W.W. Grainger, Inc. Q2 FY2025 earnings call

Key Points

• External environment had uncertainty, but Grainger focused on execution and was a reliable partner for customers.
• High-Touch Solutions segment had solid growth but margin pressure from LIFO inventory accounting and price/cost timing. Endless Assortment saw strong growth with improved margins.
• Tariffs: Initial pricing actions in May, with further increases expected in September. Ongoing negotiations with suppliers regarding tariff-related cost increases.
• Zoro and MonotaRO: Zoro showed strong momentum with improved customer retention, MonotaRO had solid growth from enterprise and small/midsized businesses.

Total company reported sales for the quarter were nearly $4.6 billion, up 5.6% or 5.1% on a daily constant currency basis. Operating margins were 14.9% and diluted EPS finished at $9.97, up $0.21. Operating cash flow was $377 million. High-Touch Solutions segment: Sales up 2.5% reported or 2.8% daily constant currency. Gross profit margin 41%, down 70 basis points. Operating margin 16.6%, down 90 basis points. Endless Assortment segment: Sales increased 19.7% or 16.3% daily constant currency. Zoro U.S. up 20%, MonotaRO 16.4% local days, local constant currency. Operating margins 9.9%, up 200 basis points.

2025 Outlook

• Adjusted sales outlook due to FX rates and pricing actions. Lowered gross margin guide to 38.6%-38.9% (down 80-50 basis points). Operating margin expected 14.7%-15.1%. EPS between $38.50-$40.25.
• Capital expenditures increased by $100 million, share repurchase outlook adjusted. Third quarter expected sales up north of 5% daily constant currency, gross margin pressure leading to operating margin around 14.5%.

• Tariff uncertainty with fluid environment and ongoing negotiations impacting pricing and margins.
• Softer MRO market in the back half potentially affecting sales and margins.
• Transitory LIFO impact affecting current gross margin results.

Q: LIFO accounting and the operating income impact A: The LIFO impact was about 50 basis points. Underlying operations are similar, but LIFO affects COGS and the P&L. EPS would have been up north of 6% without LIFO impact.

Q: Why not seeing tailwinds like during the pandemic A: Pandemic was a supply disruption, less so currently. Still gaining share, internal metrics suggest significant share gain in the second quarter Q: Gross margin split between LIFO pressures and price/cost timing A: Majority of the gross margin impact in the quarter was from LIFO (80 basis points), with price/cost impact smaller Q: Drivers of Zoro's growth A: Improved customer targeting, repeat business, and leverage from growth as the business scales Q: CapEx vs buyback shift A: Majority of CapEx is in supply chain investment for long-term network evolution, with an opportunity to make an investment for the future