Grainger Beats, Maintains Guidance - Analyst Blog

W.W. Grainger, Inc. (GWW) delivered adjusted earnings per share (EPS) of $1.79 in its fourth quarter ended December 31, 2010, up from $1.27 in the year-ago period. The company exceeded the Zacks Consensus estimate of $1.68. EPS reported in the quarter was substantially ahead of the company's guided range of EPS in a band $1.49 to $1.69.

The quarter's EPS excluded a 4 cent per share benefit from a change  in employee paid time off policy. Including this, EPS in the fourth quarter of fiscal 2010 was $1.83 compared with $1.27 in the year-ago quarter.

Revenues in the quarter were $1,826.7 million, a 12% jump from $1,633.8 million in the year-ago period and above the Zacks Consensus of $1,796 million. The fourth quarter had 63 selling days compared with 64 days in the year-ago quarter. On a daily basis, sales increased 14% in the quarter.

Volumes contributed 9 percentage points and oil spill related sales added a 2 percentage point benefit. Foreign exchange, acquisitions and pricing added one percentage point to the growth in the quarter. Sales of oil spill related products contributed 3 percentage points. On a daily sales basis, sales showed an upward trend with October, November and December posting increases of 11%, 14% and 16%, respectively.

As a percentage of revenue, the cost of merchandise upped a marginal 10 basis points to 58.2% and warehousing, marketing and administrative expenses as a percentage of revenue decreased 160 basis points to 30.2%. Consequently, gross margin dipped 10 basis points to 41.8% and operating margin expanded 145 basis points to 11.6% in the quarter.

Segment Performance

Revenues from the United States segment increased 9% (an 11% increase on a daily basis) year over year to $1,506.4 million as all the end markets showed improvement. Monthly sales, however, showed an upward trend with daily sales increasing 8% in October, 10% in November followed by 14% in December.

Sales of products used for the oil spill clean up contributed 2 percentage points to growth and price and sales of seasonal products added 1 percentage point each.

Operating income for the segment upped 24% (22% excluding the change in the paid time off policy) to $224.8 million, driven by sales growth and positive cost leverage. Segment operating margin expanded 180 basis points to 14.9%.                                                                             

Revenues from the Acklands-Grainger business in Canada leaped 20% to $216.8 million. In local currency, revenue increased 15%. Strong growth to customers in the mining, oil and gas, heavy manufacturing and forestry sectors were partially offset by decline in sales to the government. On a daily basis, sales were up 16% in October, 23% in November and 12% in December.

Operating income in Canada, however dropped 32% (down 35% in local currency) to $13.3 million. The decline was due to a 300-basis-point drop in gross margins due to unfavorable customer mix, related to strong sales growth to large customers, and difficult comparisons with the 2009 fourth quarter that included a large year-end inventory pick up.

On top of this, a 27% increase (22% in local currency) in operating earnings  driven by an increase in commissions and bonuses on higher sales and increased volume-related headcount and incremental costs for a distribution center expenses related to acquisitions aggravated the operating income decline.

Revenues from the other businesses (which include Japan, Mexico, India, Puerto Rico, China and Panama) were up 46% to $116.3 million ascribed to incremental sales from the Japanese and Colombian businesses acquired in the last 12 months, combined with strong sales growth in other international businesses.

Operating earnings of $5.4 million for the Other Businesses were in stark contrast to the loss of $3.4 million in the year-ago period given stronger operating performance for all the businesses in the group, led by Mexico and Japan.

Fiscal 2010 Performance

Grainger's adjusted EPS for fiscal 2010 was $6.92, a 30% growth over $5.33 in the earlier year and above the Zacks Consensus Estimate of $6.69. The adjusted EPS outperformed Grainger's fiscal 2010 guidance range of $6.50 and $6.70.  

The fiscal 2010 EPS included 28 cents per share benefit from changes in the company's paid time off policy and 15 cents per share tax expense related to the tax treatment of retiree healthcare benefits following the passage of the Patient Protection and Affordable Care Act, resulting in a net benefit of 13 cents per share.

Fiscal 2009 EPS included a 37 cent-per -share gain from the MonotaRO transaction in September 2009. Netting these gains, Grainger reported EPS of $7.05 compared with $5.70 in fiscal 2009.  

Grainger's fiscal 2010 revenues increased 15% year-over-year to a record $7.18 billion, which was above the Zacks Consensus Estimate of $7.15 billion.

Financial Position

Grainger had cash and cash equivalents of $313.4 million as of December 31, 2010, up from $286 million as of September 30, 2010.

The company generated net cash from operating activities of $596.4 million from continuing operating activities in fiscal 2010, down from $732.4 million in the earlier year primarily due to increases in accounts receivable and inventory tied to the strong sales growth reported for both periods.

Capital expenditures for the year were $128 million versus $142 million in 2009. Grainger returned approximately $657 million to shareholders through the repurchase of nearly 4.6 million shares of common stock during the quarter and dividends.

Debt-to-capitalization ratio was 17.9% as of December 31, 2010, compared with 19.1% as of September 30, 2010.

Outlook

Grainger maintained its fiscal 2011 guidance declared at the analyst meeting in November. The company forecasts fiscal 2011 EPS to range between $7.15 and $7.90, driven by a sales growth of 5% to 9%.

Our Take

Grainger remains focused on increasing its market share. It is also on track with its investments to secure long-term growth. Grainger's balance sheet remains strong and given its cash position, we believe Grainger can further invest in growth opportunities, increase dividends and reinvest capital through share repurchases.

The company has been rewarding shareholders with an uninterrupted streak of increased dividends for 38 consecutive years. Based on the fiscal 2010 earnings performance, we maintain our Zacks #2 Rank (Buy) on Grainger.

Performance of a Competitor

Fastenal Co. (FAST">FAST) reported a fourth quarter EPS of 44 cents, a  46.7% jump from 30 cents a year ago, a penny behind the Zacks Consensus Estimate of 45 cents per share. For fiscal 2010, Fastenal reported EPS of $1.80, up 45.2% compared to fiscal 2009.

Net sales for the quarter totaled $573.8 million, up 20.3% year over year driven by improvement in sales to both manufacturing customers as well as non-residential construction customers of the company. Full year net sales were $2.27 billion, up 17.6% from last year's $1.93 billion.

Illinois-based Grainger also competes with Applied Industrial Technologies, Inc. (AIT) and WESCO International Inc. (WCC).

 
APPLD INDL TECH (AIT): Free Stock Analysis Report
 
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GRAINGER W W (GWW): Free Stock Analysis Report
 
WESCO INTL INC (WCC): Free Stock Analysis Report
 
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