Note: This is an earnings call transcript. Content may contain errors.

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DATE

Friday, October 31, 2025 at 11:00 a.m. ET

CALL PARTICIPANTS

  • Chairman and Chief Executive Officer — Donald G. Macpherson
  • Senior Vice President and Chief Financial Officer — Deidra Cheeks Merriwether

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RISKS

  • Deidra Cheeks Merriwether stated, "Gross margin finished ahead of our previously communicated expectations due to a less-than-expected LIFO impact, though we were still down 60 basis points year over year," with continued segment mix headwinds and tariff-related cost impacts within High-Touch weighing on results.
  • Donald G. Macpherson said, "every day. A point or more impact on on our total business. And so you know, if it goes six weeks, it'll be half a point. If it goes all the time, it'll be a point or more. Impact. That's what we've seen so far," noting that extended shutdowns could increase the negative effect.
  • Deidra Cheeks Merriwether noted, "Tariff landscape, we now anticipate the inventory accounting dynamics from LIFO will persist over the next couple quarters until inflation cools."

TAKEAWAYS

  • Total Sales -- $4.7 billion total company reported sales, up 6.1% reported and 5.4% on a daily constant currency basis, outpacing August guidance.
  • Gross Margin -- 38.6% gross margin, down 60 basis points year over year due to segment mix and tariff-related costs but ahead of prior expectations due to lighter LIFO impact.
  • Operating Margin -- 15.2% operating margin, down 40 basis points compared to the prior year but 70 basis points above communicated expectations.
  • Diluted EPS -- $10.21 diluted EPS, increasing $0.34, or 3.4%, from the prior-year period.
  • Operating Cash Flow -- $597 million operating cash flow, supporting $399 million in shareholder returns through dividends and repurchases.
  • High-Touch Solutions Segment Sales -- Up 3.4% reported and on a daily constant currency basis, driven by volume growth and price inflation; contractor, healthcare customers performed well, manufacturing improved, other areas slower.
  • High-Touch Solutions Gross Profit Margin -- 41.1% gross profit margin for the High-Touch Solutions segment, down 50 basis points year over year, impacted by negative but improving price-cost spread and LIFO charges.
  • High-Touch Solutions Operating Margin -- 17.2% operating margin for the High-Touch Solutions segment, down 40 basis points from the prior year.
  • Endless Assortment Segment Sales -- Increased 18.2% reported, 14.6% daily constant currency; Zoro US up 17.8%, MonotaRO up 12.6% local constant currency.
  • Endless Assortment Operating Margin -- 9.8%, up 100 basis points; MonotaRO margin at 13.2% (+80 bps), Zoro margin at 5.8% (+150 bps).
  • Cromwell Divestiture -- Agreement to sell UK-based Cromwell and exit UK market due to post-Brexit dynamics; $40 million in Q4 revenue to be removed from outlook, 20 basis points annualized operating margin benefit post-exit.
  • 2025 Sales and EPS Guidance -- Updated organic daily constant currency sales growth range of 4.4% to 5.1% for fiscal 2025 (period ending Dec. 31, 2025), diluted adjusted EPS range of $39.00 to $39.75 for fiscal 2025; government shutdown and Cromwell divestiture factored in.
  • October Sales Trends -- Preliminary daily constant currency sales up ~1% for October 2025 due to prior-year hurricane benefit and government shutdown; excluding hurricane effect, last two weeks up in the 4% to 5% range.
  • Tariffs and Pricing -- Incremental pricing actions were taken in September and November 2025 to offset inflationary pressure from recent tariff expansions, including those related to Section 232.
  • LIFO Impact -- LIFO expense materially reduced reported gross margins for fiscal Q3 2025 (period ended Sept. 30, 2025) versus FIFO peer comparables, but management expects normalization toward 39% gross margin as inflation cools.

SUMMARY

W.W. Grainger (GWW 1.29%) reported results above prior guidance in sales and gross margin despite explicit ongoing headwinds from tariffs, unfavorable segment mix, and government shutdown impacts. Management confirmed the decision to exit the UK market through the sale of Cromwell, which will remove $40 million of Q4 revenue and is expected to improve annual operating margin by 20 basis points. Updated full-year guidance for fiscal 2025 (period ending Dec. 31, 2025) narrows the sales growth range to 4.4% to 5.1% on an organic daily constant currency basis and maintains prior EPS expectations, primarily through offsetting margin improvements.

Pricing actions in High-Touch Solutions and Endless Assortment segments are a direct response to additional supplier costs and inflationary trends highlighted during the call. The company projects that gross margin will normalize near 39% as LIFO headwinds diminish, with long-term aims to leverage SG&A improvements through technology, process enhancements, and continued focus on North America and Japan.

  • Donald G. Macpherson stated, "Effectively. So it is it is mostly it is entirely just the government impact we're seeing from both the hurricane, which affects state governments, three states that obviously in the South, Southeast that were hurt. Hit hardest last year. And then the federal government given the shutdown," when explaining the volume challenges in High-Touch Solutions for Q4.
  • Management expects further inflationary pressure in 2026 and confirmed that LIFO-related accounting impacts will "persist over the next couple quarters until inflation cools," per Deidra Cheeks Merriwether.
  • October public-sector sales remain pressured, with the guide incorporating both last year's hurricane benefit and the current-year government shutdown.
  • Deidra Cheeks Merriwether clarified that the $40 million Cromwell/Zoro UK revenue impact pertains specifically to Q4, and the associated margin uplift will occur after transaction close.
  • Management explicitly characterized LIFO impact as "during periods of normal cost inflation, the LIFO headwind, the difference between LIFO margin and the implied FIFO margin is roughly 20 to 30 basis points," but acknowledged a heightened gap under current inflationary conditions.
  • Return on invested capital remains above 40%, though management noted temporary dilution from ongoing distribution center investments.

