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Pandemic Sales Help Grainger in 2Q, Traditional Product Mix on Upswing

Grainger’s sales dipped 2% last quarter as pandemic-related sales (e.g., PPE) again offset softness in its traditional product line, but non-pandemic sales are showing signs of life.
Grainger DC, Minooka, Illinois

W.W. Grainger Inc. wasn’t the only distributor in the second quarter that pivoted to selling pandemic-related products like personal protective equipment (PPE) and JanSan items, but the Chicago-based industrial giant emerged from the last three months of economic disruption better than most.

The company, which released 2Q earnings on Thursday morning, closed the period in a strong financial position with approximately $1.9 billion in available liquidity, including $1.6 billion in cash. And its sales profile is on solid footing despite the slowdown, due in part to Grainger’s status as an “essential” business that hasn’t had to close branches during the pandemic, but also to product mix shift designed to meet customers’ needs.

Grainger reported sales of $2.84 billion, only a 2% decline compared to the year-ago quarter at a time when many others were down in the mid-single or even double digits. The company said it gained significant share in the U.S. even as the MRO market declined 14% to 15% during the period.

Pandemic-related sales — including everything from masks to gloves to sanitizers — was the standout for Grainger in the period, soaring 66% in the U.S. during the second quarter. But the company also showed steady improvement in its traditional product mix.

Over the quarter, non-pandemic U.S. daily sales were down 21% in April (year-over-year), down 17% in May and down 13% in June. That trend continued in the right direction with July down just 11% month-to-date, the company said.

“In the U.S., we started to see increased pandemic sales in February, and they really picked up in March, but we quickly moved in-stock inventory,” DG Macpherson, Grainger’s chairman and CEO, told analysts on Thursday morning’s earnings call. “This trend continued with pandemic-related sales up around 70% in the second quarter, and while the environment remains fluid, this has continued at an accelerated rate into July.

“A heightened demand came from a multitude of customers across numerous industries, with most of the pandemic products going to health care, government and essential businesses. Through most of March non-pandemic sales were pretty stable. With the stay-at-home orders, we saw non-pandemic sales fall off significantly in late March, but they have gotten better each month since bottoming out in April. We’ve seen further improvement in July.”

Despite the softness for MRO products, as well as customers across all geographies and end markets struggling at times during the last few months, Grainger has seen green shoots in its daily sales reports as business resumes for many.

“The good news is that we have seen a steady improvement in non-pandemic revenue across all customer types,” Macpherson said. “It’s still below pre-pandemic levels, but it has improved. While we don’t know how this will progress, we do feel good about our ability to help customers weather the storm, regardless of how the pandemic evolves.”

Profit, Gross Margins Suffer in 2Q

Grainger’s profit did sink during the period, plummeting 56% to $114 million, while diluted earnings per share of $2.10 were down from $4.67 in 2Q 2019 and missed analysts’ estimates by 86 cents.

And the company’s pandemic-related product mix hurt gross margins. In the quarter, it was just 35.8%, down 290 basis points from the year-ago period. Grainger said it doesn’t expect another dramatic dip in gross margin but also wouldn’t commit to improved margins in the third quarter.

“This decline continues to be driven mostly by pandemic-related impacts, particularly noticeable in our U.S. segment, as well as continued business unit mix impact as we experienced faster growth in our lower-margin, endless-assortment business,” said CFO Tom Okray.

In a note to clients, Baird analyst Dave Manthey wrote, “Second-quarter results were mixed with slightly better sales and SG&A leverage offset by weaker gross margin, driving EBIT that was in line with our estimate. Gross margin continues to be negatively impacted by unfavorable product mix and heightened freight mix due to COVID-19. SG&A leverage was a bright spot, however, with the company taking out $70 million in cost q/q vs. normal seasonal increases. The conference call was fairly straightforward with a positive tone and some specifics (below) but the outlook is understandably a bit blurry based on the trajectory of pandemic-related sales.”

For the first six months, Grainger’s sales increased 2.6% to $5.84 billion while its profit was down 44% to $287 million.

Shares of Grainger (NYSE: GWW) were flat on Thursday. At market close, they were down 29 cents, or 0.1%, to $338.66. The company’s stock has rebounded nicely, though, growing about 50% from its March 23 trough of $209.49.

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