W.W. Grainger Inc. (GWW) reported earnings of $2.13 per share for the fourth quarter 2011, exceeding the Zacks Consensus Estimate by 2 cents. The result was 19% above the year-ago earnings of $1.79. The improvement stemmed largely from strong sales across all segments.
Quarterly EPS excluded a 16 cent per share charge related to U.S branch closures and a gain on the sale of Grainger’s 49% ownership in MRO Korea. Including these items, EPS in the quarter was $2.04. The prior-year EPS excluded a gain of 4 cents per share pertaining to a change in paid time off policy. Including this, EPS was $1.83 in the year-earlier period.
Operational Update
Revenues in the quarter were $2.08 billion, up 13.7% from $1.82 billion in the year-ago period. Revenue also surpassed the Zacks Consensus Estimate of $2.07 billion. On a daily basis, sales improved 16% in October, 15% in November and 11% in December.
The improvement in revenue was attributable to volume growth and favorable pricing coupled with favorable foreign exchange rates and acquisitions, partly offset by the negative impacts from the oil spill clean-up in the Gulf of Mexico in 2010.
Operating earnings in the quarter improved 5% to $221.5 million, primarily driven by higher sales volume and gross profit margins, partially offset by steeper operating expenses. The increase in operating expenses was triggered by volume-related costs, expenses related to the acquired Fabory business and increased spending towards the company's growth programs, including new Territory Sales Representatives, eCommerce, advertising and for a new distribution center in northern California.
Segment Performance
Revenues from the United States segment increased 8% year over year to $1.62 billion, driven by favorable volume and price growth, partially offset by the negative impacts from the oil spill in the Gulf. On a daily basis, sales increased 9% in October and November and 5% in December.
Operating income for the segment rose 5% to $236.4 million, mainly due to higher sales and improved gross profit margins from the region.
Revenues from the Acklands-Grainger business in Canada climbed 13% to $245 million, thanks to the improvements in heavy manufacturing, construction, agriculture and mining customer end markets. On a daily basis, segment sales increased 16% in October, 15% in November and 11% in December.
Operating income in Canada expanded a whopping 121% to $29.4 million as a result of strong sales and improvement in gross margins and operating expenses.
Revenues from Other businesses (which include Europe, Japan, Mexico, India, Colombia, Puerto Rico, China and Panama) catapulted 95% year over year to $226.9 million, driven by strong growth in Japan and Mexico.
Operating earnings remained flat at $5.4 million as strong earnings growth in Japan and Mexico was offset by lower operating losses in China, India and the startup at Dominican Republic. On top of this, the Fabory business reported a loss due to the challenging economic conditions in Europe.
Fiscal 2011 Performance
Grainger reported adjusted EPS of $9.04 compared with $6.80 in the prior fiscal. Results were ahead of the company’s guided range of $8.85 and $9.00, and the Zacks Consensus Estimate of $9.02. Including one-time items, EPS was $9.07 compared with $6.93 in the prior year.
Grainger reported record revenues of $8.08 billion, a 12.5% increase over $7.18 billion in the prior year and at par with the Zacks Consensus Estimate of $8.08 billion. The sales growth recorded during the year surpassed the company’s estimate of 11% to 12%.
Financial Position
Grainger had cash and cash equivalents of $335.5 million and long-term debt of $175 million, as of fiscal 2011 end. That compares favorably with a cash balance of $313.5 million and long-term debt of $420.4 million as of 2011 end.
The company generated net cash from operating activities of $724 million during the year, up from $596 million in the prior year. Capital expenditures increased to $197 million from $128 million in the prior year, mainly due to the expansion of the distribution center network in the United States.
Grainger repurchased 1 million shares through the year and has approximately 7.1 million shares remaining under its current repurchase authorization. The company paid dividends worth $181 million round the year.
Outlook
For 2012, the company maintained its previous forecast of sales growth in the range of 10% to 14%, and earnings per share between $9.90 and $10.65. Organic sales growth for 2012 is forecast at 6% to 10%.
Our Take
We retain our Outperform recommendation on W.W. Grainger, encouraged by its successful market share strategy that includes increased product offerings, expansion of private label products, sales force investment and focus on e-commerce.
In addition, a sound balance sheet coupled with healthy cash flow enables Grainger to further invest in growth opportunities, increase dividends and reinvest capital through share repurchases. The quantitative Zacks #1 Rank (short-term Strong Buy rating) for the company indicates upward directional pressure on the shares over the near term.
Illinois-based Grainger is a leading North American distributor of material handling equipment including safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, etc. The company’s services comprise inventory management and energy efficiency solutions. The company competes with Applied Industrial Technologies Inc. (AIT) and WESCO International Inc. (WCC).
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