INDUSTRY GLOSSARY

  • LIFO (Last-In, First-Out): An inventory accounting method under which the most recently acquired items are assumed to be sold first, creating unique impacts on reported margins during periods of inflation compared to FIFO (first-in, first-out).
  • Section 232: U.S. trade action imposing tariffs on certain imported commodities, frequently referenced regarding inflationary cost pressures on industrial distributors.
  • Endless Assortment: Grainger's business segment comprising online, high-SKU-count platforms such as Zoro and MonotaRO, targeting broad B2B and enterprise customers primarily through digital channels.
  • High-Touch Solutions: Grainger's segment focused on service-intensive fulfillment and account support for North American customers, emphasizing hands-on, relationship-driven sales and support.

Full Conference Call Transcript

Donald G. Macpherson: Thanks, Kyle. Morning, everyone, and thank you for joining today's call. As headlined in the release, our third quarter results were fueled by consistently strong execution from our team. Despite the continued external uncertainty, our customers remain focused on improving their operations through increased efficiency and productivity. The value of the fundamentals of having inventory where and when they need and a partner who understands their business and can bring the right solutions. As I spent time in the market with large customers this past month, these themes rang true. I was proud to see Grainger deliver the critical fundamentals that help our customers every day.

I recently had great discussions with an aerospace customer and a municipality about how Grainger's deep-rooted inventory management expertise can save them time and reduce costs. I saw that when we deliver a great service experience, customers take notice, and it leads to more opportunities and deeper relationships. I also had the opportunity to speak with several experts focused on technology. Tech and AI will continue to be an ongoing focus for Grainger, enabling us to provide great solutions for customers and drive productivity in our operations. The promise of these new transformation technologies has never been greater.

But the key will be leveraging our proprietary data and know-how to build solutions that connect business processes and create a more seamless user experience. I'm excited about the work we're doing to bring more digital capabilities to both our customers and team members to make things better with every interaction. Making things better and staying focused on what matters is core to how Grainger operates. And we take that responsibility to heart in our communities as well. Last month at our annual bucket build in Lake Forest, more than 500 Grainger team members came out to pack over 4,000 disaster relief kits.

This included filling five-gallon buckets with essential cleaning supplies and hand tools that will help families and individuals begin the process of recovery after a natural disaster. Grainger has a long-standing commitment to emergency preparedness and response efforts. And this is another reason I'm proud of how the Grainger team lives our principles every day. Now moving to our third quarter results. We delivered a solid performance that in total outpaced our August formal guide, particularly on the gross margin line. Total company reported sales for the quarter were nearly $4.7 billion, up 6.1% on a reported basis or 5.4% on a daily constant currency basis.

Gross margins for the company were 38.6%, operating margins were 15.2%, and diluted EPS finished the quarter up $0.34 to $10.21. Operating cash flow came in at $597 million, which allowed us to return a total of $399 million to Grainger shareholders through dividends and share repurchases. Our results continue to reflect tariff-related FIFO inventory valuation headwinds, consistent with what we discussed last quarter, which came in lighter than expected in the period. As Dee will discuss, without this LIFO impact, our operating margin would have increased year over year in the period. Looking ahead, we're continuing to see more costs in the market.

These LIFO headwinds will eventually dissipate as inflation cools and our gross margin will recover to our run rate expectation. As you likely saw, we recently announced that we've entered into an agreement to sell our UK-based Cromwell business and plan to fully exit the UK market. Given the economic dynamics post-Brexit, we had to alter our assumptions around the go-forward potential in the region. With this planned divestiture, we are now focused entirely on growing our North America and Japanese businesses where we can deliver the greatest long-term impact. Overall, while it has been an eventful few months, the business continues to perform well and in line with expectations.

With this, we are narrowing our earnings outlook, which Dee will outline in a few minutes. It's important to note that we factored in the October headwinds from last year's active hurricane season and an estimated impact from the government shutdown. As we wrap up 2025, I'm confident that we'll continue to serve our customers well, deliver on our financial commitments, and drive solid results for all stakeholders. I will now turn it over to Dee to go through the details.

Deidra Cheeks Merriwether: Thank you, DG. Turning to slide seven, you can see the high-level third quarter results for the total company, including $4.7 billion in sales, up 5.4% on a daily constant currency basis. While gross margin finished ahead of our previously communicated expectations on a less than expected LIFO impact, we were still down 60 basis points year over year as segment mix headwinds and tariff-related cost impacts within the high-touch business weighed on results. This led to total company operating margins of 15.2% for the quarter, down 40 basis points compared to 2024 but 70 basis points ahead of our communicated expectations. Diluted EPS for the quarter was $10.21, up $0.34 or 3.4% higher than the prior year period.

Moving to segment level results, the High-tech Solutions segment delivered solid growth in the quarter. In total, sales were up 3.4% on both the reported and daily constant currency basis. Results were driven by volume growth and price inflation for the segment, with the latter improving as tariff costs continued to be passed. From an end market perspective, our indicators suggest that the MRO market remained muted as the heightened inflationary environment continued to weigh on demand. For Grainger specifically, we saw strong performance with contractor and healthcare customers, and improving results with manufacturing customers, which helped to offset slower growth in other areas of the business.

For the segment, gross profit margin finished the quarter at 41.1%, down 50 basis points versus prior year, driven by similar themes to what we prior discussed last quarter. We saw negative but improving price cost spread. As we progressed negotiations with suppliers through the quarter and passed incremental price in September. Further, we pulled through LIFO charges to reflect the impact of supplier cost increases, albeit less than expected as certain increases were pushed into latter periods. These two tariff-related headwinds were only partially offset by mix and freight.

