Sales performance and strong expense management lead to share gain and operating earnings growth despite slower macroeconomic environment.
Third Quarter Financial Highlights
– Sales of $2.9 billion, up 4 percent, up 2.5 percent on a daily basis
– U.S. Segment and endless assortment businesses grew 4.5 percent on a daily basis
– Reported operating earnings of $338 million, up 78 percent; adjusted operating earnings of $339 million, up 2 percent
– Reported EPS of $4.25, up 134 percent; adjusted EPS of $4.26, up 2 percent
– Returned $279 million to shareholders through dividends and share repurchases; Returned $842 million in the year to date period ending September 2019
– Reiterating 2019 total company guidance ranges
CHICAGO, Oct. 23, 2019 /PRNewswire/ — Grainger (NYSE: GWW) today reported results for the 2019 third quarter. Sales of $2.9 billion in the quarter increased 4 percent versus the 2018 third quarter. On a daily basis, sales were up 2.5 percent. The third quarter had one more selling day than the prior year period. Foreign exchange had no impact on total company sales.
“While the global demand environment continued to weaken, our U.S. and endless assortment businesses gained share as we made solid progress on our key growth initiatives and were diligent in managing expenses,” said DG Macpherson, Chairman and Chief Executive Officer. “We remain confident in our ability to achieve results within our 2019 total company guidance ranges as provided in our second quarter earnings release.”
2019 Third Quarter Financial Summary
|($ in millions)||Q3 2019||Q3 2018||Q3|
|Change v. Prior|
|Gross Profit %||37.3%||37.3%||38.1%||38.1%||-80 bps||-80 bps|
|Operating Margin||11.4%||11.5%||6.7%||11.7%||480 bps||-20 bps|
|Tax Rate||24.2%||24.2%||32.7%||20.0%||-850 bps||420 bps|
|(1)||Results exclude restructuring and income tax items as shown in the supplemental information of this release. Reconciliations of the adjusted measures reflected in this table to the most directly comparable GAAP measures are provided in the supplemental information of this release. 2019 reported results included restructuring primarily in Canada resulting in a negative $1 million impact to operating earnings and a negative $0.01 impact to EPS. Reported results in Q3 2018 contained $139 million in non-cash impairment charges related to the Cromwell business in the U.K. and $4 million in restructuring charges related to the U.S. segment and Other Businesses.|
Daily sales for the quarter increased 2.5 percent. Sales were primarily composed of a 2.5 percentage point increase in volume. Price inflation and the impact from foreign exchange were both flat.
Gross Profit Margin
Reported and adjusted gross profit margin for the third quarter were 37.3 percent versus 38.1 percent in the 2018 third quarter due primarily to performance in the U.S. segment and Other businesses. Year to date 2019 reported and adjusted gross profit margin were 38.4 percent versus 38.8 percent in the 2018 year to date period due to performance in Other businesses.
Reported operating earnings for the 2019 third quarter of $338 million were up 78 percent versus $189 million in the 2018 third quarter. Reported earnings in the 2018 third quarter included $143 million in restructuring and non-cash impairment charges, which were primarily related to the Cromwell business in the U.K. On an adjusted basis, operating earnings for the quarter of $339 million were up 2 percent versus $332 million in the 2018 quarter.
Reported operating margin of 11.4 percent increased 480 basis points in the third quarter of 2019 versus the prior year quarter. Adjusted operating margin of 11.5 percent in the quarter declined 20 basis points versus the prior year quarter. The decline in operating margin was due primarily to investments in Zoro. Year to date 2019 reported operating margin of 12.5 percent increased 225 basis points versus the 2018 year to date period. Year to date adjusted operating margin of 12.5 percent increased 30 basis points versus the 2018 year to date period due primarily to the U.S. segment and Canada.
Reported earnings per share of $4.25 in the third quarter was up 134 percent versus $1.82 in the 2018 third quarter. Adjusted earnings per share in the quarter of $4.26 increased 2 percent versus $4.19 in the 2018 third quarter. The improvement in adjusted earnings per share was due primarily to higher operating earnings and lower average shares outstanding, partially offset by higher taxes due to lower tax benefits from stock based compensation.
