W.W. Grainger, Inc.’s (GWW) fiscal 2010 EPS improved 30% year over year and revenues climbed 15.4%; both outperforming the Zacks Consensus Estimates. However, Grainger’s January sales growth of 10% was a disappointment compared with the 16% growth in December 2010 and also below the 11% growth in October, the lowest point in 2010.
Given moderating sales growth, the lack of any further benefit from oil spill cleanup products in 2011 and weakness in government end-markets, we downgraded our recommendation on Grainger to Neutral from Outperform.
Grainger delivered adjusted EPS of $1.79 in its fourth quarter and $6.80 in fiscal 2010, a corresponding growth of 41% and 30% over the prior-year periods. Both the figures were ahead of the Zacks Consensus Estimates as well as the relevant guided range.
Revenues in the quarter were $1,826.7 million, a 12% jump from the year-ago period. Fiscal 2010 revenues increased 15% year over year to a record $7.18 billion, both ahead of the respective Zacks Consensus Estimates.
Grainger remains focused on expanding its product offering and growing the share of its private label products. It launched a multi-year product line expansion program in 2006 and has since added approximately 234,000 new products.
Grainger’s most recent catalog, issued in February 2011, offers around 350,000 products, compared with 307,000 products in the February 2010 issue. Grainger has a long-term vision to expand the count to 500,000 products. The continued success of this program is expected to drive sales growth in 2011 and beyond.
Moreover, Grainger is focused on growing the share of its private label products, which carry higher margins than the national branded products.
Grainger maintains a debt ratio and liquidity position that provides flexibility in funding working capital needs and meeting long-term cash requirements. As of December 31, 2010, its debt-to-capitalization ratio remained at 17.9%, compared with 19.1% as of December 31, 2009. This enables Grainger to further invest in growth opportunities, increase dividends and reinvest capital through share repurchases.
Fiscal 2010 marked the 39th consecutive year of increased dividends. In July, the board authorized the repurchase of up to 10 million shares of the company’s outstanding common stock. Grainger repurchased shares worth $504.8 million in 2010 and has earmarked $210 million to $265 million for further buybacks in 2011.
Cash flow from operations is pegged at $550 million to $650 million. We expect Grainger to execute another dividend increase in 2011 and to continue to use its strong balance sheet to make strategic, accretive acquisitions both in the U.S. and internationally.
E-commerce is one of Grainger’s most efficient channels both in terms of market growth and profitability. Grainger continues to invest in e-commerce tempting customers to utilize more of this channel and thus increasing the percentage of overall sales. With the e-commerce business constituting 25% of its overall business, there is ample room for growth.
On the flipside, we are disappointed with the slowdown in its recent monthly sales. Grainger recently reported February sales growth of 11%, not much of an improvement from January results.
We note that, in 2010, Grainger’s volume growth benefited by 1 percentage point from increased sales of safety related products used to clean up the Gulf of Mexico oil spill. This is not expected to recur in the future, setting the company against tougher comparisons this year.
Further, Grainger’s recent sales reflect a weakening in its government end markets. Given that Grainger derives approximately 20% of its sales from government customers, considering the government’s financially constrained position and tight budgets, we believe this segment will continue to be a drag on revenues in the coming year as well. We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.
Based in Lake Forest, Illinois, Grainger is a distributor of facilities maintenance and other related products and services. The company distributes material handling equipment, safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, cleaning and maintenance supplies, forestry and agriculture equipment, building and home inspection supplies, vehicle and fleet components and various aftermarket components. Grainger competes with Applied Industrial Technologies Inc. (AIT) and WESCO International Inc. (WCC).
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