I would note that if we excluded our LIFO headwind and wanted to across our peer set, which report on FIFO, our implied FIFO gross margin rate would have increased year over year. On SG&A, margin improved in the period as continued investments in our seller initiatives and marketing were more than offset by productivity and sales leverage. Taking all this together, operating margin for the segment finished at 17.2%, down 40 basis points versus the prior year quarter. Now focusing on the endless assortment segment. Sales increased 18.2% on a reported basis or 14.6% on a daily constant currency basis, which normalizes for the FX tailwinds realized in the period.

Zoro US was up 17.8% while MonotaRO achieved 12.6% growth in local days local constant currency. At a business level, Zoro continues its momentum driving efficiencies with marketing spend and working to further enhance the customer experience, including improved search, better fulfillment, and continued optimization of their assortment. Taken together, these actions are driving strong growth from core B2B customers along with improving customer retention rate. At MonotaRO, sales growth remained strong with continued growth from enterprise customers coupled with solid acquisition and repeat purchase rates with small and midsized businesses. On profitability, operating margins increased by 100 basis points to 9.8% with favorability across the segment.

MonotaRO margins remained strong at 13.2%, up 80 basis points and Zoro margin improved to 5.8%, up 150 basis points with both businesses benefiting from gross margin flow through and healthy top line leverage. Overall, we had another strong quarter across endless assortment and we expect the team will carry this momentum forward as we wrap up the year. Before moving into guidance, I wanted to share a brief update on where we're at with tariffs. In the third quarter, we remain engaged in active dialogue with our supplier partners and use our September price increases to help offset continued cost pressure.

While our initial pricing actions back in May only apply to a small portion of our products, largely those where Grainger imports the product directly, the September increase was much broader and included initial pricing actions on supplier imported products, where we had finalized negotiations. As we move into the fourth quarter, we're seeing inflationary pressure continuing to build, including impacts from the recent section 232 expansion. As a result, we are taking some incremental pricing actions to better align price cost timing as the tariff landscape unfolds. These actions are only modest in nature but are in addition to the price passed earlier in the year.

Our profitability expectations for the fourth quarter we anticipate gross margins will improve sequentially with our normal seasonal recovery and improving price cost. The LIFO impact is expected to be roughly consistent quarter over quarter. Looking ahead, based upon what we're hearing from suppliers as part of our annual cost cycle, we expect further inflationary pressure into 2026. With this, assuming no further material changes to the current tariff landscape, we now anticipate the inventory accounting dynamics from LIFO will persist over the next couple quarters until inflation cools. That being said, consistent with our long-term earnings framework, we anticipate gross margin will stabilize around 39% for the total company subject to normal quarterly seasonality.

While we'll experience continued segment mix headwinds and some pressure within a subset of our private label assortment, these will be offset as price cost normalizes back to neutral and the LIFO impact subsides. On LIFO specifically, we thought it would be helpful to provide a view of how inventory accounting dynamics impact our gross margin over time, especially because of how the cycle is playing out relative to 2022. While LIFO expense is always a drag relative to implied FIFO margins, it is not typically a material impact in every period depending on what else is impacting our gross margin results.

As you can see on Slide 12, during periods of normal cost inflation, the LIFO headwind, the difference between LIFO margin and the implied FIFO margin is roughly 20 to 30 basis points. Reflecting the real-time impact of higher cost flowing through our P&L. As we enter into a heightened inflationary cycle, like what we see in 2022, and like what we're seeing again today, this LIFO impact becomes more pronounced as the difference in COGS diverges between the two inventory methodologies. However, as inflation cools, the LIFO expense will normalize LIFO and FIFO margins will converge, and if this happens and we pass for the price, our reported margin will recover.

With this, we expect our total company gross margins will stabilize around 39% consistent with our long-term earnings framework. Now moving to the updated outlook for the remainder of 2025, as DG mentioned at the beginning of the call, we're nearing our full year 2025 adjusted EPS outlook which reflects slightly lower sales to account for the Cromwell divestiture FX update and the impact of the government shutdown, which we're assuming reaches a resolution by mid-November. These top line headwinds are offset by higher margins resulting in an EPS mid consistent with the prior guide.

In total, the updated guide includes daily organic constant currency sales growth, of between 4.4% to 5.1% and a diluted adjusted EPS range of $39 to $39.75. If you squeeze to the annual guide to get an implied fourth quarter, the revised revenue outlook implies a Q4 daily organic constant currency growth rate of 4% at the midpoint which assumes more than three points of price contribution to revenue within the High Touch segment. October growth is off to a slow start of approximately 1% on a preliminary daily constant currency basis as we lapped a fairly significant hurricane-related sales benefit in the first two weeks of the month and as we face current year headwinds from the government shutdown.

However, if we just looked at the last two weeks of the month, which exclude the prior year hurricane impact, October total company sales are up in the 4% to 5% range on a daily constant currency basis more in line with what we saw in the third quarter but still reflecting the impact of the government shutdown, which is weighing on public sector sales. Annual margin expectations have increased from our previous guide due to improved price cost and LIFO timing. If you were to squeeze the implied operating margins from the updated annual guide and focus on the fourth quarter, it shows a sequential step down in the fourth quarter to around 14.5% at the midpoint.

While the puts and takes are different, the sequential movement is roughly in line with normal seasonality. Overall, despite the tariff-related noise over the last couple of quarters, we remain poised to deliver a solid year. Before I hand it back to DG, I thought it would be important to reiterate our long-term earnings framework in light of the recent tariff uncertainty and as we look ahead. While we have made some minor edits to CapEx, to reflect the latest estimates around our global DC expansion, the core tenets of our framework remain solidly intact.

We remain confident we can drive share gain in the US, grow the EA business in the team, stabilize total company gross margins around 39%, and grow SG&A slower than sales through process improvements and technology. Taken together, these actions will drive attractive returns, and we remain well-positioned to deliver great results for our shareholders for the years to come. With that, I'll turn it back to DG for some closing remarks.

