Grainger's Chairman and CEO, Richard L. Keyser, spoke to analysts attending the Lehman Brothers 19th Annual Industrial Select Conference in Coral Gables, FL. In his presentation, Keyser reiterated earnings guidance for 2001, which was originally presented on Jan. 31. 'As we close what has been a challenging year with sales below the prior year, we have succeeded in taking costs out of our operations. I want to reiterate that we expect to deliver earnings per share this year between $2.20 to $2.30, excluding a $0.40 per share restructuring charge,' he said.
Keyser also discussed expectations for 2002. 'Based on the consensus economic forecast for next year, we don't expect any pickup until the second half of the year. Due to the economic uncertainty, we are planning for total sales growth in the 2 to 7 percent range with an earnings per share target of $2.30 to $2.65,' he said. Longer-term goals include sales growth of 7-10 percent, continued improvement in return on invested capital, and a return to historic operating margins.
The following excerpted comments by Keyser outline how the company views its strategic positioning in the industry. For his complete remarks, go to www.grainger.com
Three elements set Grainger apart from others in our market: our financial strength, our competitive edge, and our industry leadership.
We consistently generate strong cash flows... to invest in the business, to keep debt low and to return to our shareholders. Our balance sheet remains the strongest among all the competitors in the $100 billion dollar market we serve.
Because we have maintained a solid balance sheet, we have the financial flexibility to add inventory in tough economic times. Our inventory is one of our strongest competitive weapons. Our customers rely on Grainger for solutions to their immediate and unpredictable needs. The way we effectively serve many customers is by keeping what they want nearby. Right now we are hearing from several of our suppliers that most distributors are not replenishing their inventory. We view this as an opportunity. We believe that now is the time in the cycle to invest, so we will have product ready when customers need it. We expect to add inventory during the coming months because based on our experience in previous recessions, when the economy turns, those few distributors with the product will gain market share.
The second element distinguishing Grainger is our market leadership. Although Grainger has only a small percentage of the markets we serve, we are the market share leader and unlike our competitors have the scale in the back room and efficiencies to compete. We're also able to leverage our financials to serve our customers better by extending credit when our competitors can't.
We're also unique in our multiple channel approach. Between our branches, call centers, distribution centers, and websites, customers can do business with us in whatever way is most convenient. In fact, very few of our customers place all of their purchases through a single channel. More than half of our orders come over the telephone. A third result from branch visits. And almost ten percent are via the Internet. Even those customers who have transitioned to the Internet place only a third of their orders over the website; the rest come in through traditional channels. Because our multi-channel approach is such an important aspect of our business, a primary focus continues to be the integration of our sales channels.
When customers convert to buying online, Grainger picks up market share. The incremental revenue generated across all channels by customers who convert to online purchasing approaches 11 percent. Our second goal is to increase our operating margin. Historically, Grainger's operating margins have been between 9 and 10 percent. Recently, they've averaged between 6 and 8 percent. Achieving this is a function of both improved sales growth and operating efficiency. And while cost reduction is not a sustainable way of growing a business, we have taken cost out of the business this year.
Among the improvements:
we have reduced our headcount in our branch-based businesses by over 300 employees since the beginning of the year;
we shut down Material Logic, part of our digital business, in April, taking a charge of 25 cents a share.
we have refocused our remaining websites and made them profitable; and
Grainger Integrated Supply and FindMRO are now making money.