Grainger reported sales increased 1% to $2.5 billion in the first quarter of 2017, driven by a 5 percentage point increase from volume growth, partially offset by a 3 percentage point decline in price and a 1 percentage point decline from lower sales of seasonal products.

Q1 operating earnings declined 7% to $295 million, hampered by lower gross profit from the strategic pricing initiatives in the U.S. Net earnings declined 6% to $175 million, while earnings per share dipped 2% to $2.93. 

“Overall, the first quarter clearly fell short of our expectations, driven primarily by the stronger than anticipated customer response to our U.S. strategic pricing actions, with a greater volume of products sold at more competitive prices,” said CEO DG Macpherson. 

“Based on the positive customer response thus far, we are pulling forward the remaining pricing actions originally scheduled for 2018 into the third quarter of this year. This decision requires a significant change to our earnings per share guidance for the year but should enable us to accelerate growth with existing customers and attract new customers sooner than planned.”      

Grainger’s pricing actions, first described in November 2016, were primarily implemented in January and February of this year.  The actions included:

▪ Adjusting list prices to make it easier for large customers to consolidate their purchases;

▪ Introducing new web prices on about 450,000 SKUs to drive medium and large non-contract customer acquisition and growth;

▪ Negotiating large customer contracts with more competitive pricing for infrequently purchased items.

“Results from the first quarter pricing actions showed that customers with access to lower pricing bought more than company expectations,” the company stated. “Although it is early, the data provided confidence that the pricing actions were successful.”  

Grainger said accelerating pricing actions should enable “faster growth through share gain with existing customers and acquisition of new customers.”

Sales for the U.S. fell 1% to $1.95 billion, driven by a 4 percentage point decline in price and a 1 percentage point decline from lower sales of seasonal products, partially offset by a 4 percentage point increase from volume growth.  Sales to customers in the Government and Heavy Manufacturing end markets led the sales performance in the quarter.   

Operating earnings for the U.S. segment declined 6% to $312.5 million. Gross profit margins declined 1.7 percentage points. Q1 operating expenses were down 4%, which included a $9 million benefit from the gain on sale of branches and $3 million of restructuring costs. 

Q1 sales in Canada increased 4% in U.S. dollars to $186.1 million, consisting of 4 percentage points from volume, partially offset by 2 percentage points from lower price and a 1 percentage point decline from unfavorable holiday timing.  

The business in Canada posted a $17 million operating loss in the 2017 first quarter versus a $12 million operating loss in the prior year, primarily driven by a lower gross profit margin and negative expense leverage.  The gross profit margin in Canada declined 2.7 percentage points versus the prior year largely due to price deflation and higher freight costs. 

Grainger said the business in Canada increased prices to offset foreign exchange-related cost of goods sold inflation in the first quarter, but most customers are under contract and will not experience price increases until later in the year.  Freight costs increased year-over-year as the business shifts to direct-to-customer shipping. Operating expenses increased 3%

Sales for the Other Businesses segment (Europe, Asia and Latin America) increased 12% to $497.4 million, consisting of 15 percentage points of growth from volume and price, partially offset by a 3 percentage point decline from foreign exchange, primarily attributable to weakness in the British pound.  The performance was driven primarily by 23 percent sales growth for the single channel online businesses. Operating earnings jumped 45% to $32 million. 

For 2017, Grainger lowered its 2017 sales and EPS guidance and now expects sales growth of 1% to 4% and EPS of $10.00 to $11.30. Web: grainger.com