the challenges in our Canadian business and the U.S. specialty business divestiture,” Macpherson concluded.

The company now expects 2017 sales growth of 1.5 to 2.5 percent and earnings per share of $10.40 to $10.90. The midpoint of 2017 earnings per share guidance remains unchanged at $10.65. The company's previous 2017 guidance included sales growth of 1 to 4 percent and earnings per share of $10.00 to $11.30.

Sales increased 2 percent and were up 3 percent on a daily basis in the 2017 third quarter versus the prior year. The daily sales performance was driven by 8 percentage points from volume, partially offset by declines of 4 percentage points from price and 1 percentage point from the divestiture of a specialty business in the United States in mid-July. Other items that affected sales in the quarter included a 1 percentage point increase from hurricane-related sales in the United States, offset by a 1 percentage point decline in seasonal sales.

Company operating earnings of $281 million for the 2017 third quarter declined 13 percent versus $323 million in the 2016 quarter. The decline was driven by lower gross profit due to the strategic pricing initiatives.

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 in the U.S. segment decreased 1 percent and were up 1 percent on a daily basis versus the third quarter of 2016. The increase was driven by a 7 percentage point increase in volume partially offset by declines of 5 percentage points from price and 1 percentage point from the divestiture of a specialty business. Other items that affected sales in the quarter included a 1 percentage point benefit from intercompany sales and a 1 percentage point increase from hurricane-related sales, offset by declines of 1 percentage point from the July 4 holiday timing and 1 percentage point from seasonal sales. Natural Resources and Reseller customers posted the strongest sales growth in the quarter for the segment.

Operating earnings for the U.S. segment declined 13 percent in the quarter driven by lower gross profit. Gross profit margins for the quarter declined 1.9 percentage points as a result of the strategic pricing initiatives. Operating expenses for the segment were flat in the quarter. Reported results included a net $5 million of charges related to restructuring and other charges.

Canada
Sales in the Canada segment increased 5 percent and were up 7 percent on a daily basis versus the 2016 third quarter. Daily sales for the Canada segment increased 2 percent in local currency, consisting of volume.

The business in Canada posted a $15 million operating loss in the 2017 third quarter, up 1 percent versus the prior year. The gross profit margin in Canada improved by 0.8 percentage point versus the prior year, primarily due to lower inventory reserve requirements. Operating expenses increased 6 percent in the quarter and included $5 million of restructuring charges related to facility and headcount reductions.

Other Businesses
Sales for the Other Businesses increased 11 percent and were up 13 percent on a daily basis for the 2017 third quarter versus the prior year. The increase was driven by 15 percentage points of growth from volume and price, partially offset by a 2 percentage point decline from foreign exchange. Performance for the Other Businesses was driven by 17 percent sales growth for the single channel online businesses and strong sales growth for the business in Mexico.

Operating earnings for the Other Businesses of $27 million in the 2017 third quarter were up 8 percent versus $25 million the prior year. This performance was driven by strong results from Zoro in the United States and MonotaRO in Japan.

Other
Other income and expense was a net expense of $31 million in the 2017 third quarter versus a net expense of $29 million in the 2016 third quarter. This increase was primarily due to additional interest expense from the $400 million of debt issued in May 2017. For the quarter, the effective tax rate in 2017 was 31.7 percent versus 34.0 percent in 2016. The decrease was primarily due to a higher benefit from incremental tax credits.  The company is currently projecting an adjusted effective tax rate of 34.5 to 35.5 percent for the year 2017, excluding $11 million of year-to-date tax benefits from stock-based awards and other discrete items.

Cash Flow
Operating cash flow was $349 million in the 2017 third quarter versus $346 million in the 2016 third quarter. The company used the cash generated during the quarter and proceeds from the May 2017 debt offering to invest in the business, pay down short-term debt and return cash to shareholders through share repurchases and dividends.  Capital expenditures were $60 million in the 2017 third quarter versus $108 million in the third quarter of 2016.  In the 2017 third quarter, Grainger returned $196 million to shareholders through dividends and share repurchases.  Grainger paid $74 million in dividends and repurchased 719,000 shares of stock for $122 million in the quarter.  

Year-to-Date
For the nine months ended September 30, 2017, sales of $7.8 billion increased 2 percent versus $7.7 billion in the nine months ended September 30, 2016.  There were 191 selling days in the first nine months of 2017, one fewer than in 2016.  On a daily basis, sales increased 2 percent versus the prior year.  Net earnings declined 20 percent to $435 million versus $545 million in the first nine months of 2016.  Earnings per share for the nine months decreased 16 percent to $7.39 versus $8.82 in the first nine months of 2016.

 

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