W.W. Grainger, Inc. GWW has been disappointing investors of late. Shares of this provider of MRO solutions have plunged 22% year to date, due to its dismal first-quarter results and reduced outlook for 2017.

Should investors dump the stock from their portfolio? Let’s find out.




Estimates Headed South

The estimates for the company for second-quarter 2017, fiscal 2017 and fiscal 2018 have moved south in the past 60 days, reflecting the negative outlook of analysts. For the second quarter, the estimate has gone down 3% to $2.61 per share in the past 60 days.

For fiscal 2017, the estimate has dipped 1% to $10.38. For fiscal 2018, the estimate has declined 2% to $10.97 per share.

Negative Earnings Surprise History

The company missed the Zacks Consensus Estimate in the last reported quarter by 4.32%. Further, it has an overall negative earnings surprise of 2.01% in the trailing four quarters.

Negative Growth Projections




The Zacks Consensus Estimate for the second quarter is pegged at $2.61, a 9.57% drop from $2.89 reported in second-quarter 2016. For fiscal 2017, the Zacks Consensus Estimate is pegged at $10.38, reflecting a 10.39% year–over-year decline.

Weak Q1, Lowered 2017 Guidance

Grainger’s first-quarter 2017 adjusted earnings per share declined 9% year over year, due to the adverse effect of strategic pricing initiatives in the U.S.

Due to stronger-than-anticipated positive customer response to the U.S. strategic pricing actions, Grainger decided to accelerate pricing actions this year instead of 2018. However, the decision requires a significant reduction to the company’s earnings per share guidance for 2017.

Accordingly, Grainger now guides sales growth of 1–4%, down from the earlier guidance of 2–6%. It estimates earnings per share to be in the range of $10.00–$11.30 compared with the previous band of $11.30–$12.40. Compared with the earnings of $11.58 in fiscal 2017, the mid-point of the guidance range depicts a year-over-year decline of 8%.

An Underperformer




Grainger has underperformed the Zacks categorized Industrial Services  sub-industry with respect to price performance in the past two years. The stock lost around 21.3% while the industry dropped 18.3%.

Near-Term Headwinds Remain

The abovementioned pricing actions will affect results in 2017. The company now expects U.S. price deflation of 5% for the year and a gross margin contraction of 210 basis points in 2017. The price acceleration is a headwind to 2017 and 2018 gross margin.

Grainger’s Canada segment remains a concern. The segment continues to be challenged due to elevated expenses. Additionally, the company’s oil and gas, and energy exposure in Canada is very high. Consequently, fluctuation in oil prices will hamper the segment’s results.

Lower Inventory Turnover Ratio

Over the trailing 12 months, the inventory turnover ratio for Grainger has been 4.35% compared with the industry’s level of 5.07%. This is a signal of inefficiency, and implies either poor sales or excess inventory.

Unfavorable Zacks Rank

Grainger currently carries a Zacks Rank #4 (Sell).

Source: Zacks.com