Donald G. Macpherson: Thanks, Dee. As we head into the final months of the year, our team will continue to navigate the complex environment and deliver value for our customers, our communities, and our shareholders. And as Dee mentioned, we continue to work through this inflationary environment and the challenges from the government shutdown. And while there is some short-term noise, we remain confident in our ability to pass through cost increases and achieve the core tenets of our long-term earnings framework. We'll continue to stay focused on driving strong execution, providing industry-leading service, and building innovative capabilities to deliver on what matters most to our stakeholders. And with that, we will open it up for Q&A.

Operator: Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press 1 on your telephone keypad. It may be necessary to pick up the handset before pressing the star keys. One moment please while I poll for questions.

David John Manthey: Thank you. Our first question is from David Menchen with Baird.

David Menchen: That was a very clear presentation of the business. For outlining all of that data. Question on the 2025 guidance and the Cromwell. So Cromwell's held for sale as of September 30. So I assume you're taking any assumption out for that. And just ballpark ish, are we talking, what, $7,580,000,000, I'm guessing? And then from an operating income standpoint, those Cromwell operating losses are pretty immaterial. Is that all correct?

Deidra Cheeks Merriwether: Yeah. So two things I point you at. You know, we kinda adjust it for the Cromwell impact. And, you know, if you go back the press release that we issued around our proposal, to exit the UK in total and incorporated both that impact you know, as well as the impact that's being proposed for Zoro UK. So in total, it's about 40 That's

David Menchen: That's $40 million in revenues for Cromwell and Zoro UK as held for sale. In the fourth quarter. Correct.

Deidra Cheeks Merriwether: Okay.

David Menchen: Alright. And then on the on the pricing actions that you've taken thus far in the 2025, Should we assume that those are in endless assortment I think you said your next opportunity to adjust contract pricing on high touch customers would be Jan one. So is that another bite at the apple when we turn the page to 2026?

Deidra Cheeks Merriwether: No. We obviously, the actions we've taken were September 1. Those have flowed into the fourth quarter and that was a normal price cycle increase. And then in November 1, now we're taking another one, and that will flow into contracts well as non contract business. And that's all high touch related. Zoro has had good price inflation this year based on some strategic changes they've made.

David Menchen: Yep. Okay. Thank you very much.

Operator: Our next question is from Christopher Snyder with Morgan Stanley.

Christopher Snyder: Oh, sorry. I was on mute. So, you know, you guys said that you know, I guess ex LIFO, the gross margin would have been up year on year. Which I guess implies a LIFO headwind of something at least 70 basis points. I guess my question is, you guys are kind of saying you'll maintain a roughly 39% gross margin through these LIFO headwinds. So I guess as the LIFO headwinds go away, does that 39 go to something closer to 40, you know, just assuming that we're in a 70 bps LIFO headwind? Backdrop, Thank you.

Deidra Cheeks Merriwether: Thanks for the question, Chris. So you know, as we've noted during this period of time when we are comparing our results versus those who may be reporting on FIFO, we do have more of a negative impact directly related to the LIFO impact on gross margin. And so what we attempted to do here with our information is to re recast and imply FIFO gross margin number for Grainger for more easily compare easy comparability. But as you know, as we go through the cycle, and others eat through the less expensive FIFO layers. And, you know, we're already there. With WIFO.

We believe gross margins will become a little bit tougher for them And we, as we pass continue to pass price, our gross margins will continue to elevate as you noted. However, there are more things besides LIFO that impacts gross margin. Product mix, you know, freight, and other areas where we receive where we're gaining some favorability. We deemed that though some of those things may not be as favorable in the future. As price becomes more favorable. And so that's why we stick to a longer range outlook of around 39 or around the area of 39. That doesn't mean it can't be a couple basis points better than that in the future.

We just don't wanna project out too much because all the information we have today around tariffs and other cost inflation is what we have to use to project from this point.

Christopher Snyder: Thank you. I appreciate that. That was helpful. You know, I guess, we look at the Q4 guide, you know, overall company up four. So, you know, high touch, I guess, would be below that. May maybe something more like three. Which is effectively all price. So it seems like the guide is calling for no volume growth. Within High Touch. I mean, I know the backdrop's been challenged for a while, but that business has continued to grow volumes even if modestly. You know, through the first March of the year. So is that step down in Q4 to maybe '0 just all because of these government contracts and the risk associated with that?

Or is there also maybe macro softening alongside that? Any color there. Would be helpful. Thank you.

Deidra Cheeks Merriwether: Yeah. In Q4, we have two challenges. One of which you called out, which is the impact to our business related to the government shutdown. And the other one is related to the benefit that we see in the prior year in October related to the hurricane. We range bound that last year of about 30 to $40 million, in the month of October. So that's also a challenge that we're cycling in The in Q4. One the one thing I'd also point out is

Donald G. Macpherson: If you look at October by segment, which we don't typically talk about, but government is obviously substantially. Everything else looks normal. Effectively. So it is it is mostly it is entirely just the government impact we're seeing from both the hurricane, which affects state governments, three states that obviously in the South, Southeast that were hurt. Hit hardest last year. And then the federal government given the shutdown.

Christopher Snyder: Thank you. I appreciate that.

Operator: Our next question is from Jacob Levinson with Melius Research.

Jacob Levinson: Hi. Good morning. I realized there are some advantages on the tax front using life of my inventories, but I'm wanted to ask if there's been any discussion in terms of shifting the FIFO. It just seems like the last couple of years, we've seen a lot of companies that had LIFO accounting actually moving to FIFO just given the maybe a stickier inflation backdrop.

