Grainger Shows Mixed Earnings Results for 2018

GraingerCHICAGO, Jan. 24, 2019  — Grainger today reported results for the fourth quarter and full year 2018. For the full year, sales of $11.2 billion increased 8 percent versus $10.4 billion in the prior year. Sales of $2.8 billion in the 2018 fourth quarter increased 5 percent versus $2.6 billion in the 2017 fourth quarter.

“2018 was a year of focus and achievement for Grainger. Across the business, we executed on our long-term strategy and enhanced our relationships with customers. Our key accomplishments included U.S. segment volume growth of 8 percent, a profitable fourth quarter for the Canadian business and double-digit revenue growth for our single channel businesses, all while reducing our cost structure across the organization. In addition, we delivered 12 percent company operating margin a year earlier than anticipated. I’m extremely proud of our team members and what they have accomplished,” said DG Macpherson, Chairman and Chief Executive Officer. “We remain confident in our ability to drive volume growth above the market and generate operating expense leverage in 2019 and beyond. Consistent with our previous projections, we expect 12.2 to 13.0 percent operating margin for the company in 2019.”

2018 Financial Summary
($ in millions) FY 2018 FY 2018
Change v. Prior
Q4 2018 Q4 2018
Change v. Prior
Reported Adjusted1 Reported Adjusted1 Reported Adjusted1 Reported Adjusted1
Net Sales $11,221 $11,221 8% 8% $2,763 $2,763 5% 5%
Gross Profit $4,348 $4,348 6% 6% $1,066 $1,065 4% 3%
Operating Earnings $1,158 $1,344 12% 17% $290 $310 23% 10%
Net Earnings $782 $952 33% 42% $209 $225 38% 34%
Diluted EPS $13.73 $16.70 37% 46% $3.68 $3.96 40% 35%
Gross Profit % 38.7% 38.7% (60) bps (70) bps 38.6% 38.5% (20) bps (70) bps
Gross Profit Margin (Rev. Rec.)2 39.2% 39.2% (10) bps (20) bps 39.0% 39.0% 20 bps (20) bps
Operating Margin 10.3% 12.0% 40 bps 100 bps 10.5% 11.2% 160 bps 50 bps
Tax Rate 23.9% 21.7% 950 bps 1080 bps 21.5% 21.6% 60 bps 750 bps
(1) Results exclude restructuring, asset impairments and income tax items as shown in the supplemental information of this release. Reconciliations of the adjusted measures reflected in this table to the most directly comparable GAAP measures are provided in the supplemental information of this release.
(2) Gross margin normalized for the new revenue recognition standard.

Reported operating earnings for 2018 contained $139 million in non-cash impairment charges related to the Cromwell business in the U.K. and $47 million of restructuring primarily related to Canada.

The fourth quarter and the full year 2018 contained one more selling day than the prior year. In the fourth quarter, Christmas Eveand New Year’s Eve fell on a Monday versus on a Sunday in the prior year. The company’s U.S. operations were open for business both days to serve customers; however, revenue on those days was significantly lower than normal. That lower revenue effectively offset the benefit of the additional calendar sales day. In addition, the week between Christmas and New Year’s Daysaw significantly lower volume as more customers closed for the full week than anticipated. Sales in the United States for the quarter grew 6 percent, with the sales day benefit and negative holiday timing offsetting each other.

For the full year 2018, total company sales increased 8 percent versus the full year 2017. On a daily basis, sales increased 7 percent driven entirely by volume. Sales increased 5 percent in the 2018 fourth quarter versus the 2017 fourth quarter, including a negative impact of 1 percentage point from foreign exchange. On a constant currency basis, sales grew 6 percent, 4 percent on a daily basis. Sales were composed of a 4 percentage point increase from volume and a 1 percentage point increase in price, partially offset by 1 percentage point from holiday timing.

Gross Profit Margin
For the full year 2018, reported gross profit margin was 38.7 percent versus 39.3 percent in 2017. Adjusted gross profit margin in 2018 was 38.7 percent versus 39.4 percent in 2017.

