W.W. Grainger, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are with the same 2022 periods unless noted. Grainger distributes maintenance, repair and operating products and services. Amounts are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Net sales | $4,182 | $3,837 | +9.0% |
| Gross profit / margin | $1,644 / 39.3% | $1,441 / 37.6% | +14.0%; margin +170 bps |
| Operating earnings / margin | $661 / 15.8% | $534 / 13.9% | +23.5% |
| Net earnings attributable to Grainger | $470 | $371 | +26.5% |
| Diluted EPS | $9.28 | $7.19 | +29.1% |
Q2 SG&A was $983, up 8.4%, mainly reflecting higher marketing and payroll costs. The effective tax rate was 24.0%, versus 24.8%; management attributed the decrease primarily to increased stock-compensation tax benefits.
| Six-month metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net sales | $8,273 | $7,484 | +10.6% |
| Gross profit / margin | $3,278 / 39.6% | $2,824 / 37.7% | +16.0%; margin +190 bps |
| Operating earnings | $1,341 | $1,068 | +25.5% |
| Net earnings attributable to Grainger | $958 | $737 | +30.0% |
| Diluted EPS | $18.89 | $14.26 | +32.6% |
| Operating cash flow | $904 | $593 | +$311 |
Segments and drivers
- High-Touch Solutions N.A.: Q2 sales rose 9.9% to $3,355; operating earnings increased 26.0% to $600. Sales growth reflected price/customer mix of 5% and volume/product mix of 5%. Gross margin rose 200 bps to 41.7%, supported by freight and supply-chain efficiencies and improved product mix.
- Endless Assortment: Q2 sales rose 4.5% to $751; operating earnings increased 3.8% to $65. Sales growth of 10% was partly offset by a 5% unfavorable foreign-exchange impact, mainly from the Japanese yen. Gross margin increased 50 bps to 29.7%; SG&A leverage declined 60 bps.
- For the first half, High-Touch sales increased 12.1% and operating earnings 27.7%; Endless Assortment sales increased 4.2% and operating earnings 4.9%. Foreign exchange reduced Endless Assortment sales growth by 8% for the half.
Cash, liquidity and capital
- At June 30, cash and cash equivalents were $515, versus $325 at December 31, 2022. Current assets were $5,343 and current liabilities $1,920; the current ratio was 2.7, compared with 2.5 at year-end. Working capital was $3,144.
- First-half operating cash flow was $904; investing cash outflow was $191, including $193 of capital expenditures; financing cash outflow was $521. Cash increased $190 during the period. Operating cash flow growth reflected higher earnings, partly offset by working-capital changes.
- Long-term debt was $2,275 and current maturities were $33. Management’s debt measure, which includes interest-bearing debt and lease liabilities, was 46.3% of total capitalization, versus 49.9% at year-end. The company reported approximately $1.8 billion of available liquidity and investment-grade ratings from Moody’s and S&P.
- First-half treasury-stock purchases were $313 and cash dividends paid were $194. The company continued share repurchases during Q2, purchasing 244,299 shares.
Outlook, risks and notable items
- Guidance: The provided filing text does not state specific financial guidance. Management said cash, marketable securities and revolving-credit availability were expected to meet liquidity needs for the next 12 months, with continued business investment, dividends and repurchases planned to be funded through operating cash flow.
- Management cited inflation, product availability and cost pressures, labor and transportation conditions, higher interest rates, currency fluctuations, recession concerns and geopolitical uncertainty. It said the full effects were uncertain; a diverse customer base and the nondiscretionary nature of MRO products have historically helped buffer downturns.
- Other disclosed risk exposures include competition and pricing, customer or supply disruptions, gross-margin pressure, technology and cybersecurity, litigation and regulatory matters, and foreign-exchange and interest-rate movements. The company reported no material changes to previously disclosed risk factors or legal contingencies and did not expect potential liabilities to materially adversely affect its financial position, results or cash flows; outcomes and loss estimates could not be determined.
- On July 6, 2023, Grainger purchased 48 acres in Oregon for a planned 500,000-square-foot distribution center, with operations expected to begin in 2025. On July 26, the board declared a $1.86-per-share quarterly dividend, payable September 1 to shareholders of record August 14.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of sales and margin growth is sustainable as price, customer/product mix, freight efficiencies and inflationary cost pressures change.
- Whether Endless Assortment customer-acquisition and enterprise growth can continue to offset foreign-exchange headwinds and weaker SG&A leverage.
- Cash conversion and working-capital trends, especially receivables and accrued liabilities, alongside planned capital spending, repurchases and dividends.
- Execution, cost and timing of the Oregon distribution-center project and other supply-chain investments.
- Developments in macroeconomic, currency, cybersecurity, regulatory and litigation risks; the filing provides no specific financial guidance in the text supplied.