Donald G. Macpherson: Yeah. Yeah. So we obviously have talked about and evaluated I mean, the thing you need to probably realize is if you make that change, you end up having a cash payment, not an earnings payment, but a cash payment effectively for the accumulated taxes you saved at whatever tax rate is today. So it's not an inconsequential number. So we need to weigh that versus the benefit of being on five o and having easy compares. Right now, we're not gonna make that change. We might in the future.

Jacob Levinson: Okay. That makes sense. And then and then just on the government shutdown, I realized these are unfortunately, becoming more regular occurrences. But in your experience, is there normally some catch up in demand once the shutdown's over? Because I'd imagine a lot of these facilities are just mothballed right now. So once you ramp back up, maybe there's some pent up demand there.

Donald G. Macpherson: Yeah. So, you know, what I would say is the nature of the shutdown and this one in particular, obviously, some of the non military entities that we would serve are completely shut down. Typically, you wouldn't see much of a catch up from those, but we also are seeing this impact given the lack of the number of people who are furloughed. And purchasing people who furloughed, we're we're seeing a little bit of slowdown in military and other areas well. And so some of that may come back, but typically, it wouldn't all come back. You see a little bit of it maybe come back. If there's there's catch up projects they stop doing.

But we would expect something between, you know, zero and something not huge to come back on that.

Jacob Levinson: Okay. Perfect. Appreciate the color. Thank you.

Operator: Our next question is from Ryan Merkel with William Blair.

Ryan Merkel: Hey, everyone. Thanks for the question. Just sticking with the government, did you guys size what the impact you expect in April is from the government shutdown?

Donald G. Macpherson: Yeah. I mean, basically, the way to think about that is every day. A point or more impact on our total business. And so you know, if it goes six weeks, it'll be half a point. If it goes all the time, it'll be a point or more. Impact. That's what we've seen so far. Know, I would say that, you know, it doesn't get resolved, it could become even bigger. If it if it goes on a long time. But that's what that's what we would see and expect to see now.

Ryan Merkel: Okay. Got it. And then it sounds like you put through another price increase in April and, you know, that would be off cycle. For you. Which, you know, I think I thought you were trying to stick to the national account timing there. So is that sort of a change in how you're doing things? Or why the off cycle price increase?

Donald G. Macpherson: I think I think a lot of this is just probabilistic. So when tariffs first hit, we actually didn't know how they would play out and we didn't wanna get out in front of it. So we've been actually taking price increases when we have cost increases as opposed to speculatively. And you know, there's been over a thousand negotiations our suppliers at this point. Lots and lots. That's that's not normal. For the record. And so what we saw was a number of cost increases come in after between the time we set the nine one prices and the time we would we would now. And so what we've done is we've raised price to compensate for that.

We think it's the right thing to do, and our customers understand that.

Deidra Cheeks Merriwether: And I would just add you know, a lot of that is price changes and corrections based upon what we're seeing in the market place. I wouldn't assume that change was as big as, like, you know, the five one change. As an example.

Ryan Merkel: Got it. Okay. Thank you.

Deidra Cheeks Merriwether: Thanks, Ryan.

Operator: Our next question is from Steven Volkmann with Jefferies.

Steven Volkmann: Great. Thank you. And apologies for beating this dead horse, DG. But the price increase in November was there any aspect of that would that would be I think your word was speculative. Did you try to get ahead of any of this?

Donald G. Macpherson: No. It's not speculative. It's it's just matching what we're seeing and what we're seeing in the market. We're sticking to our pricing tenants, which are basically the price to market. At this point.

Steven Volkmann: Okay. Great. And then I think you also talked about in your private label business, some headwinds, competitive kind of headwinds. How does that play out? Or what can you do to sort of address that? Going forward?

Donald G. Macpherson: Well, we don't think we're we're uniquely exposed or at competitive disadvantage. In private brand. But what has happened with some of the larger tariffs is the difference between a private brand product and some cases and a national brand product can become very tight. And so then we have decisions to make as to how much price we take in those situations. And so we're we're still working through all of that. It's a subset of our private brand. It's not it's not all of them. It's not a huge portion of them, But for some of those, cases, we have to decide how we treat those strategically.

Steven Volkmann: Understood. Okay. Thank you, guys.

Donald G. Macpherson: Thanks.

Deidra Cheeks Merriwether: Thanks.

Operator: Our next question is from Christopher Glynn with Oppenheimer and Company.

Christopher Glynn: Thanks. Happy Friday, Happy Halloween. So you know, I appreciate the comments at the beginning on you know, how you're looking at AI and adopting new technology. You've always been very tech forward and investing at scale. And so curious what you're envisioning with that from both sides, you know, layering into the outgrowth algorithm. Versus the cost to serve side. And margin potential.

Donald G. Macpherson: Yeah. I think you know, so what I would say is it's gonna require all of the above to be successful long term, we think. And you know, we have been out in front in certain areas with AI thinking about back end processing and customer service and those areas that are kind of obvious to attack. I don't, you know, everybody's gonna be doing those things is my opinion is my expectation. And so you're creating advantage probably gonna be more on the commercial side. And leveraging our data, our product data, customer data to create solutions that provide better experiences for customers. And so we are we are investing heavily there as well.

And we think both areas are gonna be critical to our success.

Christopher Glynn: Great. Thanks for that. And then last quarter, you mentioned elevated bidding activity for your new large business. Curious how that pipeline's playing out and should we think of that as incrementally constructive to the outgrowth algorithm perhaps for interim period.

Donald G. Macpherson: Yeah. We think we're we think we're doing well. I don't know I don't know that it say it's constructive for the outgrowth at this point, but we think things are going well on that front. And you probably know in our business, you know, having big contracts and getting all the volume is are two different things sometimes. And so you know, you have to you have to have the contracts and then you have to win at the local level and we know that. And so that's really how we how we construct our business and our focus.

Christopher Glynn: Great. Thank you.

