Grainger Up 13.3% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for W.W. Grainger (GWW). Shares have added about 13.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is W.W. Grainger due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Grainger Misses on Q1 Earnings, Suspends ’20 Outlook

Grainger reported first-quarter 2020 adjusted earnings per share of $4.24, which missed the Zacks Consensus Estimate of $4.42, resulting in a negative surprise of 4%. The bottom line also declined 6% year over year primarily on account of lower operating earnings that were partially offset by lower average shares outstanding in the current year period.

Including one-time items, such as restructuring and other charges, earnings came in at $3.19 in the reported quarter. The figure plunged 29% from the year-ago quarter’s $4.48.

Grainger’s revenues improved 7% to $3 billion from the prior-year quarter figure of $2.8 billion. Daily sales for the quarter increased 5.5%. Volumes were up 7% while price and mix headwinds were at around 2%. Foreign exchange had an unfavorable impact of 0.2%. Further, the top line surpassed the Zacks Consensus Estimate of $2.9 billion.

Operational Update

Adjusted cost of sales increased 10% year over year to $1,880 million. Gross profit was up 2% year over year to $1,121 million. Gross margin contracted to 37.4% in the quarter from 39.2% in the year-ago quarter. Higher growth in the lower margin carrying endless assortment businesses, headwinds in the U.S. segment related to customer and product mix stemming from the COVID-19 pandemic primarily led to the drop in gross margins.

Grainger’s adjusted operating income in the first quarter declined 6% to $343 million from the $365 million in the prior-year quarter. Adjusted operating margin contracted 160 bps year over year to 11.4% in the quarter, mainly due to lower gross margins.

Financial Position

The company had cash and cash equivalents of $1,492 million at the end of first-quarter 2020, significantly up from $360 million at 2019 end. Cash provided by operating activities increased to $244 million in the first quarter from the year-ago quarter figure of $127 million, driven by favorable working capital in first-quarter 2020.

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