W.W. Grainger Inc. (GWW) delivered earnings per share (EPS) of $1.65 in its second quarter ended June 30, 2010, up from $1.21 in the year-ago period. The company exceeded the Zacks Consensus Estimate of $1.50. The second quarter’s EPS excluded the benefit of 8 cents per share from a change in employee paid time off policy.
Improved results were driven by increased sales in the United States and Canada, as well as a majority of its international operations. Increased sales related to the cleanup of the oil-spill in the Gulf of Mexico also proved to be beneficial. Grainger, however, faced difficult comparisons due to strong sales of H1N1-related products in 2009.
Revenues in the quarter were $1.8 billion, a 16% jump from $1.5 billion in the year-ago period. Foreign exchange contributed 2 percentage points, while acquisitions added another 5 percentage points to the growth in the quarter. Pricing was flat and volumes were up 9%. On a daily sales basis, April and May both posted a 16% increase, which further tweaked to 18% in June.
As a percentage of revenues, cost of merchandise declined 110 basis points to 58.1% and warehousing, marketing and administrative expenses, as a percentage of revenues, slashed 90 basis points to 29.8%. Consequently, gross margin increased 110 basis points to 41.9% and operating margin expanded 200 basis points to 12.0% in the quarter.
Segment Performance
Revenues from the United States segment upped 11% (9% excluding acquisitions) year over year to $1.5 billion. End markets showed improvement, led by a 20% growth at the heavy manufacturing sector, which was somewhat offset by a decline in the contractor and government sectors.
Sales showed a promising trend with daily sales increasing 8% in April, 10% in May and 14% in June. Sales of products used for the oil spill cleanup and the integration of Lab Safety Supply and Grainger Industrial Supply also contributed to growth.
Increased revenues, coupled with higher gross margins and lower growth rate in operating expenses versus sales, led to a growth of 26% in the segment’s operating income to $231 million. Segment operating margin expanded 240 basis points to 15.4%.
Revenues from the Canada segment leaped 29% to $207.8 million. In local currency, revenue soared 14%. Robust growth to customers in the agriculture and mining, oil and gas, heavy manufacturing and forestry sectors was partially offset by a drop in sales to the government. Daily sales shot up 17% in April, 12% in May and 14% in June. Grainger faced difficult comparisons in May and June due to strong sales of H1N1-related products in 2009.
Operating income in Canada spiked up 30% (16% in local currency) to $12.7 million. Improvement in gross margin due to lower product costs, positive foreign currency translation and improved sales was partially offset by a higher growth in operating expenses versus sales. The hike in operating expenses was driven by increased payroll and benefits costs due to higher commissions and bonus on higher sales, raised volume related headcount and incremental costs for acquisitions made during the last 12 months.
Revenues from the other businesses (which include Japan, Mexico, India, Puerto Rico, China and Panama) were up 226% to $90.8 million, which can be ascribed to new acquisitions in Japan and India and growth in the emerging economies.
Operating earnings of $2 million for the Other Businesses segment were a stark contrast to the loss of $3 million in the year-ago period. In addition to the earnings contribution from Japan, the Mexico business returned to profitability and the China business reduced its loss versus the prior year.
Financial Position
Grainger had cash and cash equivalents of $388.0 million as of June 30, 2010, down from $548.5 million as of April 30, 2010.
The company generated net cash from operating activities of $173 million in the second quarter of fiscal 2010 compared with $190 million in the year-ago period.
Grainger returned approximately $250 million to shareholders through the repurchase of nearly 2.4 million shares of common stock during the quarter. Additionally, the company paid dividends of approximately $41 million, reflecting the 17% increase in the quarterly dividend announced in April 2010.
Debt-to-capitalization ratio was 18.6% as of June 30, 2010, compared with 18.0% as of April 30, 2010.
Outlook
Although Grainger remains cautious regarding the extent and duration of the economic recovery, based on its year-to-date performance, the company raised its fiscal 2010 sales growth guidance to a range of 12 to 14%, up from its previous range of 9 to 12%.
Grainger now expects EPS to be within the range of $6.10 to $6.40, up from its previous expected range of $5.70 to $6.10. The guidance does not include a benefit of 34 cents related to the change in the employee paid time off policy.
Despite a weak economy, Grainger focuses on increasing its market share. It is also on track with its investments to secure long-term growth. The company has recently entered into a joint venture with THF International SAS, an associate of Torhefe S.A., in order to capture the Latin American market.
Grainger’s balance sheet remains strong and it can further explore 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.
We expect the oil spill cleanup related sales to boost results in the near future. Based on the second quarter earnings beat and increased guidance, we maintain our Zacks #2 Rank (Buy) on Grainger.
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; and services comprise inventory management and energy efficiency solutions.
Read the full analyst report on “GWW”
Zacks Investment Research
