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Grainger, Chicago, IL, reported sales for the first quarter ended March 31, 2006 were $1.4 billion, up 6 percent over the prior year's first quarter. Net earnings for the quarter increased 18 percent to $86.2 million, as compared to $72.8 million in the 2005 first quarter. For the first time, the company split out its Canadian business, Acklands-Grainger, which reported sales for the quarter of $139 million were up 19 percent versus the 2005 first quarter, 12 percent in Canadian currency. In its Branch-based segment, the company's decision to wind-down its integrated supply and automotive-related contracts resulted in a 3 percentage point reduction in the segment's sales growth.
In January, Grainger successfully implemented the U.S. phase of its SAP system. The company said it now has an integrated enterprise management system that helps improve customer service and provides greater operational visibility throughout the U.S. branch-based business. The new system uses an improved methodology to capture data related to certain inventory transactions and estimates. This methodology resulted in a $0.05 earnings per share improvement for the 2006 first quarter that would have been recorded in the fourth quarter of 2006 under the prior years' inventory transaction procedures.
Beginning January 1, 2006, the company revised its segment reporting from two reportable segments to three reportable segments (Grainger Branch-based, Acklands-Grainger Branch-based, Lab Safety). Prior periods have been restated for comparability.
Sales in its Branch-based segment, which now includes the U.S., Mexico and China, increased 5 percent in the 2006 first quarter. Sales in the U.S. were up 5 percent as compared to the 2005 first quarter. The company's decision to wind-down its integrated supply and automotive-related contracts resulted in a 3 percentage point reduction in the segment's sales growth. Sales for the quarter were positively affected by sales in market expansion markets, timing of the Easter holiday and higher sales to manufacturing and reseller markets. Partially offsetting these were slower growth in commercial, government and transportation sectors and lower sales of seasonal products.
The market expansion program contributed approximately 2 percentage points to the 5 percent segment sales growth for the quarter. The company is currently enhancing its presence in the top U.S. metropolitan markets. Sales in Phase 1 of the program -- Atlanta, Denver and Seattle -- grew by 11 percent in the quarter versus first quarter 2005. Sales in Phase 2, covering four markets in Southern California, were up 13 percent. Sales in Phase 3 -- Houston, St. Louis and Tampa -- were up 13 percent. Phase 1 was completed in the first quarter of 2005. As of the end of the 2006 first quarter, Phase 2 was 90 percent complete and Phase 3 was 70 percent complete. Phase 4 of the program -- Baltimore, Cincinnati, Kansas City, Miami, Philadelphia and Washington D.C. -- is underway but is less than 50 percent complete. In the second quarter 2006, the company expects to open, relocate or expand more than 25 branches.
Sales in Mexico were up 23 percent in the quarter versus the same period in 2005 driven by an expanded telesales operation and direct marketing efforts.
Operating earnings for the quarter were up 21 percent in the Grainger Branch-based segment, the result of higher sales and an improved gross profit margin, partially offset by operating expenses, which grew faster than sales. The segment's gross profit margin benefited from the new SAP system, positive inflation recovery and from exiting integrated supply and automotive contracts.
Operating expenses grew 12 percent during the quarter. Contributing to the increase were the accounting change for stock-based compensation, higher profit sharing accruals and