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    GWW
    Earnings call· Jun 2025(Q2 FY25)

    W.W. GRAINGER Q2 FY25 earnings call GWW

    Aug 1, 2025 Source

    Executive summary

    W.W. Grainger Q2 FY25 — Strong Endless Assortment Growth Amidst LIFO Headwinds

    W.W. Grainger delivered solid Q2 FY25 results, with strong performance in its Endless Assortment segment driven by improved customer retention and operating leverage. However, the company's overall profitability was significantly impacted by LIFO inventory valuation headwinds and a softer MRO market, leading to a revised full-year outlook. Management remains confident in its strategy and ability to navigate the evolving environment, expecting gross margin recovery as pricing actions take hold in the back half of the year.

    Highlights

    5

    • Total company reported sales were nearly $4.6 billion, up 5.6% (5.1% daily constant currency).

    • Diluted EPS finished up $0.21 to $9.97, a 2.2% increase compared to the prior year period.

    • Endless Assortment segment sales increased 19.7% (16.3% daily constant currency), with Zoro U.S. up 20% and MonotaRO up 16.4%.

    • Endless Assortment operating margins increased by 200 basis points to 9.9%, with Zoro's operating margins accelerating to 5.8% (up 380 bps YoY).

    • Operating cash flow came in at $377 million, enabling $336 million returned to shareholders through dividends and share repurchases.

    Concerns

    4

    • Total company operating margins were 14.9%, down 50 basis points compared to the prior year, primarily due to LIFO inventory valuation headwinds.

    • High-Touch Solutions segment gross profit margin finished at 41%, down 70 basis points versus prior year, impacted by negative price/cost spread and LIFO.

    • Full-year 2025 EPS outlook lowered to $38.50-$40.25 (up roughly 1% YoY at midpoint) due to a softer MRO market and tariff-related price/cost timing.

    • Full-year gross margin guide lowered to 38.6%-38.9% (down 80 to 50 basis points year-over-year).

    Guidance & targets

    14
    CategoryTargetConfidence
    Full-year 2025 Sales
    Adjusted to reflect latest FX rates and pricing actions, partially offset by softer MRO market
    high materiality
    Medium
    Full-year 2025 Gross Margin
    38.6% to 38.9%
    high materiality
    High
    Full-year 2025 Operating Margin
    14.7% to 15.1%
    high materiality
    High
    Full-year 2025 Diluted EPS
    $38.50 to $40.25
    high materiality
    High
    Full-year 2025 Capital Expenditures
    $100 million increase
    medium materiality
    High
    Q3 2025 Total Company Sales Growth (Daily Constant Currency)
    Up north of 5%
    medium materiality
    High
    Q3 2025 Total Company Operating Margin
    Around 14.5%
    medium materiality
    High
    Gross Margin Recovery
    Will begin to recover over time
    high materiality
    High
    Price/Cost Neutrality
    Achieve price cost neutrality over time
    high materiality
    High
    High-Touch Business Net Annualized Price Inflation Run Rate (May actions)
    1% to 1.5%
    medium materiality
    High
    High-Touch Business Net Annualized Incremental Price (September actions)
    2% to 2.5%
    medium materiality
    High
    High-Touch Business Total Price Contribution
    Close to 1%
    medium materiality
    High
    Gross Margin Recovery
    Recover to more normal levels over time
    high materiality
    High
    Gross Margin Expansion
    Likely to be a year of gross margin expansion back to that 39% level
    high materiality
    High

    Segment performance

    2
    SegmentRevenueYoYQoQMargin
    High-Touch Solutions
    Sales driven by continued volume growth and modest price inflation across all geographies. Strong performance with contractor and healthcare customers offset slower growth elsewhere. Gross margin impacted by negative price/cost spread and 80 bps LIFO impact. SG&A deleveraged due to marketing investments and merit increases, partially offset by productivity.
    Gross profit margin: 41% (down 70 bps vs prior year)
    		Up 2.5% reported2.8% daily constant currency—16.6% operating margin
    Endless Assortment
    Sales growth normalized for FX tailwinds. Zoro's momentum driven by core B2B customers and improving customer retention. MonotaRO's growth from enterprise customers and solid acquisition/repeat rates. Operating margins increased by 200 bps, with both businesses contributing. Zoro's margin acceleration aided by gross margin flow-through and top-line leverage. SKU optimization for customer experience.
    Zoro U.S. sales growth: 20%MonotaRO sales growth (local days, local constant currency): 16.4%MonotaRO operating margin: 13.2%Zoro operating margin: 5.8% (up 380 bps YoY)Net SKUs declined: 1.1 million
    		Up 19.7% reported16.3% daily constant currency—9.9% operating margin

    Operational metrics

    19
    Total Company Sales
    $4.6 billionUp 5.6% reported, 5.1% daily constant currency
    Q2 FY25

    Nearly $4.6 billion in sales, up 5.6% or 5.1% on a daily constant currency basis.

