W.W. Grainger Inc. (GWW) reported its earnings results for the first quarter 2012; increasing 19% year over year to $2.57 per share, exceeding the Zacks Consensus Estimate of $2.51. The improvement was due to expansion in its product line as well as in the international markets, eCommerce and inventory management services.
Operational Update
Revenues in the quarter were $2.193 billion, up 16% from $1.884 billion in the year-ago period. Revenues also surpassed the Zacks Consensus Estimate of $2.179 billion. On a daily basis, sales improved 17% in January, 18% in February and 15% in March.
The improvement in revenue in the quarter was attributed to volume growth, favorable pricing and also acquisitions, partly offset by the negative impact of lower sales of seasonal products in U.S. and Canada and unfavorable foreign exchange.
Operating earnings in the quarter improved 16% to $304 million, primarily driven by higher sales volume and gross profit margins, partially offset by steeper operating expenses. The increase in operating expenses was triggered by volume-related costs, corporate services-related costs; expenses related to the acquired Fabory business and increased spending towards the company’s growth programs.
Segment Performance
Revenues from the United States segment increased 11% year over year to $1.70 billion, driven by favorable volume and price growth, partially offset by the negative impact from the lower sales of seasonal products. On a daily basis, sales increased 11% in January, 12% in February and 9% in March.
Operating income in the segment rose 17% to $298.9 million, mainly due to higher sales and positive leverage in expense from the region.
Revenues from the Acklands-Grainger business in Canada climbed 13% to $272.9 million, thanks to the improvements in the transportation sector, construction, agriculture and mining customer end markets, partially offset by a decrease in sales to the government. On a daily basis, segment sales increased 19% in January, 14% in February and 11% in March.
Operating income in Canada expanded 24% to $29.7 million as a result of strong sales, improvement in gross margins and sales as well as positive leverage in operating expense.
Revenues from Other businesses (which include Asia, Europe and Latin America) jumped 104% year over year to $238.9 million, driven by strong growth in Japan and Mexico and increase in sales from the Fabory acquisition.
Operating earnings increased 67% to $10.7 million brought about by strong earnings growth in Japan and Mexico. Sales for Other Businesses increased 33% excluding the Fabory acquisition.
Financial Position
Grainger had cash and cash equivalents of $338.8 million as of March 31, 2012, compared to $335.5 million as of December 31, 2011. Long-term debt was worth $191.6 million as of March 31, 2012, compared to $175.1 million as of December 31, 2011.
The company generated net cash of $106.2 million from operating activities as of March 31, 2012, up from $118.4 million as of March 31, 2011. Grainger used cash from operations to fund capital expenditures of $41 million in the first quarter of 2012 compared to $33 million in the year ago quarter, mainly due to the expansion of the distribution center network in the United States.
Grainger paid dividends worth $47 million in the reported quarter and expended $62 million for the buy-back of 291,000 shares. In total, the company returned $109 million to shareholders in the quarter.
Outlook
For 2012, the company increased its forecast of sales growth in the range of 12% to 14% from the previous guidance range of 10% to 14%, and earnings per share between $10.40 and $10.80 from the previous guidance between $9.90 and $10.65.
Our Take
Grainger’s sound balance sheet, low debt level and cash flow are some of the characteristics that enable the company to further invest in growth opportunities, increase dividends and reinvest capital through share repurchases.
Currently, the shares of Grainger have a Zacks #2 Rank (short-term “Buy” rating). We have a long-term Outperform recommendation on the stock.
Illinois-based W.W. Grainger Inc. is a leading North American distributor of material handling equipment including safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, etc. The company’s services comprise inventory management and energy efficiency solutions. The company competes with Applied Industrial Technologies Inc. (AIT) and WESCO International Inc. (WCC).
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