W.W. Grainger, Inc. (NYSE:GWW) Q4 2023 Earnings Call Transcript

We continue to hear that Grainger’s product availability and our next-day order complete shipping capabilities greatly set us apart from our competitors, allowing us to show up well and win with customers. As I mentioned at our 2022 Investor Day, we set out to accelerate our investment in capacity, automation and sustainability initiatives to further strengthen our service advantage. We are well on that path as we add new square footage to the network, including the following: Three new bulk warehouses, including a 525,000 square foot facility in Pineville, North Carolina, that’s scheduled to open later this year. A 535,000 square foot distribution center currently under construction in Gresham, Oregon which is on track to open in 2025. and as shared earlier this week a new 1.2 million square foot distribution center near Houston, Texas.

With the addition of these facilities, we’re adding 3.5 million square feet to our supply chain network in total, representing more than a 35% increase from where we began 2023. These latest investments will only strengthen our promise to customers who count on us to provide next-day complete orders to keep their operations running and people safe. Finally, I think it’s important to reinforce how the Grainger Edge is truly the key to all of the success that I just mentioned. Every day, our purpose, we keep the world working, motivates us to do our best for customers, communities and each other. That commitment has driven a culture we are very proud of and one that’s continuously being noticed externally. Recently, Grainger ranked third out of 400 of America’s largest companies and the American Opportunity Index for our commitment to developing internal talent drive, business performance and individual growth.

The index primarily focuses on the experience of workers and non-college degree roles and the company’s ability to offer them growth and development on that of their career path. Additionally, Grainger [indiscernible] Glassdoor’s 2024 Best Places to Work. Glassdoor has more than 50 million unique monthly visitors, and this recognition is particularly special as it was first time Grainger was named to Glassdoor’s U.S. large employer list. Both of these awards are based on third-party facts or proprietary career databases, not surveys. So they eliminate subjectivity and service a testament to the way that Grainger Edge has strengthen our team member experience and employer brand. Lastly, before switching to the financials, I want to take a second to announce an update to our 2030 sustainability target.

Our target approved by the Board early in the fourth quarter of 2023 seeks to reduce absolute Scope 1 and 2 by 50% and from a 2018 baseline, up from the previous 30% target. This new goal aligns with the level required to reduce Scope 1 and 2 emissions to limit global temperature rise to 1.5 degrees Celsius. Environmental stewardship, which has long been a standing focus for Grainger remains a key component of our culture and is embedded with the Grainger Edge in everything we do. To be clear, our investments in sustainability are profitable as our team has been very resourceful at finding ways to improve our missions while also supporting results. Turning to Slide 9. We finished the year with over $16.5 billion in sales, up 8.6% on a daily basis or 9.5% in daily organic constant currency amidst the normalizing demand [indiscernible] Growth for the year is highlighted by our high-touch solutions U.S. business, which continued to gain profitable share finishing the year with 525 basis points of market outgrowth, exceeding our annual target of 400 to 500 basis points.

Alongside the strong top line, the team also did a great job of managing profitability through the year with operating margins up 130 basis points in 2023, finishing the year at 15.7%. Together, these strong results fueled record earnings ROIC and cash flow. For the year, adjusted EPS was up over 23% to $36.67 per share. ROIC finished at 42.8% and operating cash flow was over $2 billion which allowed us to return $1.2 billion to shareholders through dividends and share repurchases. Overall, these strong results for 2023 are the byproduct of a lot of hard work from our entire team, and I’m very proud of what we’ve been able to accomplish. As we embark on another year, regardless of what market we face, we are well positioned to continue our momentum and expect to drive great results for our stakeholders in 2024 and beyond.

With that, I will turn it over to Dee.

Deidra Merriwether: Thanks, D.G. And I pause those upfront, everyone. I’m a little [indiscernible] today, so please bear with me. Turning to our [Technical Difficulty] fourth quarter results. We had a solid quarter to finish out the year with profitability coming in stronger than expected, but also reflected some top line softness as we exited the year. For the total company results, daily sales grew 5.1% or 5.5% on a daily organic constant currency basis, which was driven by growth across both segments. Consistent with what we’ve seen all year, year-over-year top line growth rates continue to moderate as we wrap price pass in the prior year. While sales finished within our implied guidance range for the quarter, we did see more holiday-related softness than anticipated as we ended the quarter.

The total company gross margin for the quarter finished at 39.1%. And declining by 50 basis points over the prior year period. Both segments saw slight year-over-year margin contraction as expected, which I will detail in the coming slides, but in total, finished the quarter at the top end of our implied fourth quarter guidance. Total company operating margin was up 80 basis points which was aided by a lap of roughly $35 million of onetime expenses in the prior year period. When excluding this impact, SG&A as a percentage of sales was still favorable versus prior year by roughly 40 basis points. In total, we delivered diluted EPS for the quarter of $8.33, which was up over 16% versus the fourth quarter of 2022. Moving on to segment level results.

The High Tech Solutions segment continues to perform well, with sells up 4.7% of both the reported and daily organic constant currency basis, fueled by growth across all geographies. Volume growth remains strong and accounts for a vast majority of the overall year-over-year expansion. In the U.S., almost all customer end markets continue to see growth in the fourth quarter with government contractors and health care seeing the strongest year-over-year performance. Canada grew slowly in Q4, driven by a softer macro but the business remains solidly profitable in the quarter and finished 2023 with their most profitable year and over half a decade. For the segment, gross profit margin finished the quarter at 41.4%, down 50 basis points versus the prior year due to negative price/cost spread a year-end inventory cost adjustments, which included the lap of a prior year LIFO inventory benefit that we did not repeat in 2023.