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

These headwinds were partially offset by the continued supply chain tailwinds we’ve seen all year as improved product availability and lower fuel and container costs drove year-over-year favorability. Although we were price cost negative in the quarter and for the full year of 2023, we are nearly neutral on a 2-year stack as the timing favorability captured in 2022 as fully unwound and we enter 2024 on a neutral [indiscernible]. At the operating margin line, we saw an improvement of 90 basis points year-over-year as the slight GP decline was offset by leverage in the business despite continued investment in marketing and head count to drive long-term growth. As mentioned, the year-over-year SG&A leverage was aided by roughly 90 basis points due to the lap of onetime expenses in the prior year period.

Overall, it was another solid quarter for the High-Touch Solutions North American segment, wrapping up a great year. Looking at market outlook on Slide 13. We estimate that the U.S. MRO market grew in the quarter between 2.5% and 3%, largely driven by price with industrial production, our proxy for volume remaining roughly flat year-over-year. This indicates that the High-Touch Solutions U.S. business achieved roughly 225 basis points of outgrowth in the fourth quarter in total. This more muted quarterly outgrowth reflects higher market-based inflation and Grainger’s Q4 price contribution due to the timing of where we pass price versus the market. On a pure volume basis, when looking at our volume contribution versus IP growth our market out growth was closer to 475 basis points.

In any case, as D.G. mentioned, looking at the full year, we achieved an annual outgrowth target by capturing approximately 525 basis points of growth above the market and remain poised to deliver against our target again in 2024. Moving to our endless assortment segment. Sales increased 6% or 8.2% on a daily constant currency basis, which adjusts for the impact of the depreciated Japanese yen. Zoro U.S. was up 2.6%, while MonotaRO achieved 9.9% growth in local days local currency. At a business level, Zoro’s growth reflects the continuation of headwinds they’ve experienced all year with declines in noncore B2C volume and slowing macro environment impacting its B2B customers. B2B customer growth remained steady in the high single digits for the quarter while noncore B2C and B2C light customer performance remained down over 20% year-over-year.

At MonotaRO, macro-related headwinds continued to impact results, however, the business still drove strong growth with increased sales to new and enterprise customers while also maintaining strong repeat purchase rate. From a profitability perspective, gross margins in the segment declined 60 basis points versus the prior year as MonotaRO favorability was offset by year-over-year declines at Zoro. As in the prior quarters, MonotaRO results reflect continued freight efficiencies, while the Zoro decline was driven by negative product mix and the impact of unfavorable timing from prior year price increases. Operating margins for this segment expanded by 50 basis points to 7.8% as the unfavorable gross margin was offset by SG&A leverage aided by the lap of onetime distribution center and commissioning costs in the prior year.

Now looking forward to 2024. We expect to deliver another solid year of performance [indiscernible] more muted MRO market. Our outlook for the year includes revenue to be between $17.2 billion and $17.7 billion at the total company level with daily organic constant currency sales growth between 4% and 7%, driven by top line growth in both segments. With our High-Touch Solutions segment, we expect daily organic constant currency sales growth between 3.5% and 6.5%. In the U.S., we’re planning for the total MRO market growth to be largely flat with a range of down 0.5% to plus 1.5%. This assumes the flattish volume range coupled with price inflation between 0 and 1%. On top of this market outlook, we expect to continue executing against our strategic growth engines to achieve 400 to 500 basis points of U.S. market outlook in 2024.

In the endless assortment segment, we anticipate daily constant grocery sales to grow between 7% and 10%, which normalizes for the impact of 2 additional business days and expected foreign currency exchange headwinds. MonotaRO is expected to grow in the low double digits in local currency and local gains as they continue to ramp new and enterprise customers [indiscernible] an expected slower macro demand environment. Zoro is anticipated to grow in the mid-single digits as we anticipate that many of the macro-related headwinds impacting their core B2B customers hold over to 2024. We also expect the continued unwind of B2C and B2C like customers, which include resellers and marketplaces to impact results, especially in the first half of the year.

In 2024, the team will focus on growing long-term relationships with its core B2B customers, including work to improve targeted marketing, fine-tune their pricing model and drive consistent service for all of their customers. Moving to our margin expectations. Even after normalizing to some onetime gross margin benefits we realized in 2023, we expect total company operating margins to remain quite healthy in 2024. In the High-Touch Solutions segment, operating margins will stay relatively flat year-over-year between 17.4% and 17.9%. We expect gross profit margins to be down in 2024 after lapping roughly 50 basis points of onetime benefits captured in 2023. We anticipate price cost for the year will be the only neutral as we worked our way through the timing discrepancy we’ve seen over the last couple of years.