W.W. Grainger, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with the three months ended March 31, 2020 unless noted. Grainger distributes maintenance, repair and operating (MRO) products and services. Effective January 1, 2021, it reported High-Touch Solutions (N.A.) and Endless Assortment as its two reportable segments. The quarter had 63 sales days versus 64 in Q1 2020.
Financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $3.084 billion | $3.001 billion | +2.8%; +4.4% per sales day |
| Gross profit / margin | $1.093 billion / 35.5% | $1.121 billion / 37.4% | Profit down 2.5%; margin down 1.9 percentage points |
| Operating earnings / margin | $358 million / 11.6% | $159 million / 5.3% | +125.5% |
| Net earnings | $255 million | $185 million | +37.5% |
| Net earnings attributable to Grainger | $238 million | $173 million | +37.5% |
| Diluted EPS | $4.48 | $3.19 | Increase |
| Operating cash flow | $294 million | $244 million | Increase |
Reported operating earnings and net earnings comparisons benefited from Q1 2020 restructuring and Fabory impairment charges totaling $184 million before tax, and a $85 million tax benefit related to Fabory. Excluding the specified restructuring, impairment and tax items, Grainger reported adjusted operating earnings of $358 million versus $343 million (+4%) and adjusted net earnings attributable to Grainger of $238 million versus $230 million (+3%). These are company-defined non-GAAP measures.
Segments and operating drivers
- High-Touch Solutions (N.A.): Sales were $2.397 billion, up 1.8% (3.4% per sales day); operating earnings were $306 million, down 3%. Sales gains reflected price/customer mix and volume, while U.S. inventory adjustments on non-core pandemic-related products pressured gross margin.
- Endless Assortment: Sales were $622 million, up 25.4% (27.4% per sales day); operating earnings were $55 million, up 58%. Growth was driven primarily by customer acquisition; gross margin improved 0.3 percentage points.
- Other: Sales were $65 million, down 56.5% per sales day, reflecting divestitures and Cromwell weakness; the operating loss narrowed to $3 million from $190 million, chiefly because of the prior-year Fabory impairment.
Cash, liquidity and debt
- Cash and cash equivalents were $562 million at March 31, 2021, versus $585 million at year-end 2020. Available liquidity was approximately $1.8 billion.
- Cash flows: operating activities provided $294 million; investing activities used $58 million, including $73 million of additions to property, equipment and intangibles; financing activities used $250 million, including $175 million of treasury-stock purchases and $81 million of dividends.
- Long-term debt, less current maturities, was $2.373 billion; current maturities were $7 million. Total debt as a percentage of capitalization, including lease liabilities, was 55.5%, compared with 55.6% at year-end 2020. No short-term debt was reported.
- Current assets were $3.934 billion and current liabilities $1.531 billion; the current ratio was 2.4, versus 2.6 at year-end. Management said available liquidity should meet needs for the next 12 months, assuming operations are not significantly affected by COVID-19 for a prolonged period.
Outlook, risks and other notable items
The filing provides no specific numerical earnings or sales guidance. Management said 2021 strategic priorities were unchanged and emphasized serving customers, employee safety, recovery readiness and maintaining a strong financial position. It planned continued business investment and shareholder returns through dividends and repurchases.
COVID-19 continued to affect customer demand, supply chains and product mix. Pandemic-related sales were softening toward pre-pandemic levels while non-pandemic sales improved; pandemic-related products generally carry lower margins. Excess market supply and inventory adjustments on non-core pandemic-related products also weighed on gross margin. Management cited risks including prolonged pandemic effects, economic downturns, supply or inventory disruption, competition and pricing, cybersecurity, foreign-exchange and interest-rate changes, and litigation or regulatory matters.
Grainger is defending multiple product-liability lawsuits arising from the 2019 KMCO refinery explosion, including claims by individuals and insurers. The matters were described as early-stage; the company intends to contest them and said resolution of its legal matters was not expected to have a material adverse effect on consolidated financial condition or results. The board declared a quarterly dividend of $1.62 per share on April 28, payable June 1, 2021. It also authorized a new share-repurchase program of up to 5 million shares, replacing the prior program.
Most important facts for investors to verify
- Whether sales growth and Endless Assortment customer acquisition persist, and how post-pandemic demand changes affect product mix.
- Whether gross-margin pressure from inventory adjustments and pandemic-related products reverses or continues.
- How much of the sharp reported earnings increase reflects the unusual 2020 impairment, restructuring and tax-benefit comparisons versus underlying growth.
- Whether operating cash generation and approximately $1.8 billion of available liquidity remain adequate as investment and shareholder returns continue.
- Developments in the KMCO litigation and other legal, regulatory, cybersecurity and COVID-19-related risks.