W.W. Grainger, Inc. — Q3 2023 Form 10-Q
Business context and period: Grainger distributes maintenance, repair and operating products and services, primarily in North America, Japan and the U.K. This unaudited report covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $4.208B | $3.942B | $12.481B | $11.426B |
| Gross profit | $1.655B | $1.519B | $4.933B | $4.343B |
| Gross margin | 39.3% | 38.5% | 39.5% | 38.0% |
| Operating earnings | $667M | $603M | $2.008B | $1.671B |
| Operating margin | 15.9% | 15.3% | 16.1% | 14.6% |
| Net earnings attributable to Grainger | $476M | $426M | $1.434B | $1.163B |
| Diluted EPS | $9.43 | $8.27 | $28.32 | $22.52 |
Cash flow and liquidity: For the nine months, operating cash flow was $1.427B, versus $973M; capital expenditures were $318M, versus $208M. Cash ended at $601M, up from $325M at year-end 2022. Working capital was $3.129B and the current ratio was 2.7. Grainger reported approximately $1.9B of available liquidity and said existing cash, marketable securities and credit availability should cover needs for the next 12 months.
Debt and capital returns: Long-term debt was $2.260B, with $34M of current maturities. Total debt, defined by the company to include interest-bearing debt and lease liabilities, was 44.9% of total capitalization, down from 49.9% at December 31, 2022. Nine-month financing uses included $506M of treasury-stock purchases and $300M of dividends. The company declared a $1.86-per-share dividend payable December 1, 2023.
Material changes and segment results
- Q3 sales increased 6.7%; daily sales increased 8.4%. Nine-month sales rose 9.2%; daily sales rose 9.8%. Currency reduced daily sales growth by 0.3 percentage points in Q3 and 1.3 points year to date.
- Q3 attributable net earnings grew 11.9%, while diluted EPS rose 14.1%. For the nine months, attributable earnings rose 23.3% and diluted EPS rose 25.7%.
- High-Touch Solutions N.A. generated Q3 sales of $3.403B, up 7%, and operating earnings of $612M, up 11%. Q3 sales growth reflected 3% price/customer mix and 6% volume/product mix. Gross margin improved 110 basis points to 41.7%, supported by freight and supply-chain efficiencies and product mix.
- Endless Assortment Q3 sales were $732M, up 4%, but operating earnings fell 4% to $55M. Growth from customer acquisition and MonotaRO enterprise customers was partly offset by weaker non-core consumer-like customer sales, slower Zoro market demand and unfavorable currency. Segment gross margin declined 20 basis points to 29.6%.
- For the nine months, High-Touch sales rose 10% and operating earnings 22%; Endless Assortment sales rose 4% and operating earnings 2%.
Outlook, risks and other notable items
- The filing provides no specific new numerical earnings or sales guidance. Management cited inflation, geopolitical disruption, higher interest rates, exchange-rate volatility and possible recession as uncertainties; the full impact is unknown. Grainger said it is using strategies to mitigate higher costs while remaining price competitive.
- Management attributed the year-over-year rise in operating cash flow to higher earnings and favorable working capital. Increased supply-chain investment drove higher investing cash use; greater share repurchases drove higher financing cash use.
- On October 11, 2023, Grainger entered a new unsecured five-year $1.25B revolving credit facility, replacing its prior facility. The board declared the $1.86-per-share quarterly dividend on October 25.
- The company reported no material change in previously disclosed legal contingencies, commitments, risk factors or market-risk exposures. It expects potential liability from legal matters not to have a material adverse effect, though outcomes and potential losses cannot be determined. No goodwill impairment indicators were identified and no impairment was recorded in the period.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether High-Touch margin gains from freight efficiencies and product mix persist as costs and customer demand change.
- Whether Endless Assortment can improve operating performance amid slower Zoro demand, customer-mix pressures and yen exchange-rate effects.
- How inflation, interest rates, foreign exchange, supplier availability and broader economic conditions affect sales, margins and working capital.
- Planned capital spending, repurchases and dividends relative to operating cash generation and the company’s liquidity needs.
- Terms and availability of the new revolving facility, and developments in legal or regulatory matters whose outcomes are currently uncertain.