For the 2019 third quarter, the company’s reported tax rate was 24.2 percent versus 32.7 percent in the 2018 third quarter. The higher tax rate in the prior year quarter was driven primarily by Cromwell impairment charges, which were not tax deductible.
Excluding net restructuring and impairment charges in both periods, the adjusted tax rates were 24.2% and 20.0% for the three months ended September 30, 2019 and 2018, respectively. The increase in effective tax rate was primarily driven by lower tax benefit from stock-based compensation and the absence of the Company’s clean energy tax benefits in 2019 as the Company concluded these investments in 2018.
Operating cash flow was $320 million in the 2019 third quarter compared to $348 million in the 2018 third quarter. The decline in operating cash flow was primarily the result of timing related to supplier payments. The company used the cash generated during the quarter to invest in the business and return cash to shareholders through share repurchases and dividends. Grainger returned $279 million to shareholders through $79 million in dividends and $200 million used to buy back approximately 725,000 shares in the third quarter of 2019.
2019 Company Guidance:
The company is reiterating 2019 guidance at the total Company level. These metrics reflect the updated guidance provided in the Q2 2019 earnings release.
|Total Company||2019 Guidance Range|
|Market Growth (nominal)ꝉ||-1.0% to 2.0%|
|Net Sales||2.0% to 5.0% growth|
|Gross Profit Margin||38.1% to 38.7%|
|Operating Margin||12.2% to 13.0%|
|Earnings per Share||$17.10 to $18.70|
|ꝉ In the U.S., Business Investment and Exports are two major indicators of MRO spending. Per the Global Insight October 2019 forecast, Business Inventory is forecast to improve while Business Investment, Industrial Production, Exports and GDP are forecast to soften, as a result of the trade tensions and associated uncertainty around tariff policy, slowing global growth and a strong US dollar, diminishing support from fiscal stimulus and a decline in the pace of inventory accumulation. Per the Global Insight September 2019 forecast, Canada’s Business Investment, Exports, Industrial Production and GDP are expected to slow due to elevated global trade uncertainties, a reduction in spending, delayed investments and slowing global oil demand.|
Grainger will conduct a live conference call and webcast at 11:00 a.m. ET on October 23, 2019 to discuss the third quarter results. The webcast will be hosted by DG Macpherson, Chairman and CEO, and Tom Okray, Senior Vice President and CFO, and can be accessed at www.invest.grainger.com. For those unable to participate in the live event, a webcast replay will be available for 90 days at www.invest.grainger.com.
W.W. Grainger, Inc., with 2018 sales of $11.2 billion, is North America’s leading broad line supplier of maintenance, repair and operating products (MRO), with operations also in Europe, Asia and Latin America.
Visit www.invest.grainger.com to view information about the company, including a supplement regarding 2019 third quarter results. Additional company information can be found on the Grainger Investor Relations website which includes our Fact Book and Corporate Social Responsibility Report .
Safe Harbor Statement
All statements in this communication, other than those relating to historical facts, are “forward-looking statements.” Forward-looking statements can generally be identified by their use of terms such as “anticipate,” “estimate,” “believe,” “expect,” “could,” “forecast,” “may,” “intend,” “plan,” “predict,” “project” “will” or “would” and similar terms and phrases, including references to assumptions. Forward-looking statements are not guarantees of future performance and are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from such statements. Forward-looking statements include, but are not limited to, statements about future strategic plans and future financial and operating results. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among others: higher product costs or other expenses; a major loss of customers; loss or disruption of source of supply; increased competitive pricing pressures; failure to develop or implement new technology initiatives; the implementation, timing and results of our strategic pricing initiatives; the outcome of pending and future litigation or governmental or regulatory proceedings, including with respect to wage and hour, anti-bribery and corruption, environmental, advertising, privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry, economic, market or political conditions; general global economic conditions; currency exchange rate fluctuations; market volatility; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural and other catastrophes; unanticipated and/or extreme weather conditions; loss of key members of management; our ability to operate, integrate and leverage acquired businesses; changes in effective tax rates; our common stock, including volatility in our stock price; and other factors which can be found in our filings with the Securities and Exchange Commission, including our most recent periodic reports filed on Form 10-K and Form 10-Q, which are available on our Investor Relations website. Forward-looking statements are given only as of the date of this communication and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.