Christopher Glynn: Thank you.

Operator: Our next question is from Ken Newman with KeyBanc Capital Markets.

Ken Newman: Hey, good morning guys. Morning, Brian. Maybe Morning. Maybe first, just to clarify. Sorry if I missed this. In response to Dave's first question. But any help on just how to think about the operating profit or loss in the other segment, not that Cromwell's divested? Is that segment gonna be profitable in April? Or just how do you think about that normalizing to next year?

Deidra Cheeks Merriwether: Okay. So the exiting The UK, it shows up in two areas. It shows up in other kind of where Cromwell was, and that's the vast majority of it and a little bit in EA because that was the Zoro UK business. So that will positively contribute you know, once we close the deal. From a profitability perspective. And it's, in the teens from a operating not in the teens. 20 or so basis points improvement in operating margin.

Ken Newman: Okay. That's helpful. I appreciate that. And then for the follow-up here, it looks like there was a pretty sizable increase in mid-sized customer growth in HITUCH US this quarter. Is that primarily a price versus volumes mix And then maybe just any color on how you think about how sustainable midsized customer growth can be going forward and its impact to mix.

Deidra Cheeks Merriwether: Yeah. So we believe you know, we're doing really well with midsize customers, but the majority of the difference in the increase I believe, is 7% in the noted slide. Is really due to some softer comps. In the prior year.

Donald G. Macpherson: And I would just add that I think. I would just add that I think we have a lot of opportunity with midsize customers. And we're we're learning And I think we'll continue to do better, but it is it's it's it's not immediate. So to this point.

Ken Newman: Got it.

Operator: Our next question is from Sabrina Abrams with Bank of America.

Sabrina Abrams: Good morning. So the gross margins in the quarter were, I guess, a lot better than expected. I know you've spoken to some stuff around LIFO expense timing, but it was a pretty big delta. Just wanna understand if there were any benefits from burning down inventories quarter over quarter or anything about LIFO layers. And maybe if you could give more color on exactly what happened with the LIFO timing. Did suppliers choose to eat increases? Thank you.

Deidra Cheeks Merriwether: Yeah. For the question, Sabrina. So it's really around the fact that you know, LIFO is really difficult to estimate. Because you know, based upon your inventory purchase, and the specific changes on the cost. You have to be able to estimate that by SKU. And then whatever you sell, you have to go back in prior periods and pull those adjustments in and make a very good estimate for your prior year inventory at the same time. So we do the best we can at trying to a pretty complicated quantification of LIFO impact And so our team here was all always continue to negotiate with the suppliers.

And based upon where those negotiations landed, some of those cost increases are being pushed into prior periods. And so you know, based upon that, that is some of the LIFO charge improvement In addition to that, we have some benefit from price cost. As well. That impacts gross margin And then also, we also had benefits from favorable mix and freight.

Sabrina Abrams: Okay. Got it. Thank you. And maybe if you could talk a little bit about you know, the market growth has been I think and your daily sales growth has been very stable this year with the exception of, I guess, what's happening in Q4, and you've already explained that. But barring that, just any early thoughts on how you're thinking about the growth in 2026? Are you thinking it will be similar to this year? Thank you.

Donald G. Macpherson: So we'll we'll provide that information at the end of the year in January. We typically don't provide that know, we do expect to have know, significant price rollover as you might guess so and we still expect to continue to gain share at our target rate. So but we will we will have more news on what we think the market will do as we get to that point.

Sabrina Abrams: Thank you.

Donald G. Macpherson: Thanks.

Operator: Our next question is from Deal Burke with UBS.

Deal Burke: Hey. Thanks for the question. I wanted to ask about asking the price question another way. We hear about some price fatigue with respect to customers in the industrial channel. Can you talk about your conversations with your suppliers? I think you mentioned over a thousand negotiations. So is there a sense that they are not fully passing on cost since the inflation is a bit below a bit below market.

Donald G. Macpherson: Yeah. I don't know if a bit below market. What I would say is that for manufacturer they have decisions to make about whether they pie pass percent or dollars. And I would say that a lot of them have passed somewhere in between that two. In many cases. So, you know, just because the headline is 20% tariff increase may not pass 20% in all cases until we've seen really a mix of things and a wide range of things from our suppliers on that drop.

Deal Burke: Okay. Thanks. And I know we'll get more on this one in January, but, like, any kind of initial thoughts on 2026? Not so much on the top line, but you mentioned gross margins around 39%. So any kind of, like, puts and takes we think about how that drops through to operating profit? I mean, I would just I would just point to two things that you know, probably set us up well. One is the LIFO thing we've been talking about that will should improve as you're going on, and the other is exiting The UK market if we can The UK market, that will help too.

So I would only point to those two things at this point. We'll talk about others as we get to the end of the year.

Deal Burke: Great.

Deal Burke: Thank you. Our next

Operator: Our next Thank you. Good morning, everyone.

Donald G. Macpherson: Morning.

Operator: Hey. Was hoping as we close the books on Calmwell DG can share some of the lessons This was not the first time Granger had tried to expand in Europe. There's also Fabry. So what doesn't work with the MRO model in Europe That's kinda moot now, I think. But then more importantly, don't you still have all kinds of opportunity to outgrow North America in you know, it's still highly fragmented. So isn't that still the growth opportunity? So two questions there.

Donald G. Macpherson: Yeah. Yeah. So and that and the second one's really easy. So, yeah, we do think the to grow in North America. And in Japan with MonotaRO. We've got great growth opportunities there. Yeah. I'd I'd say, you know, favor and Crumble are very different. Experiences. I think Cromwell is very good business. It, you know, we bought it right before Brexit happened. We thought we had an opportunity to learn and build off that platform for Jorah UK and then potentially think about expansion and learn about the European market. That turned out to not be true, obviously, when Brexit happened.

