Grainger challenged by ‘difficult industrial environment’
Grainger (NYSE: GWW) reported results for the 2016 second quarter ended June 30, 2016. Sales of $2.6 billion increased 2 percent versus $2.5 billion in the second quarter of 2015. There were 64 selling days in the 2016 second quarter, the same as the 2015 second quarter. Net earnings for the quarter of $173 million were down 22 percent versus $221 million in 2015.
“Grainger and our industry remain challenged by the difficult industrial environment. The U.S. business performed slightly below our expectations due to lower sales volume that was partially offset by better than expected gross profit margins. We managed expenses tightly in the quarter given the lower sales volume” said Chairman, President and Chief Executive Officer Jim Ryan.
“A bright spot for the quarter was the continued strong performance of our single channel online businesses, which posted topline growth of 34 percent,” Ryan said. “Despite the significant shortfall in Canada, which contributed to quarterly performance below our expectations, I have great confidence that we have positioned Grainger to capitalize on the attractive growth opportunity in the large and fragmented MRO market.”
The company also revised its 2016 sales and earnings per share guidance and now expects sales growth of 1 to 4 percent. The company’s previous 2016 guidance, communicated on April 18, 2016, included sales growth of 0 to 6 percent.
Sales increased 2 percent in the 2016 second quarter versus the prior year. The sales performance included a 4 percentage point contribution from Cromwell Group (Holdings) Limited, acquired on September 1, 2015. Excluding this acquisition, organic sales declined 2 percent driven by a 1 percentage point decrease in volume and a 1 percentage point reduction in price.
Company operating earnings of $306 million for the 2016 second quarter declined 14 percent versus $357 million in the 2015 quarter. The decline was driven by lower sales, lower gross profit margins and higher operating expenses.
The company has two reportable business segments, the United States and Canada, which represented approximately 82 percent of company sales for the quarter. The remaining operating businesses are located in Europe, Asia and Latin America. The single channel online businesses are included in Other Businesses and are not reportable segments.
Sales for the U.S. segment declined 3 percent versus the 2015 second quarter. The 3 percent decline was driven by a 2 percentage point decrease in volume and a 2 percentage point decline in price, partially offset by a 1 percentage point contribution from increased sales to Zoro, the single channel online business in the United States. Retail and Government customers posted the strongest sales growth in the quarter.
Operating earnings for the U.S. segment declined 6 percent in the quarter driven by lower sales and lower gross profit margins, partially offset by lower operating expenses. Gross profit margins for the quarter declined 0.9 percentage points driven by unfavorable customer mix and price deflation outpacing cost deflation. Operating expenses for the segment were down 4 percent in the quarter versus the 2015 second quarter.
The quarter included $6 million of restructuring costs for the U.S. segment driven by previously announced branch closures and the offshoring of some IT support functions. These charges were more than offset by $15 million in gains on the sale of branch real estate for a net restructuring benefit of $9 million, or $0.09 per share. Excluding restructuring, operating expenses were down 2 percent and operating earnings were down 8 percent.
Second quarter 2016 sales for Acklands-Grainger declined 19 percent in U.S. dollars and 16 percent in local currency. The 16 percent decline consisted of 14 percentage points from lower volume and 2 percentage points from the wildfires in Alberta. The business in Canada continued to be affected by a weak economic environment, resulting in lower sales to most customer end markets.
The business in Canada posted a $28 million operating loss in the 2016 second quarter versus operating earnings of $9 million in the prior year, driven by the sales decline, a lower gross profit margin and negative expense leverage. The gross profit margin in Canada declined 12 percentage points versus the prior year, primarily due to a large inventory adjustment along with cost of goods inflation exceeding price inflation due to unfavorable foreign exchange. Operating expenses declined 3 percent in the quarter due to lower SAP project costs and lower advertising costs, partially offset by restructuring costs.
For the six months ended June 30, 2016, sales of $5.1 billion increased 2 percent versus $5.0 billion in the six months ended June 30, 2015. There were 128 selling days in the first six months of 2016, one more than in 2015. Net earnings decreased 17 percent to $359 million versus $432 million in the first half of 2015. Earnings per share for the six months decreased 9 percent to $5.77 versus $6.32 in the first half of 2015.
Year-to-date results contained special items that the company believes are not indicative of ongoing operations and have been removed to provide better comparability with prior periods. Excluding the special items in both six-month periods noted below, net earnings decreased 13 percent and earnings per share decreased 5 percent.