Grainger Sales Grow 8% in Third Quarter

Grainger also reports a settlement with the government over pricing disclosure issues.

Chicago-based Grainger (NYSE: GWW), No. 2 on MDM's list of the top 40 industrial distributors, reported sales for the third quarter ended Sept. 30, 2012, were $2.3 billion, up 8 percent from the 2011 third quarter.

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Sales on a daily basis increased 10 percent versus last year. The 10 percent increase in daily sales in the quarter included 3 percentage points from acquisitions and a 1 percentage point decline attributable to unfavorable foreign exchange.  

Daily organic sales for the quarter increased 8 percent including 4 percentage points from volume and 4 percentage points from price.  Daily organic sales growth by month was as follows: 8 percent in July, 7 percent in August, and 8 percent in September.

Year-to-Date
For the nine months ended Sept. 30, 2012, sales of $6.7 billion increased 12 percent, 13 percent on a daily basis, versus $6 billion for the nine months ended Sept. 30, 2011. Profit increased 5 percent to $534 million versus $510 million in the first nine months of 2011.

"We delivered a solid quarter, with stronger organic sales growth in September than in August and continued to gain market share, expand margins and generate nearly $100 million in operating cash flow over the prior year. We are also resolving an ongoing dispute with the GSA and USPS and are pleased to be near final settlement with the DOJ. We value our long-standing relationship with these important federal government customers and look forward to continuing to expand the products and services we provide to them in the future," said President and CEO Jim Ryan.

Settlement
During the third quarter, the distributor recorded a $70 million pre-tax reserve for a settlement in principle to resolve pricing disclosure issues relating to government contracts with General Services Administration and United States Postal Service. The proposed settlement remains subject to the approval of the U.S. Department of Justice (DOJ). In addition, the company has established a $6 million pre-tax reserve for resolving tax, freight and miscellaneous billing issues with these government customers.  

Including the reserve, profit for the third quarter decreased 15 percent to $155 million versus $182 million in 2011.

The company has two reportable business segments, the U.S. and Canada, which represented 89 percent of sales for the quarter.  The remaining operating units located in Asia, Europe, and Latin America are in Other Businesses and are not reportable segments.  

U.S.
Sales for the U.S. segment increased 4 percent, 5 percent on a daily basis, in the 2012 third quarter versus the prior year. The 5 percent daily sales growth for the quarter was driven by 4 percentage points from price and 1 percent volume growth. Daily sales increased 6 percent in July, 4 percent in August and 6 percent in September. Solid sales growth and market share gains in the heavy manufacturing, light manufacturing, commercial, government and retail end-markets contributed to the sales performance for the quarter.

Operating earnings for the U.S. segment increased 7 percent, excluding the reserve, driven primarily by the 4 percent sales growth and higher gross profit margins. Gross profit margins for the quarter increased 50 basis points driven by price inflation exceeding product cost inflation, partially offset by negative customer mix. 

Operating expenses, excluding the reserve, increased in line with the sales growth and included an incremental $19 million in growth-related spending on new sales representatives, eCommerce and advertising. Including the reserve, quarterly operating earnings in the U.S. decreased 18 percent versus the 2011 quarter.

Canada
Sales in the 2012 third quarter at Acklands-Grainger increased 10 percent, 12 percent on a daily basis. In local currency, sales increased 11 percent, 13 percent on a daily basis. The 13 percent sales growth consisted of 11 percent from volume and 2 percent from price. Daily sales in local currency increased 16 percent in July, 13 percent in August and 11 percent in September.

The sales increase for the quarter in Canada was led by strong growth to customers in the commercial services, oil and gas, forestry, contractor and utilities end markets.

Operating earnings in Canada increased 37 percent in the 2012 third quarter, up 38 percent in local currency. The strong improvement in operating performance was driven by strong sales growth, a 140 basis point improvement in gross profit margins and positive operating expense leverage.

Other Businesses
Sales for the Other Businesses, which includes operations in Asia, Europe and Latin America, increased 54 percent for the 2012 third quarter versus the prior year. This increase was primarily due to the incremental sales from the business in Europe (Fabory) acquired in August 2011, and the business in Brazil (AnFreixo) acquired in April 2012. Excluding acquisitions, sales for the Other Businesses increased 20 percent, primarily the result of strong revenue growth in Japan and Mexico. 

Operating earnings for the Other Businesses were $9 million in the 2012 third quarter versus $11 million in the 2011 third quarter. Earnings performance for the quarter was primarily driven by performance in Japan and Mexico, which was partially offset by small operating losses from the businesses in Europe and Brazil.

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