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W.W. Grainger,Chicago, IL, reported sales were $1.3 billion for the first quarter ended Mar. 31, 2005, up 9 percent over the prior year's first quarter. Net earnings were up 16 percent to $72.8 million. Sales in the Branch-based Distribution segment were up 9 percent in the 2005 first quarter. In the U.S., sales were up 8 percent, with growth in all customer end markets, led by the manufacturing and commercial sectors. January showed sales up 10.9 percent, February up 10.0 percent and March up 5.6 percent compared to the same quarter a year ago.
Phase 1 of the market expansion program -- Atlanta, Denver and Seattle -- is complete; sales were up 11 percent for the quarter, in spite of weakness in the Denver market. Phase 2, covering four markets in Southern California, is now 65 percent complete, with sales up 14 percent. Phase 3 -- Houston, St. Louis and Tampa -- is 55 percent complete with sales up 19 percent for the quarter. Overall, market expansion contributed 1.3 percentage points to the 9 percent segment sales growth.
Sales in Canada were up 12 percent for the quarter, 4 percent in local currency, due primarily to increased sales in the natural resource sector. Sales in Mexico were up 15 percent for the quarter, driven by enhanced telesales efforts and incremental sales from one new and one expanded branch, both added in 2004.
Operating earnings for the Branch-based Distribution segment were up 2 percent. This increase was primarily the result of volume growth and improved gross profit margins, partially offset by higher operating expenses. Excluding the impact of the market expansion program, operating earnings would have been up 10 percent.
"Overall in the first quarter we saw healthy sales growth in the government, manufacturing, transportation and commercial sectors, even though March sales showed some softness, particularly at the end of the month due to the timing of the Easter holiday," said Grainger's Chairman and CEO Richard L. Keyser. "Our market expansion program remains on track and is contributing to our growth rate. We are also continuing to see improvements in product availability resulting from our logistics network.
"During the first quarter we continued to invest in our SAP system. I'm pleased that the team has virtually completed development and that additional testing has been built into the plan. We now expect to begin implementation in the first half of 2006. When complete, the new system will provide us with a single, uniform platform that will help us better serve customers." Keyser reiterated the company's projected earnings per share guidance of $3.20 to $3.45 for 2005.
Lab Safety Supply
Sales for Lab Safety Supply (LSS) increased 9 percent, in large part due to the acquisition of AW Direct, Inc., in January 2005, and increased volume in core product lines. These increases were partially offset by the discontinuation of Harvest Partners, a customer loyalty program, in April 2004. Operating earnings increased 15 percent during the quarter due to the sales increase and improved gross profit margins, partially offset by operating expenses, which increased 14 percent.
The company benefited from higher interest income and lower interest expense versus the 2004 quarter. This change was the result of higher average cash balances and higher interest rates. In 2004, the company paid off the majority of its debt. Additionally, the company had gains on the sale of five branches: four located in the United States that were affected by the market expansion program, and one located in Canada.
The company benefited modestly from a lower tax rate versus the 2004 quarter. The estimated effective tax rate of 37 percent is 1 percentage point lower than the 38 percent rate in the 2004 quarter. This reduction is the result of a lower tax rate in Canada and the realization of tax benefits related to operations in Mexico.
Operating cash flow was $13 million for the quarter. Capital expenditures for the quarter were $35 million. The company funded its growth initiatives, including the acquisition of AW Direct, Inc., paid dividends and repurchased 239,400 shares of stock during the quarter. Approximately 6.8 million shares remain under the current authorization.