Chicago, IL – W.W. Grainger Inc. (Grainger), a broad line supplier of maintenance, repair and operating (MRO) products, has reported record sales, net earnings and earnings per share for the year ended December 31, 2011. Sales of $8.1 billion were up 12% versus $7.2 billion in 2010 (all figures in US dollars). Net earnings of $658 million increased 29% versus $511 million in 2010. Earnings per share of $9.07 increased 31% versus $6.93 in 2010.
“This was an exceptional year for Grainger,” said chairman, president and chief executive officer Jim Ryan. “Our team is producing consistently solid results with a strong focus on helping our customers improve the productivity of their businesses. We continue to see a long runway for growth and are investing aggressively in our proven growth drivers: product line expansion, sales force expansion, eCommerce, inventory services and international expansion.” In 2011, Grainger introduced more than 80,000 new products, transacted more than $2 billion in sales through eCommerce and added more than 1,300 net new jobs, while delivering a total shareholder return of 38%.
“We remain confident in our strategy and leading position in the large and fragmented MRO market. We reiterate our 2012 sales and earnings guidance issued on November 16, 2011,” said Ryan. For the full year 2012, the company is forecasting sales growth of 10% to 14% and earnings per share of $9.90 to $10.65.
For the 2011 fourth quarter, the company reported sales of $2.1 billion, an increase of 14% versus $1.8 billion in the 2010 quarter. Net earnings for the quarter of $148 million increased 12% versus $132 million in 2010. Fourth quarter earnings per share of $2.04 increased 11% versus $1.83 in 2010.
In November of 2011, the company announced its plan to close 25 branches in the United States during the 2011 fourth quarter and incur a charge of approximately $14 million to $18 million, or $0.12 to $0.15 per share, which was excluded from company earnings guidance. In total, Grainger closed 27 branches, at a cost of $18 million or $0.16 per share. The company also recognized a $0.07 per share gain on the sale of its joint venture investment in MRO Korea. Items in the fourth quarters of 2011 and 2010 are summarized below:
The 2011 fourth quarter had 63 selling days, the same number as the 2010 fourth quarter. Company sales for the quarter increased 14% versus the 2010 quarter. Daily sales increased 16% in October, 15% in November and 10% in December. The 14% increase for the quarter included a 9 percentage point contribution from volume, 5 percentage points from acquisitions, 2 percentage points from price, partially offset by a 2 percentage point drag from product sales related to the 2010 oil spill in the Gulf of Mexico.
Company operating earnings of $221 million for the 2011 fourth quarter increased 5%. Excluding the $0.16 per share charge for the branch closures in the 2011 quarter and the $4 million pre-tax benefit ($0.04 per share) from the change in the company’s paid time off policy in the 2010 quarter, company operating earnings increased 16%. This earnings growth was driven by the 14% increase in sales and higher gross profit margins, which increased 180 basis points, partially offset by operating expenses, which grew at a faster rate than sales. The increase in the company’s gross profit margin was driven by a number of factors that are explained at the segment level. In addition, the inclusion of the Fabory business for the quarter, representing less than 4% of total company sales, contributed to gross margin expansion, but was a drag on the company’s operating earnings.
Company operating expenses increased 24%, 20% excluding the two items noted above for the quarter. The 20% growth in operating expenses was driven by volume-related costs, expenses from the Fabory business acquired on August 31, 2011 and $31 million in incremental spending to fund the company’s growth programs, including new Territory Sales Representatives, eCommerce, advertising and incremental expenses for the company’s new 800,000 square foot distribution center in northern California.
Net earnings and earnings per share for the 2011 fourth quarter included a benefit from a lower tax rate than in the 2010 fourth quarter. The effective tax rate was 32.9% and 36.6% in the 2011 and 2010 fourth quarters, respectively. The lower tax rate resulted primarily from a lower state tax expense, tax law changes in Japan enacted in late November of 2011 and higher earnings in foreign jurisdictions with lower tax rates. The $31 million in incremental growth-related expenses contributed to this lower tax rate, as the spending was concentrated in the United States, which has Grainger’s largest and most profitable business, with one of the highest tax rates in the company.