And at some point, it becomes clear that you've got a mid sized business that really material to our portfolio. And wanna make sure that our attention goes to things that really matter. From a that can move the needle for us. And so that's why we made the decision We do think Cromwell is a good business and will continue to be a good business going forward. Forward.

Operator: Good to hear. And then just to clarify on the government shutdown, and I appreciate how you sized it. Is there been any difference in behavior demand? I mean, between federal, state, local. I mean, we're this is the focus is on the federal shutdown, but what's been the ripple effect across the rest of your government business?

Donald G. Macpherson: Very little, actually. I think, you know, the state business is down in October only because of the hurricane. Basically. So if you look, we remove the hurricane from the three states that had big hurricane events last year, state would be on a good path. Local hasn't really been impacted that much. So from a government shutdown perspective, it's really the military so far been hit. And things like VA hospitals that are linked to federal that you know, have had slowed down as well.

Operator: Appreciate that. Thank you. Thank you.

Operator: Our next question is from Nigel Coe with Wolfe Research.

Nigel Coe: Thanks. Good morning. Dee, I appreciate the attempt to teach in on LIFO accounting. I'm an accountant by training, and I it fries my brain. So but it's a good effort. It's really good effort. We've had so many whiteboard sessions in the last few months. You ridiculous. I know. But the more you dig into it, the more confusing becomes. But just on I don't know if you qualify it, Dee, but we calculated a $52 million impact this quarter, just the change in the LIFO reserve. I'm I'm assuming that's the charge. And then I think the PR talks about still some impact in the first half of mid-twenty six, I think, is the wording.

Would you expect more moderate impact in the first half of next year?

Deidra Cheeks Merriwether: So, yeah, your math is right. And what I will say about next year is that we're right in the middle of the cost cycle. For 2026, which is why it's so difficult for us to talk about 2026 outlook. Because we're not done with that. So but what we do know is more cost is coming into the year, and so therefore, we're going to have additional LIFO impact. Into the year. And so you know, without having, you know, Chris' numbers to lay out at this point, we know we're gonna have a LIFO impact We know we're gonna have additional cycles of price to pass. You know, as a result. Into 2026.

But as it relates to actually sizing those incremental things that haven't been locked down right now, It's really you know, hard to do. But we do think we get through the back half of next year you know, we'll be in a good position because we would have had multiple pricing cycles to catch up on any impacts and new costs that come through.

Nigel Coe: Right. Okay. Thanks, Dee. And then, obviously, good news on that the price has gone to come through here. How do we think about price elasticity? And the spirit of the question is, there is a sort of vague kind of aura of price fatigue out there with some companies and I'm just curious, you know, how the customers are still responding to these price increases, and how do you think about elasticity of demand, especially for the white label goods?

Donald G. Macpherson: Yeah. So, you know, we are having very good conversations with our customers. They are seeing everybody come to them with what we're talking to them about generally. So we haven't really seen price fatigue, and we've been very measured in how we've done this. You know, I guess there could be a point where that might be a challenge. But certainly, for most of what we sell, it's a very small portion of our customers expense. And so we find that long as our prices are competitive, we are usually in good shape.

Nigel Coe: Okay. Thanks, DJ.

Operator: Our next question is from Tommy Moll with Stephens Inc.

Tommy Moll: Good morning and thanks for taking my question.

Donald G. Macpherson: Good morning.

Tommy Moll: I want to tighten up my understanding here on The UK ex exit. Two part question. The $40 million sales impact that was over what time frame? And then the 20 basis points operating margin impact just want to clarify, you meant to say or what you meant was assuming the I six exit go is planned. That would be the uplift consolidated company. Margin.

Deidra Cheeks Merriwether: Yes. So, yeah, the 40,000,000,000 is just tied to Q4. And the and the 20 basis point impact is for total company on an annualized basis.

Tommy Moll: Okay. And the 40,000,000 d is for the entirety of Q4. Correct?

Deidra Cheeks Merriwether: So we're estimating that we will be able to close on the Cremwell deal. By the November, early December.

Donald G. Macpherson: And that's the 40,000,000 from that point.

Deidra Cheeks Merriwether: Yeah.

Donald G. Macpherson: After that point in time.

Deidra Cheeks Merriwether: Yes. Right. Okay. And that's both. That's both Cromwell and what we expect to happen at Zoro UK as well.

Tommy Moll: Perfect. Okay. We're we're clear now. Thank you. And then just on high touch, and the exit rate on pricing, the fourth quarter, think you said somewhere north of three points. And then also that there are continuing supply conversations suggesting there's probably gonna need to be more pushed Let's call it first half twenty five because we just think about the wrap here, excuse me. First half twenty six. As we think about the wrap, I mean, could we end up in a world where 2020 pricing on high touch is I don't know, four points or better. We just put all these data points after the other.

Deidra Cheeks Merriwether: Yeah. I mean, we're estimating the wrap will be you know, close to three. So since we don't know the other numbers, it's highly likely. That it's gonna be north of three.

Tommy Moll: Yeah. For next year.

Tommy Moll: Yep. Okay. Thank you. I'll I appreciate the insight, and I'll turn it back. Thanks.

Operator: Our next question is from Guy Hardwick with Barclays Capital.

Guy Hardwick: Good morning. Most of my questions have been answered because a quick one for me. Looking at the sales growth by end market, for Hightouch, Solutions US, warehousing is down mid teens which is sharply against the kind of trend of slightly up, slightly down each the last few quarters. Can you explain that?

Donald G. Macpherson: Yeah. Sure. That's entirely around one customer where there was a shift. What I would say.

Guy Hardwick: Was that a lost contract or a closure of closure of facility, that sort of change?

Donald G. Macpherson: Just a just a contract adjustment.

Guy Hardwick: Thank you.

