Grainger Q1 Sales Improve, Profit Sinks Further Despite Cost Cuts

The company's reduced operating expenses this past quarter weren't enough to offset volume decreases, although business overseas showed healthy gains.

Grainger — No. 3 on Industrial Distribution's 2015 Big 50 List — reported its 2016 first quarter fiscal performance on Monday, highlighed by a considerable year-over-year profit decline, while sales increased for the first time since Q2 2015.

The Lake Forest, IL-based company posted Q1 total sales of $2.5 billion, up 3 percent from a year earlier. Daily sales increased by 1 percent, while organic sales dipped 2 percent. Meanwhile, profit of $187 million was a 12 percent decrease from last year despite a 4 percent reduction in operating expenses.

On a sequential basis, Grainger Q1 total sales were up 1 percent from Q4 and profit rose 28 percent.

After posting year-over-year daily sales growth in January (+4.3 percent) and February (+0.6), March daily sales decreased 1.1 percent.

Total sales in the U.S. — which comprises 78.6 percent of Grainger's business — were flat year-over-year, while daily sales decreased 2 percent and operating earnings slid 9 percent, led by a 3 percentage point reduction in price. Operating expenses were down 4 percent, which included $16 million in restructuring costs related to planned branch closures and reorganization of the company's sales force. Grainger closed 5 U.S. branches in Q1, and reiterated its plan (announced after Q4) to close an additional 50 U.S. branches throughout the remainder of 2016. U.S. operating earnings declined 9 percent in Q1.

“Revenue and share gains are tracking as we expected given the tough economic environment,” said Grainger chairman, president and CEO Jim Ryan. “In our U.S. business, share gains with large and small businesses continue to outpace our performance with medium-sized customers. We continue to see price and gross margin pressure driven primarily by the low inflation economic environment and faster growth from lower gross margin customers."

Grainger's U.S. sales by end market were as follows: 

  • Government — up in the mid-single digits
  • Light manufacturing and retail — up in the low-single digits
  • Commercial — down in the low-single digts
  • Contractor and heavy manufacturing — down in the mid-single digits
  • Reseller — down in the low-double digits
  • Natural resources — down in the mid-teens.

Sales in Canada — which comprises 7 percent of Grainger's business — sunk 23.8 percent year-over-year. Daily sales were down 20 percent, and down 18 percent in local currency. The daily sales declines were largely due to a reduction in volume across all end markets. Operating earnings had a $12 million loss and posting a $9 million gain a year earlier.

Sales in Other Business — which comprises 17.8 percent of Grainger's business and includes Europe, Asia and Latin America — increased 50 percent, and 47 percent on a daily basis. Grainger's September 2015 acquisition of U.K.-based Cromwell was responsible for 33 percentage points of that daily sales growth, while volume and price boosted it by 17 points. Q1 operating earnings of $22 million more than doubled last year's $10 million.

Grainger is forecasting sales growth of 0 to 6 percent for the full-year 2016, narrowing its guidance of -1 to 7 percent growth it gave in its Q4 report.

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