W.W. GRAINGER, INC. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Business Performance: First quarter results were largely in line with expectations, with solid growth and profitability. Total company reported sales up 1.7% (4.4% on a daily constant currency basis). Operating margins were 15.6%, diluted EPS was $9.86, operating cash flow was $646 million, and $380 million was returned to shareholders through dividends and share repurchases.
• Segment Details: High-Touch started slower due to weather, holidays, and government softness but had volume growth and price contribution. Endless Assortment saw strong growth in Zoro and MonotaRO.
• Tariffs and Pricing: Working closely with supplier partners to understand tariff impact. Initial pricing actions on direct imports, with a measured approach on most products and goal to achieve price-cost neutrality.
• Culture Recognition: Received recognitions like World's Most Admired Companies, Glassdoor's Best Places to Work, and World's Most Ethical Companies, showcasing Grainger's culture.

Segment Performance

• High-Touch Solutions Segment: Reported total sales down 0.2% (up 1.9% on a daily constant currency basis). Gross profit margin finished at 42.4%, up 60 basis points vs prior year. SG&A increased, leading to 80 basis points of SG&A deleverage. Operating margin was 17.7%, down 20 basis points vs Q1 2024 but ahead of expectations. Market outgrowth on a volume-only basis using manufacturing subcomponent of industrial production was 1%-1.5%, but internal model suggests MRO market volume declined in the low single digits, so pivoting to annual outgrowth disclosure.
• Endless Assortment Segment: Sales increased 10.3% (15.3% on a daily constant currency basis). Zoro U.S. was up 18.4%, MonotaRO achieved 13.6% growth in local days, local currency. Operating margins increased by 80 basis points to 8.7%, with MonotaRO at 12% and Zoro at 5.2% due to gross margin flow through and strong top line leverage.

Guidance

• Reaffirming 2025 guidance. Second quarter sales expected just north of $4.5 billion (~5% on a daily constant currency basis). Targeting second quarter operating margin at or near 15%. Seasonality expected to improve year-over-year sales growth, with April sales up approximately 5.5% on a daily constant currency basis.

Risks

• Tariff Uncertainty: Impact on business uncertain, duration and impact on customer demand unclear; requires granular product and cost analysis.
• Market Volatility: Disconnect between IP benchmark and internal model for MRO volume growth led to pivot to annual outgrowth disclosure.

Question and Answer

• Q: About Zoro's SG&A leverage A: Most of the improvement is due to sustainable revenue growth, nice repeat rates, and ability to get leverage with continued revenue growth.
• Q: Flexing sourcing due to tariffs A: Done work to understand sources and alternatives, but some categories have no immediate alternatives. Working with suppliers on private and brand products, and managing inventory.
• Q: Macro and customer feedback A: No slowdown yet, customers are embedding modest tariffs and focused on operations. Initial price increases on direct imports, with more to come in the next quarter.
• Q: Tariffs and gross margin guidance A: Modest impact from initial price increases, targeting price-cost neutrality, with more to learn in the second quarter about price elasticity.
• Q: Benchmarking volumes A: IP was historically close, but internal model is more accurate; pivoting to annual outgrowth disclosure due to current noise.
• Q: Private label and tariffs A: Private label is more China-centric but not uniquely exposed, with manageable pressure if tariffs persist.
• Q: Market share capture A: In a good position to gain share, similar to COVID, will let the situation play out to understand rules then drive share gain.
• Q: Price-cost dynamics and supplier requests A: Supplier price increase requests varied, flow through to P&L takes time, with more impact expected in the third quarter and beyond.
• Q: Brand vs private label pricing A: Varies by product, some have modest cost advantage, with impact manageable if tariffs sustain.
• Q: COGS and tariff impact A: Product costs are the majority, with freight and other costs in single digits; a measured approach is being taken with suppliers and customers.