“Like other companies around the globe,” W.W. Grainger Inc. is dealing with supply shortages of pandemic-related supplies like N95 masks and other types of personal protective equipment, chairman and CEO D.G. Macpherson said yesterday in a first-quarter conference call with investment analysts.
But the multibillion-dollar distributor of business and industrial products still gained market share during the first quarter in U.S. sales of its core maintenance, repair and operations (MRO) products, executives said.
The company’s U.S. average daily sales grew 5.7% year over year in the quarter, a rate it pegged at “about 700 basis points faster than the broader MRO market,” which it said declined between 1% and 1.5%. Moreover, with total first-quarter sales up 7.2% year over year to just over $3 billion, Grainger’s share gain accelerated at an even faster rate in the quarter’s final month in March, executives said, as the effect of the pandemic on businesses and healthcare organizations became more severe. Ecommerce sales, under which Grainger includes EDI and internet-connected vending machine transactions, increased about 8.7% to more than $2 billion.
Tom Okray, senior vice president and chief financial officer, said the share gains in March were “almost double” the gain for the full quarter, “which would lead you to potentially conclude that when times get really tough, [with] the good things we’re doing, the customers are coming to us and allowing us to take share.”
Strong sales to ecommerce distribution centers
Across Grainger’s customer base, “our healthcare, essential manufacturing and pockets of government are growing significantly faster year over year,” Okray said.
But some customers are spending more than others, depending on how the pandemic is impacting their market. Macpherson noted that 10% are “really busy,” 40% are less-impacted essential businesses, 40% are nonessential but are working on a reduced schedule, and about 10% are “what we would call disrupted.”
Grainger noted particularly strong growth areas in sales of supplies to ecommerce retailers for use in their distribution centers. “What we’ve seen is almost all ecommerce traffic…is way up,” Macpherson said. “And so our business to distribution centers that are serving that ecommerce traffic is way up.”
Zoro.com gaining new customers
Grainger said Q1 sales were up 17% in its “endless assortment” business, which includes Zoro.com for smaller customers in the U.S. and overseas, and Japan-based MonotaRO.com. “Japan has not had yet a hard shutdown like some of the other markets we’ve seen,” Macpherson said. “Certainly, we’ve seen the online model there do very, very well.”
He added that Zoro has been particularly strong in the U.S. market, where it has been gaining new customers. “As new customers look for different solutions that are digital, we’re seeing a very strong new customer pipeline coming into Zoro,” Macpherson said.
A broad shift among customers to digital commerce, he added, has also been helping the company’s flagship ecommerce site, Grainger.com. “So we feel like we’re well-positioned for that shift,” Macpherson said.
The strong first quarter, however, was followed by a relatively tough first half of April, executives said. As of April 21, Grainger’s sales for the month were down 10% year over year “with dramatic differences” by market area and product category, Okray said. He added: “Not surprisingly, our healthcare, essential manufacturing and pockets of government are growing significantly faster year over year, and we are seeing rapid declines elsewhere in areas such as hospitality and heavy manufacturing.”
Regarding product category sales, Grainger is also experiencing a mixed bag. Sales of “safety and cleaning supplies are significantly up year over year, with most other categories down, some dramatically,” Okray said.
Planning ahead in January
“Like others around the globe, we continue to see shortages and stock-outs of critical pandemic-related items, including N95 masks, sanitizers and other PPE,” Macpherson said. “We are working diligently with our suppliers, alongside our government and healthcare customers to secure as much product as possible, as well as trying to identify and source suitable alternatives.
“To give you a sense of the magnitude of the problem, in several weeks’ time, we received orders for the same quantity of safety masks that we usually receive over several years, and in some cases, even decades,” Macpherson said. “This is truly an unprecedented challenge and getting America back to work is essential.”
Grainger “started planning and responding to the pandemic in late January and established an emergency preparedness task force shortly thereafter,” Macpherson said. “In the early days, our focus was on product supply. We executed large pre-buys of non-pandemic product, leveraging our extra capacity in Louisville to ensure we could supply our customers through this period. Our service levels of non-pandemic supplies continue to be strong.
“We have had minimal disruptions to date on non-pandemic related items,” Macpherson said. “We continue to maintain high levels of inventory and are leveraging our strong relationships with our suppliers and transportation partners to secure products and ensure we meet our same-day ship complete delivery promise as regularly as possible.”
Expecting gains over the long-term
To keep its business operating, Grainger also is taking several steps to maintain its own facilities, including temperature screening of all individuals prior to entering Grainger facilities, Macpherson said.
The company is also increasing pay for the personnel operating its branch locations and distribution centers.
In the long run, Grainger is expecting to come out ahead, even though it’s tough now to make near-term forecasts on business activity. “We are seeing a very healthy flow of new customers, given the pandemic requests, and we feel like we are going to come out of this with a nice customer file increase as well,” Macpherson said. “But right now, it’s really difficult to forecast beyond sort of this month and next month.”
On March 31, Grainger said it borrowed $1 billion against its revolving credit facility to “supplement the company’s strong cash position” and ensure liquidity during the pandemic.
In the annual 10K financial statement it filed with the U.S. Securities and Exchange Commission for its 2019 fiscal year, Grainger notes that the following shares of total orders from its three groupings of digital channels: website, 30%; EDI and e-procurement, 25%; and its KeepStock inventory management services, 16%. That comes to 71% of orders through its digital channels, with the remaining 29% received through its physical branch network and via the telephone. The company reported total 2019 sales of $11.5 billion, with the 71% digital share amounting to $8.2 billion.
For the first quarter ended March 31, Grainger reported:
- Total net sales increased 7.2% year over year to $3.001 billion; figuring 71% of sales in overall ecommerce brings ecommerce sales to $2.13 billion, up about 8.7%;
- Gross profit increased by 2.4% to $1.121 billion, resulting in a gross profit margin of 37.4%, down from 39.1%;
- Net earnings declined by 29.4% to $185 million.
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