W.W. Grainger, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Grainger is a business-to-business distributor of maintenance, repair and operating products and services, operating primarily in North America, Japan and the U.K.
Financial results and position
- Revenue: $4.091 billion, up 12.2% year over year. Daily sales also rose 12.2%; foreign exchange reduced daily sales growth by 2.3 percentage points.
- Profitability: Gross profit was $1.634 billion, up 18.1%; gross margin was 39.9%, up 200 basis points. Operating earnings were $680 million, up 27.4%, with a 16.6% operating margin versus 14.6%. Net earnings attributable to Grainger were $488 million, up 33.4%; diluted EPS was $9.61, up 36.0%.
- Cash flow: Operating cash flow was $454 million, compared with $343 million. Capital expenditures were $98 million, versus $57 million. Cash increased $136 million to $461 million.
- Liquidity: Current assets were $5.190 billion and current liabilities $1.924 billion; the current ratio was 2.7, up from 2.5 at year-end 2022. Working capital was $3.032 billion. Management reported approximately $1.7 billion of available liquidity and expects liquidity to cover needs for the next 12 months.
- Debt and capital returns: Long-term debt was $2.278 billion, with $37 million of current maturities. Debt, including lease liabilities, was 47.4% of total capitalization, down from 49.9% at year-end. The company repurchased $142 million of treasury stock and paid $87 million in dividends. A quarterly dividend of $1.86 per share was declared April 26, payable June 1, 2023.
Changes and segment performance
- High-Touch Solutions N.A. sales increased 14.5% to $3.294 billion; operating earnings rose 29.3% to $621 million. Growth reflected price/customer mix and volume/product mix. Segment gross margin rose 195 basis points to 42.4%, supported by product mix and freight efficiencies.
- Endless Assortment sales increased 3.8% to $724 million, including 14% sales growth offset by a 10% unfavorable foreign-exchange impact. Operating earnings rose 6.0% to $58 million. Gross margin increased 140 basis points to 29.6%; SG&A leverage weakened as expenses grew faster than sales.
- Consolidated SG&A rose 12.3% to $954 million, primarily due to higher payroll and marketing expenses. The effective tax rate declined to 23.3% from 25.5%, primarily due to increased stock-compensation tax benefits.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management expects to invest in the business and return excess cash through dividends and repurchases, primarily funded by operating cash flow.
- Management cites inflation, product availability and cost pressures, labor and transportation conditions, higher interest rates, currency movements, recession concerns, geopolitical events and recent banking-sector pressures. The extent and impact remain uncertain.
- In litigation related to the 2019 KMCO refinery explosion, Grainger has settled claims with 32 plaintiffs, including all six plaintiffs selected for the first scheduled bellwether trial, which was postponed to May 2023. The timing and outcome of remaining claims and separate property-damage lawsuits are uncertain; the company says it cannot estimate additional potential losses. Previously recorded settlement liability and recoverable asset were paid by insurance in Q1, with no effect on earnings or cash flow.
- The company also describes other legal, regulatory, product-liability, asbestos/silica and government-contractor matters. It believes their ultimate resolution will not materially adversely affect consolidated financial condition or results, but outcomes are uncertain. Management reported no material changes to risk factors or market-risk exposures from the 2022 Form 10-K.
Important facts for investors to verify
- Whether Q1 sales growth and margin expansion persist, particularly as price, mix, volume and freight benefits change.
- The impact of currency movements and expense growth on Endless Assortment profitability and consolidated margins.
- Cash generation relative to increased supply-chain investment, share repurchases and dividend commitments.
- Developments in the KMCO matters, including remaining claims, trial timing, insurance coverage and any future loss estimates.
- Whether inflation, supply conditions, macroeconomic pressures or other disclosed risks materially affect customer demand and operating costs.