Industrial maintenance, repair, and operating (MRO) supplies distributor W.W. Grainger (NYSE:GWW) released first-quarter 2019 results on Monday. The organization recorded rather anemic revenue against the first quarter of 2018, and shareholders quickly expressed a grievance: Shares lost 5.5% in the trading session following the earnings release. Below, I'll review essential details from the last three months. Note that all comparative numbers are presented against the prior-year quarter.
W.W. Grainger results: The raw numbers
|Metric||Q1 2019||Q1 2018||Change (YOY)|
|Revenue||$2.80 billion||$2.77 billion||1.1%|
|Net income||$250 million||$230 million||8.7%|
|Diluted earnings per share||$4.48||$4.07||10.1%|
What happened with Grainger this quarter?
Daily sales expanded 3%. The advance was comprised of 3 percentage points of volume growth and 1.5 percentage points of increased pricing, offset by foreign currency translation and an accounting adjustment as the company shifted a small group of customers from cash accounting to accrual accounting after extending trade credit to them during the quarter.
The company's U.S. business improved daily sales by 3.5%; total U.S. sales reached $2.15 billion. Operating income in this segment increased 7% to $364 million.
Canada segment daily sales fell 24% to $136 million. Volume plunged by 24%, while pricing power of 4 percentage points was negated by foreign currency effects. The constrained volume was intentional, as the company closed branches to optimize its sales footprint in Canada and boost operating margin. Net loss improved to $5 million against a net loss of $20 million in the prior-year quarter (both periods included restructuring charges).
"Other businesses" revenue improved by 9.5% on a daily sales basis to a total of $633 million, due to both positive volume and price. Management attributed the brisk growth to strong momentum in "endless assortment" revenue (i.e., single-channel, low-touch distribution of competitively priced products). Segment operating profit dipped nearly 17% to $30 million due to ongoing investments in the endless assortment model.
- Operating margin improved by 140 basis points to 12.5%, as selling, general, and administrative expenses (SG&A) declined by roughly 3% to $732 million despite the higher sales level. This enabled net earnings to advance, if barely, by double digits.
Given its revenue concentration in the U.S., Grainger monitors stateside economic expansion carefully each year in order to gauge its own potential for growth. During the company's earnings conference call on Monday, CEO Donald Macpherson described demand for the organization's high-touch solutions and endless assortment revenue streams in terms of the U.S. MRO market:
The U.S. market was choppy to start the year due to the uncertainty around tariffs, the government shutdown and the inclement weather. While we continue to see growth across all of our end markets, we did see market growth slow versus 2018. We estimate that the US market grew about 2% to 2.5% in Q1, including approximately one point in price.
Grainger reiterated its full-year outlook on Monday, which calls for operating margin of 12.2% to 13% and year-over-year sales growth of between 4% and 8.5%. CFO Tom Okray reminded investors during the earnings call that to hit the top end of the expected revenue range, Grainger intends to gain 300 to 400 points of market share in the U.S. However, the state of the overall market could hinder this objective.
After first-quarter U.S. MRO market expansion of roughly 2%, Okray indicated that the environment remains uncertain. A resumption of market growth "significantly higher than 2%" -- meaning at least 3% -- will enable Grainger to top out near 8.5% in annual revenue improvement this year.
But if the domestic MRO market continues to widen at a rate of 2% or slightly slower, Grainger's middling revenue performance of the last three months may be repeated in the coming quarters. Investors' reaction to management's caution over the organization's top line explains at least part of Monday's share price decline.