Chicago, IL - Grainger reported results for the 2014 first quarter ended March 31, 2014. Sales of $2.4 billion increased 5 percent versus $2.3 billion in the first quarter of 2013. There were 63 selling days in the 2014 first quarter, the same number as the 2013 first quarter. Net earnings for the quarter increased 2 percent to $217 million versus $212 million in 2013. Earnings per share of $3.07 increased 4 percent versus $2.94 in 2013.
"We are encouraged by the strong finish in March and our solid operating performance in a quarter that was marked by several disruptions from severe winter weather in January and February," said Chairman, President and Chief Executive Officer Jim Ryan. Ryan added, "We are particularly encouraged by the performance of our U.S. business, which was driven by continued market share gains with large customers. The performance of our online businesses in Japan and the United States also continues to be strong. We are facing near-term economic and foreign exchange headwinds in Canada and are unhappy with the current performance. However, we will continue to invest in the Canadian infrastructure as we are very optimistic about the business over the long term," Ryan concluded.
The company also reiterated its full year 2014 guidance of 5 to 9 percent sales growth and earnings per share of $12.10 to $12.85.
Company
Sales increased 5 percent in the 2014 first quarter versus the prior year. Results for the quarter included 2 percentage points from acquisitions, net of dispositions, and a 2 percentage points reduction from foreign exchange. Excluding acquisitions and foreign exchange, organic sales increased 5 percent driven by 4 percentage points from volume, 1 percentage point from price and 1 percentage point from higher sales of seasonal products, partially offset by a 1 percentage point decline from business disruptions due to the extreme weather that closed some customer and Grainger facilities across parts of North America during the months of January and February.
The company's gross profit margin for the quarter decreased 0.1 percentage point versus the prior year to 45.1 percent driven by lower gross margins from the newly acquired businesses. Company operating earnings of $354 million for the 2014 first quarter increased 3 percent versus the 2013 quarter. This increase was driven by the 5 percent sales growth, partially offset by lower gross profit margins. Operating expenses also increased 5 percent. The increase in operating expenses was driven by $31 million in incremental growth and infrastructure spending as well as incremental expenses from the acquired businesses.
The company has two reportable business segments, the United States and Canada, which represented approximately 89 percent of company sales for the quarter. The remaining operating units located primarily in Asia, Europe, and Latin America are included in Other Businesses and are not reportable segments.
United States
Sales for the United States segment increased 7 percent in the 2014 first quarter versus the prior year. Results for the quarter included 2 percentage points from acquisitions, net of dispositions. Excluding acquisitions, organic sales increased 5 percent driven by 4 percentage points from volume, 1 percentage point from price and 1 percentage point from higher sales of seasonal products, partially offset by a 1 percentage point decline due to the extreme weather in January and February. Strong sales growth to customers in the Heavy and Light Manufacturing, Natural Resources, Retail and Commercial customer end markets contributed to the sales increase in the quarter.
Operating earnings for the United States segment increased 7 percent in the quarter driven by the 7 percent sales growth and positive expense leverage, partially offset by lower gross profit margins. Gross profit margins for the quarter decreased 0.3 percentage point driven by lower gross margins from the newly acquired businesses and faster growth with lower margin customers.
Canada
First quarter 2014 sales for Acklands-Grainger decreased 10 percent in U.S. dollars and were down 2 percent in local currency. The 2 percent sales decline consisted of a 4 percentage points decline from volume partially offset by a 2 percentage points benefit from the timing of Good Friday, which occurred in March of 2013 but will fall in April this year. Growth during the quarter to customers in the Utilities, Forestry, Transportation and Reseller end markets was more than offset by declines in the Construction, Light and Heavy Manufacturing, Mining, Retail, Government, and Oil and Gas customer end markets. Approximately two-thirds of revenue is generated in the western provinces with a concentration in natural resources. The business in Canada continues to be negatively affected by a weak macroeconomic environment, unfavorable currency exchange, lower commodity prices and a reduction of Canadian exports.
Operating earnings in Canada decreased 35 percent in the 2014 first quarter and were down 29 percent in local currency. The 35 percent decline was primarily driven by the 10 percent sales decline, a lower gross profit margin and negative expense leverage. The gross profit margin in Canada declined 0.2 percentage point versus the prior year primarily due to higher freight costs and the effect of unfavorable foreign exchange from products sourced from the United States. The increase in operating expenses was primarily driven by higher payroll, benefits and severance costs along with incremental IT spending.
Other Businesses
Sales for the Other Businesses, which includes operations primarily in Asia, Europe and Latin America, increased 11 percent for the 2014 first quarter versus the prior year. This performance consisted of 18 percentage points of growth from volume and price, partially offset by a 7 percentage points decline from unfavorable foreign exchange. Sales growth in the Other Businesses was driven by Zoro Tools and the businesses in Mexico and Japan. Strong sales growth in Japan was partially offset by the weakness in the Japanese yen versus the U.S. dollar.
Operating earnings for the Other Businesses were $8 million in the 2014 first quarter, flat versus the prior year. This performance included strong results from Zoro Tools, partially offset by lower performance from the businesses in Latin America and costs associated with evaluating the new online business outside of the United States.
Other
Other income and expense was a net expense of $2.7 million in the 2014 first quarter versus $1.4 million in the 2013 first quarter. For the quarter, the effective tax rate in 2014 was 37.7 percent versus 37.3 percent in 2013. The increase was primarily due to more earnings in the United States versus other jurisdictions with lower tax rates. The company is currently projecting an effective tax rate of 37.4 to 37.8 percent for the year 2014.
Cash Flow
Operating cash flow was $168 million in the 2014 first quarter versus $176 million in the 2013 first quarter. The company used the cash generated during the quarter and cash on hand to invest in the business and return cash to shareholders through share repurchase and dividends. Capital expenditures were $66 million in the 2014 first quarter versus $43 million in the first quarter of 2013. In the 2014 first quarter, Grainger returned $215 million to shareholders through $65 million in dividends and $150 million to buy back 615,000 shares of stock.