The company has two reportable business segments, the United States and Canada, which represented approximately 89% of company sales for the quarter. The remaining operating units (Europe, Japan, Mexico, India, Colombia, China, Puerto Rico, Panama and the Dominican Republic) are included in Other Businesses and are not reportable segments.
Sales for the United States segment increased 8% in the 2011 fourth quarter versus the prior year. The 8% sales growth for the quarter was driven primarily by 8% volume growth and 3 percentage points from price, partially offset by a 2 percentage point drag from the 2010 oil spill sales and 1 percentage point from lower sales of seasonal products due to the unusually warm weather in the 2011 fourth quarter. Daily sales were up 9% in October, up 9% in November and up 5% in December. Oil spill-related sales contributed a drag of 1, 2 and 3 percentage points to October, November and December, respectively. All United States customer end markets, except reseller due to the oil spill in 2010, posted sales growth versus the 2010 fourth quarter, led by a strong increase in the heavy manufacturing customer end market.
Quarterly operating earnings in the United States were up 5% versus the prior year, up 15% excluding the expenses related to the 2011 branch closures and the 2010 paid time off benefit. The growth in operating earnings was primarily driven by the 8% sales growth and improved gross profit margins. Gross profit margins for the quarter increased 170 basis points driven mainly by price increases exceeding cost increases, positive selling mix from a decline in sales of lower margin sourced products primarily attributable to the oil spill in 2010, and lower excess and obsolete inventory requirements. Operating expenses increased 15% on a reported basis, 10% excluding the charge for the branch closures and the benefit from the change in paid time off. The 10% increase in operating expenses was driven by higher volume and $31 million in incremental growth-related spending including new sales representatives, eCommerce, advertising and incremental expenses for the new distribution center in northern California.
Fourth quarter sales for Acklands-Grainger increased 13%, 14% in local currency. Strong volume growth during the quarter contributed 13 percentage points to the sales increase, while acquisitions completed during the last 12 months contributed 1 additional percentage point, partially offset by 1 percentage point from the negative impact of foreign exchange. Daily sales in local currency were up 16% in October, up 15% in November and up 11% in December. The sales increase for the quarter in Canada was led by strong growth to customers in the construction, heavy manufacturing, agriculture and mining sectors of the economy.
Operating earnings in Canada increased 121% in the 2011 fourth quarter, up 123% in local currency. The strong improvement in operating performance was driven by the 13% sales increase, higher gross profit margins and operating expenses, which grew at a slower rate than sales. The improvement in the gross profit margin was primarily due to a combin
ation of better mix from strong sales of private label products. Operating expenses in Canada increased 1%, primarily the result of strong expense management coupled with some one-time expenditures in the 2010 fourth quarter related to the start up costs for the new distribution center in British Columbia.
Sales for the Other Businesses, which includes operations in Europe, Japan, Mexico, India, Colombia, China, Puerto Rico, Panama and the Dominican Republic, increased 95% for the 2011 fourth quarter versus the prior year. This increase was primarily due to the incremental sales from the business in Europe (Fabory) acquired on August 31, 2011, combined with strong revenue growth in Japan and Mexico. Excluding Fabory, sales for the Other Businesses increased 26%.
Operating earnings for the Other Businesses were $5 million in both the 2011 and 2010 fourth quarters. Earnings performance for the quarter was primarily driven by strong earnings growth in Japan and Mexico, partially offset by operating losses in China, India and the recent start up in the Dominican Republic. In addition, Fabory had an operating loss for the quarter, primarily due to softer sales growth from the challenging economic climate in Europe. Excluding Fabory, operating earnings for the Other Businesses in the 2011 fourth quarter were $6 million.