Grainger’s 3Q Net Earnings Down 3 Percent

CHICAGO — Grainger reported results for the 2016 third quarter ended September 30, 2016. Sales of $2.6 billion increased 3 percent versus $2.5 billion in the third quarter of 2015. There were 64 selling days in the 2016 third quarter, the same as the 2015 third quarter. Net earnings for the quarter of $186 million were down 3 percent versus $192 million in 2015. Earnings per share of $3.05 increased 4 percent versus $2.92 in 2015. 

Third quarter results contained the following special items that the company believes are not indicative of ongoing operations and have been adjusted to provide better comparability with prior periods.  Excluding the special items in both years noted below, net earnings decreased 6 percent and earnings per share increased 1 percent. 

“We continue to operate in a challenging economic environment,” said DG Macpherson, Chief Executive Officer. “The third quarter results were within our expectations. I’m pleased with our ability to continue to effectively manage costs in this low growth environment while still investing in our future success.” Macpherson added, “During the quarter, we continued to see strong revenue and earnings growth in our single channel online businesses, and we started operations in our new 1.3 million square foot distribution center in New Jersey. We expect fourth quarter demand to remain challenged, and as a result, we have narrowed our guidance and lowered the midpoint for the full year. We remain committed to managing the company for long-term success with a focus on providing our customers an exceptional experience at every touch.”

The company now expects 2016 sales growth of 1.5 to 2.5 percent and earnings per share of $11.40 to $11.70. The company’s previous 2016 guidance, communicated on July 19, 2016, included sales growth of 1 to 4 percent and earnings per share of$11.20 to $12.20.

Company 
Sales increased 3 percent in the 2016 third quarter versus the prior year. The sales performance included a 2 percentage point contribution from Cromwell Group (Holdings) Limited, acquired on September 1, 2015, and a 1 percentage point contribution from foreign exchange. Excluding acquisitions and foreign exchange, organic sales were flat consisting of a 1 percentage point contribution from sales of seasonal products offset by a 1 percentage point reduction in price.

The company’s gross profit margin declined 1.9 percentage points to 40.0 percent versus 41.9 percent in the 2015 third quarter, due primarily to unfavorable customer mix and price deflation exceeding product cost deflation. Operating expenses for the company declined 1 percent driven by lower payroll and benefits costs. 

Company operating earnings of $323 million for the 2016 third quarter declined 5 percent versus $341 million in the 2015 quarter. The decline was driven by lower gross profit margins partially offset by lower operating expenses.   

The company has two reportable business segments, the United States and Canada, which represented approximately 81 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 declined 1 percent versus the 2015 third quarter.  The decline was driven by a 1 percentage point decrease in volume and a 1 percentage point decline in price, partially offset by a 1 percentage point contribution from increased sales to Zoro, the single channel online business in the United States. Government and Retail customers posted the strongest sales growth in the quarter for the segment.

Operating earnings for the U.S. segment declined 5 percent in the quarter driven by lower sales and lower gross profit margins, partially offset by lower operating expenses. Gross profit margins for the quarter declined 1.3 percentage points driven by unfavorable customer mix and price deflation outpacing cost deflation.  Operating expenses for the segment were down 3 percent in the quarter versus the 2015 third quarter primarily due to lower payroll and benefits. Reported results included $5.4 million of net restructuring charges composed of $6.6 million of pretax charges, partially offset by $1.2 million of pretax gains, primarily from the sale of real estate. 

Canada
Third quarter 2016 sales for Acklands-Grainger declined 16 percent in U.S. dollars and local currency, consisting of 15 percentage points from lower volume and a 1 percentage point decline in price. Daily sales in the province of Alberta, which currently represents about 30 percent of the company’s business in Canada, were down 22 percent versus the prior year, while daily sales for all other provinces were down 12 percent in the quarter.

The Canadian segment posted a $15 million operating loss in the 2016 third quarter versus operating earnings of $4 million in the prior year, driven primarily by the sales decline and a lower gross profit margin, partially offset by lower operating expenses.  The gross profit margin in Canada declined 5.5 percentage points versus the prior year, primarily due to product cost inflation exceeding price deflation, including U.S. sourced products, and higher freight costs.  Operating expenses declined 5 percent in the quarter due to lower SAP project costs and payroll costs.  Reported results included $4.4 million of pretax restructuring charges, composed of $3.8 million in operating expense-related charges and $0.6 million of inventory-related charges.

Other Businesses
Sales for the Other Businesses increased 36 percent for the 2016 third quarter versus the prior year, consisting of 16 percentage points from Cromwell, 15 percentage points from volume and price and a 5 percentage point benefit from foreign exchange. Strong performance for the Other Businesses was driven by 38 percent sales growth for the single channel online businesses.

Operating earnings for the Other Businesses of $25 million in the 2016 third quarter were up 74 percent versus $14 million the prior year. This performance was driven by strong operating results from Zoro in the United States, MonotaRO in Japan and the business in Mexico.  Cromwell’s business also contributed to the earnings growth in the quarter.  

Other 
Other income and expense was a net expense of $29 million in the 2016 third quarter versus a net expense of $21 million in the 2015 third quarter. This increase was primarily due to additional interest expense from the $400 million of debt issued in May 2016 used to buy back stock and higher losses from the company’s clean energy investments.

For the quarter, the effective tax rate in 2016 was 34.0 percent versus 38.4 percent in 2015. The year-over-year decrease in the tax rate was primarily due to a higher benefit from the company’s clean energy investments partially offset by a larger proportion of earnings from higher tax rate jurisdictions. The 2016 third quarter also included a $6 million benefit from the conclusion of the federal income tax audit for the years 2009 through 2012 and other discrete items. Excluding this discrete benefit, the company’s effective tax rate was 36.1 percent. 

Cash Flow
Operating cash flow was $344 million in the 2016 third quarter versus $366 million in the 2015 third quarter. The company used the cash generated during the quarter and proceeds from the May 2016 debt offering to invest in the business and return cash to shareholders through share repurchase and dividends. Capital expenditures were $108 million in the 2016 third quarter versus $82 million in the third quarter of 2015. In the 2016 third quarter, Grainger returned $275 million to shareholders through $74 million in dividends and $201 million to buy back 887,000 shares of stock. 

Year-to-Date
For the nine months ended September 30, 2016, sales of $7.7 billion increased 2 percent versus $7.5 billion in the nine months ended September 30, 2015. There were 192 selling days in the first nine months of 2016, one more than in 2015.  Net earnings declined 13 percent to $545 million versus $624 million in the first nine months of 2015. Earnings per share for the nine months decreased 5 percent to $8.82 versus $9.24 in the first nine months of 2015.

Year-to-date results contained special items that the company believes are not indicative of ongoing operations and have been adjusted to provide better comparability with prior periods. Excluding the special items in both nine-month periods noted below, net earnings decreased 11 percent and earnings per share decreased 3 percent.