Operator: Our next question is from Patrick Baumann with JPMorgan.

Patrick Baumann: Hi. I had a couple quick ones here. Touch on the Vonage and the high touch again. What do you estimate the MRO market volume did in the third quarter? And in context of that, you know, can you touch on if you're still happy with the returns you're getting on your investments? Share gain investments.

Donald G. Macpherson: Yeah. Yes. Roughly 2% on volume. For the debt to below 2% on volume for the core. 2% market. No. You're talking about bar volume.

Patrick Baumann: Market.

Deidra Cheeks Merriwether: Market. Market.

Donald G. Macpherson: Oh, market. Oh, market would have been down 2%. That's correct. I'm sorry. I thought you're asking what our volume was. Our volume been one to two. In the in the quarter. And, yes, the short answer is yes. We are seeing significant returns on our investments getting more effective and more efficient in some of those investments. So, yeah, we're pretty we're pretty bullish on what we're seeing from what we're investing right now. Yeah. And I would just point you to, you know, our return on invested capital as still north of 40. It was lower than prior year. However, you know, the main impact from that is just us continuing to build assets.

And in this case, build networking assets related to you know, a lot of investments that we're making in DC capacity to ensure that we have great service and availability.

Patrick Baumann: Okay. Then my follow-up is on the margin side again. So the LIFO charge I get is hard to size for 26 so we can make our you know, own assumptions around. How much that 80 to 90 basis point drag to add back as a starting point. But, you know, the slide mentions price cost as being negative as well. Can you can you size that I assume that's incremental to that 80 to 90 basis points. And then as you sit in front of the whiteboard, you know, and game theory, If the IEPA tariffs are ruled illegal, mechanically, how do you guys think about that? In terms of the flow through to results?

Deidra Cheeks Merriwether: So I'll start and then and DG can kinda focus. So as we look into Apollo, when we look at next year, we're still gonna have LIFO impact. Right? That's still going to exist. The difference will be our price will continue to build. And so we will see gross margin from a Granger perspective improve into next year as it relates to that? Now the piece that we don't and that's based upon all we know today. Right? Working on additional cost increases. When we start the year, you know, generally, we based upon the cost negotiations, we put push through cost increases in line with the go negotiations that we have completed.

And so the cycle kinda will start again. And those details, we don't have to share. But, usually, LIFO weighs heavily on our business at the beginning of the year. And then, again, we catch up from a price perspective. Through our cycle of increases. So LIFO will not be going away. It some it will normalize what we're what we're experiencing this year would normalize. But then we will be on a path where price will continue to build.

And that's why we feel pretty confident that, you know, as we get to the second half of next year, just like we're ending this year, if you look at the midpoint of the guide, that we're gonna be at about 39%.

Donald G. Macpherson: Your second question is probably more theoretical at this point, which is if tariffs are illegal, what would happen? First of all, know, we have followed the guide our own guidelines here that we only do things that actually are happening. And so, you know, we would have to actually see what law change would look like and figure out what would happen. I'd say two things. One is we have worked closely with suppliers to tag what tariff cost increases are. So we could we would know how to unwind those if that was in factory required. We could do that.

And certainly, as that happened, we would then, of course, get a benefit because when we took the lower cost product in, then we have the reverse of what's happened way. But I don't know I don't know how big it benefits that would be. So we'd have to come back to you and model all that if that in fact

Deidra Cheeks Merriwether: Thanks.

Operator: Our next question is from Chris Dankert with Loop Capital Markets.

Chris Dankert: Hey, good morning. Thanks for taking the questions. I guess focusing on endless assortment here, nice results. Maybe can you comment on how much of that's being driven by the more targeted selection, continue to provide some benefits? How much of that is kind of the customer acquisition flywheel know, just larger invoice sizes. Maybe just any commentary kind of what we're seeing in terms of trends inside of EA?

Donald G. Macpherson: Yeah. So what I would say is that most of the improvement we've seen in I'll start I'll focus on Zoro because Zoro's been a pretty big shift in terms of performance. Has been improved fundamentals on getting more attractive customers and then getting them buy frequently. Average order size hasn't really changed at all. It's all been frequency of orders when you look at it. That's been the driver, and that's been better customer acquisition to find, you know, a acquiring customers with the right products that gives higher probability of actually getting a repeat. And it's also just doing better at marketing to those customers and creating a relationship and on a digital through digital means.

So really, the fundamentals have improved a lot and we've seen repeat rates go way up. We've seen them do them do things as business pricing that have helped, and we've we've seen service improvements. On the road. So all those things have contributed to improvement. Performance.

Chris Dankert: Got it. Thanks for the color there. Any guesses a follow-up, I mean, we're we're seeing better drop through now on the SG and A leverage. Are there any additional investments similar to the Tokyo DC or anything else we should keep in mind into 2026, 2027 that would impact kind of that drop through rate? Or should we expect pretty good incremental margins in EA Going Forward From Here? Other Than Me, Though, I Don't Know Of Any Other Investment That Is On The Horizon. They Would Have A Lot Of Capacity In Both Osaka and Tokyo after Mido, and that would be the

Donald G. Macpherson: They would be there for a while.

Chris Dankert: Got it. Well, thanks so much. Thank you.

Operator: Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Donald G. Macpherson: Great. So thanks for joining the call today. You know, one thing I'd highlight is that know, I think the underlying business trends are really good, and they're doing, you a lot of great things. To improve the customer experience to prepare to improve our cost structure, I think it's a new work on building technology and building service capabilities through the right network changes on the distribution center network. So we spend a lot of time talking about LIFO, hope you get the sense that's not really the what we're focused on. As a business. We're focused on actually underlying performance. We feel like the underlying performance is pretty good.

With that, I wish you all a safe and happy Halloween, and thanks for joining the call today.

Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.