Reported gross profit margin for the fourth quarter was 38.6 percent versus 38.8 percent in the 2017 fourth quarter. Adjusted gross profit margin for the quarter was 38.5 percent versus 39.2 percent in the 2017 fourth quarter.

The lower gross profit margin reflects a 50 basis point decline from implementation of the new revenue recognition standard for the quarter and the year. When normalized for the new standard, adjusted gross profit margin for the full year 2018 was 39.2 percent, down 20 basis points versus 2017, and for the quarter was 39.0 percent, down 20 basis points versus the 2017 quarter.

For the full year 2018, reported operating earnings of $1.2 billion were up 12 percent versus $1.0 billion in 2017. On an adjusted basis, operating earnings for 2018 were $1.3 billion, up 17 percent versus $1.1 billion in 2017. Reported operating margin of 10.3 percent increased 40 basis points versus the prior year.  Adjusted operating margin of 12.0 percent increased 100 basis points versus the prior year due primarily to strong operating expense leverage. Reported earnings per share of $13.73 were up 37 percent versus $10.02 in 2017. Adjusted earnings per share of $16.70 increased 46 percent versus $11.46 in 2017.

Reported operating earnings for the 2018 fourth quarter of $290 million were up 23 percent versus $236 million in the 2017 fourth quarter. On an adjusted basis, operating earnings for the quarter of $310 million were up 10 percent versus $281 million in the 2017 quarter. Reported operating margin of 10.5 percent increased 160 basis points versus the prior year.  Adjusted operating margin of 11.2 percent increased 50 basis points versus the prior year due primarily to operating expense leverage driven by higher sales growth. Reported earnings per share of $3.68 in the fourth quarter were up 40 percent versus $2.63 in the 2017 quarter. Adjusted earnings per share in the quarter of $3.96 increased 35 percent versus $2.94 in the 2017 fourth quarter. The improvement in adjusted earnings per share was due primarily to higher sales, operating expense leverage and a lower tax rate.

Tax Rate
For the year, the company’s reported tax rate was 23.9 percent versus 33.4 percent in 2017. The adjusted tax rate was 21.7 percent in 2018 versus 32.5 percent in 2017. The lower tax rate in 2018 reflects the benefit from U.S. tax legislation, partially offset by lower benefits from the termination of the company’s two clean energy investments.

For the fourth quarter, the company’s reported tax rate was 21.5 percent versus 22.1 percent in the 2017 fourth quarter. The 2017 fourth quarter contained higher tax benefits from stock-based compensation, the clean energy investments and other favorable tax adjustments. The stock-based compensation benefits were more concentrated in the 2017 fourth quarter than the year overall.

Cash Flow
Operating cash flow for 2018 of $1.1 billion was flat versus 2017, as increased net earnings were offset by investment in inventory and timing of payables. The company used the cash generated during the year to invest in the business and return cash to shareholders through share repurchases and dividends. In 2018, capital expenditures were $239 million. Grainger returned $741 million to shareholders through $316 million in dividends and $425 million used to buy back 1.4 million shares in 2018.

Operating cash flow for the quarter was $314 million versus $336 million in the 2017 fourth quarter, a decrease of 7 percent compared to the same period last year. In the fourth quarter, similar to the full year, the company had an increase in inventory to support availability and higher trade payments due to timing.

2019 Outlook
The company is providing the following 2019 guidance:

 Total Company 2019 Guidance Range
Net Sales 4.0% to 8.5% growth
Market Growth (nominal) 1.0% to 4.0%
Gross Profit Margin 38.1% to 38.7%
Operating Margin 12.2% to 13.0%
Earnings per Share $17.10 to $18.70
Operating Cash Flow $1.1 to $1.3 billion
CapEx $300 to $350 million
Share Buyback $450 to $600 million
Dividend $310 to $325 million
Tax Rate 24.5% to 27.5%
Segment Operating Margin
United States 15.5% to 16.1%
Canada 1.0% to 5.0%
Other Businesses 6.0% to 8.0%


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