W.W. Grainger Inc. (GWW) delivered record earnings per share (EPS) of $2.18 in its fiscal 2011 first quarter ended March 31, 2011, up 58% from an adjusted EPS of $1.38 in the year-ago period. Earnings were way ahead of the Zacks Consensus Estimate of $1.79.

The impressive results were driven by expanding product lines, providing new services complementing Grainger’s products, investments in eCommerce and enhancement of sales force. These efforts have helped gain market share in North America as well as penetration in the high growth, emerging markets.

The prior-year quarter’s EPS excluded a 15 cent per share expense related to the tax treatment of retiree healthcare benefits following the passage of the Patient Protection and Affordable Care Act, and an 8 cent per share benefit from changes to the company’s paid time off policy. Including these items, EPS in the first quarter of fiscal 2010 was $1.31. When considering this as the base comparison, EPS climbed a massive 66%.

Revenues in the quarter were $1,883.6 million, a 12.6% jump from $1,672.3 million in the year-ago period and above the Zacks Consensus of $1,837 million. On a daily basis, sales increased 11% in the quarter with January, February and March posting increases of 10%, 11% and 12%, respectively.

Volumes contributed 7 percentage points and pricing added another 2 percentage point benefit. Foreign exchange and acquisitions added one percentage point each to the growth in the quarter.

As a percentage of revenue, the cost of merchandise improved 180 basis points to 56% and warehousing, marketing and administrative expenses as a percentage of revenue decreased 120 basis points to 30.1%. Consequently, gross margin expanded 180 basis points to 44% and operating margin widened 300 basis points to 13.9% in the quarter.

Segment Performance

Revenues from the United States segment increased 9% (a 7% increase on a daily basis) year over year to $1,537.7 million as all the end markets showed improvement, led by heavy manufacturing. Volumes added 5 percentage points while pricing added 2 percentage points to the increase. Monthly sales showed an upward trend with daily sales increasing 6% in January and 8% in February and March alike.

Operating income for the segment upped 27% (33% excluding the change in the paid time off policy in the year-ago quarter) to $256.4 million, driven by sales growth, improved gross profit margins and operating expenses increasing at a slower rate than sales. Segment operating margin expanded 240 basis points to 16.7%.                                                                               

Revenues from the Acklands-Grainger business in Canada leaped 25% to $242.4 million. On a daily sales basis, revenues increased 23%. Strong growth, especially from customers in the agriculture and mining, oil and gas, heavy manufacturing, forestry, transportation and government sectors, culminated in the increase. On a daily basis, sales were up 18% in January, 16% in February and 16% in March.

Operating income in Canada increased an impressive 279% (260% in local currency) to $23.9 million driven by strong sales and a 380 basis point improvement in gross margin. The gross margin expansion was spurred by less price discounting and better customer mix. On top of this, product cost deflation tied to the strength of the Canadian dollar, along with price increases and positive operating expense leverage due to tight cost controls contributed to the improvement.

Revenues from the other businesses (which include Japan, Mexico, India, Puerto Rico, China and Panama) were up 44% to $116.9 million ascribed to incremental sales from the Japanese, Mexican and Colombian businesses, combined with sales growth in other international businesses.

Operating earnings of $6.4 million for the Other Businesses were a stark contrast to the loss of $0.82 million in the year-ago period given strong earnings growth in Japan and Mexico, coupled with lower operating losses in China and India.

Financial Position

Grainger had cash and cash equivalents of $334.7 million as of March 31, 2011, up from $313.4 million as of December 31, 2010 and down from $548.5 million as of March 31, 2010.

The company generated net cash from operating activities of $118.4 million in the reported quarter, up from $113.2 million in the year-ago quarter. Capital expenditures for the quarter were $33 million versus $14 million in the year-ago period. Grainger returned approximately $89 million to shareholders through the repurchase of 376,000 shares of common stock and dividend payments.

The debt-to-capitalization ratio was 17.0% as of March 31, 2011 compared with 17.9% as of December 31, 2010 and 18.0% as of March 31, 2010.

Outlook

Based on the upbeat first quarter results, Grainger upped its fiscal 2011 guidance, which it had declared at its analyst meeting in November. The company now expects sales growth in the range of 7% to 10% compared with the prior guidance range of 5% to 9%. The company forecasts fiscal 2011 EPS to range between $8.10 and $8.60 in place of its prior expected range of $7.15 to $7.90.

Our Take

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 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.

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 39 consecutive years.

A Quick Look at Peers

Fastenal Co. (FAST) reported first quarter EPS of 54 cents, a 42.1% jump from 38 cents a year ago, beating the Zacks Consensus Estimate of 51 cents. Net sales for the quarter totaled $640.6 million, up 23% year over year, driven by an improvement in sales to the company’s manufacturing as well as non-residential construction customers. Grainger’s other competitors – Applied Industrial Technologies Inc. (AIT) and WESCO International Inc. (WCC) – are yet to declare their first quarter results.

Illinois-based Grainger is a leading North American distributor of 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. The company’s services comprise inventory management and energy efficiency solutions.

 
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