Posted April 18, 2017

Grainger sales up 1 percent

Grainger reported first quarter sales of $2.54 billion increased 1 percent versus $2.50 billion in the first quarter of 2016.

Net earnings for the quarter of $175 million were down 6 percent versus $187 million in 2016. Earnings per share of $2.93 declined 2 percent versus $2.98 in 2016.

"Overall, the first quarter clearly fell short of our expectations, driven primarily by the stronger than anticipated customer response to our U.S. strategic pricing actions, with a greater volume of products sold at more competitive prices," said chief executive officer DG Macpherson. "Based on the positive customer response thus far, we are pulling forward the remaining pricing actions originally scheduled for 2018 into the third quarter of this year. This decision requires a significant change to our earnings per share guidance for the year but should enable us to accelerate growth with existing customers and attract new customers sooner than planned.

"Our Zoro and MonotaRO businesses continued to perform very well. We continue to be challenged in Canada, although our service has improved. We will continue to aggressively take action to improve gross margins and reduce our cost structure in Canada with the expectation of hitting break-even by the end of 2017," Macpherson concluded.

Grainger's pricing actions were primarily implemented in January and February of this year. The actions included adjusting list prices across the board to make it easier for large customers to consolidate their purchases; introducing new web prices on about 450,000 SKUs to drive medium and large non-contract customer acquisition and growth; negotiating large customer contracts with more competitive pricing for infrequently purchased items. Most large customers already receive very competitive pricing on routine items through their contracts.

Results from the first quarter pricing actions showed that customers with access to lower pricing bought more than company expectations. Although it is early, the data provided confidence that the pricing actions were successful, the company said. The decision to accelerate the pricing actions is expected to enable faster growth through share gain with existing customers and acquisition of new customers. Web pricing will be available on all SKUs in the 2017 third quarter.

United States
Sales for the U.S. segment were down 1 percent versus the 2016 first quarter. The decrease was driven by a 4 percentage point decline in price and a 1 percentage point decline from lower sales of seasonal products, partially offset by a 4 percentage point increase from volume growth. Sales to customers in the Government and Heavy Manufacturing end markets led the sales performance in the quarter.

Operating earnings for the U.S. segment declined 6 percent in the quarter driven by lower gross profit. Gross profit margins for the quarter declined 1.7 percentage points driven by the strategic price initiatives. In the 2017 first quarter, operating expenses were down 4 percent, which included a $9 million benefit from the gain on sale of branches and $3 million of restructuring costs. Excluding restructuring costs and the gain on sale of assets, operating expenses were flat and operating earnings were down 12 percent.

First quarter 2017 sales for the Canada segment increased 4 percent in U.S. dollars and 1 percent in local currency. The 1 percent increase consisted of 4 percentage points from volume, partially offset by 2 percentage points from lower price and a 1 percentage point decline from unfavorable holiday timing.

The business in Canada posted a $17 million operating loss in the 2017 first quarter versus a $12 million operating loss in the prior year, primarily driven by a lower gross profit margin and negative expense leverage. The gross profit margin in Canada declined 2.7 percentage points versus the prior year largely due to price deflation and higher freight costs. The business in Canada increased prices to offset foreign exchange-related cost of goods sold inflation in the first quarter, but most customers are under contract and will not experience price increases until later in the year. Freight costs increased year-over-year as the business shifts to direct-to-customer shipping. Operating expenses increased 3 percent, driven by the re-establishment of the national sales meeting and the unfavorable comparison to the 2016 gain from the sale of the former Toronto distribution center, partially offset by lower IT expenses.

Other Businesses
Sales for the Other Businesses increased 12 percent versus the prior year, consisting of 15 percentage points of growth from volume and price, partially offset by a 3 percentage point decline from foreign exchange, primarily attributable to weakness in the British pound. The performance was driven primarily by 23 percent sales growth for the single channel online businesses.

Operating earnings for the Other Businesses were $32 million in the 2017 first quarter versus $22 million in the prior year. This performance included strong results from Zoro in the United States and MonotaRO in Japan.