    Total Company Operating Margin
    14.9%Down 50 basis points compared to 2024
    Q2 FY25

    Total company operating margins of 14.9% for the quarter, down 50 basis points compared to 2024, but roughly in line with our communicated expectations.

    Diluted EPS
    $9.97Up $0.21 or 2.2% higher compared to the prior year period
    Q2 FY25

    Diluted EPS for the quarter of $9.97 was up $0.21 or 2.2% higher compared to the prior year period.

    Capital Returned to Shareholders
    $336 million
    Q2 FY25

    returned a total of $336 million to greater shareholders through dividends and share repurchases.

    LIFO Inventory Valuation Headwinds Impact
    80 basis points
    Q2 FY25

    the vast majority of the impact to us or like as an example, to High-Touch in this quarter is the LIFO impact. It's like 80 basis points.

    Diluted EPS without LIFO impact (hypothetical)
    Up north of 6%vs. 2.2% reported
    Q2 FY25

    if we were not on LIFO... our EPS year-over-year just comparing ourselves to ourselves instead of being up 2, EPS would have been up north of 6%.

    Price/Cost Spread
    Negative
    Q2 FY25

    In the quarter, we saw a negative price/cost spread as we progress negotiations with suppliers and elected to not pass any off-cycle price increases on to our customers.

    Customer Retention Rates
    Improving
    Q2 FY25

    Zoro continues its strong momentum driven by growth from its core B2B customers, along with improving customer retention rates.

    Repeat Purchase Rate
    Up about 200 basis pointsYoY
    YoY

    That repeat rate is really, really important. That's up about 200 basis points year-over-year, which is a big deal to that business.

    Customer Acquisition and Repeat Purchase Rates
    Solid
    Q2 FY25

    MonotaRO, sales growth remained strong with continued growth from enterprise customers coupled with solid acquisition and repeat purchase rates with small and midsized businesses.

    Net SKUs declined
    1.1 million
    Q2 FY25

    Specifically, net SKUs declined by $1.1 million in the quarter, driven by the elimination of some low volume, low service items.

    Price Realization from May Actions
    1% to 1.5%
    Annualized run rate

    we still expect these may price actions will approach the previously discussed 1% to 1.5% net annualized price inflation run rate for the high touch business.

    Price Realization from September Actions
    2% to 2.5%Incremental
    Annualized run rate

    The past price from this route is expected to result in net annualized incremental price of 2% to 2.5% on a run rate basis for the high touch business.

    Total Price Realization
    Close to 1%
    FY25

    on a cumulative basis, we'll lay across the full year 2025 to deliver close to 1% price in total for the High-Touch business.

    Preliminary Sales Growth
    Slightly north of 6%Daily constant currency
    July

    The third quarter is off to a solid start with preliminary total company July sales up slightly north of 6% on a daily constant currency basis and aided by softer comps in the prior year period.

    MRO Market Demand
    Muted, softer than expected
    Q2 FY25

    our indicators suggest the MRO market remained muted but was softer than expected.

    External MRO Market Growth
    Down 2% or 3%
    Q2 FY25

    there's been surveys from your peers that have suggested the market was down 2% or 3% even in the quarter.

    Federal Non-Military Business
    Struggling, down
    Q2 FY25

    the non-military federal business certainly has been struggling is down.

    Government Business Mix
    70% state and local, 30% federal
    Current

    we're 70% state and local, 30% federal.

    Industry KPIs

    2
    MetricValueDetails
    End market growth mixStrong performance with contractor and health care customers, offset by slower growth in other areas.
    Market volume mro market benchmarkDown 2% or 3%%

    Capital programs

    1
    DC Network Investmentsunderway
    Period spend: $100 million increase

    Benefit: Longer-term network evolution

    Updates were also made to our supplemental guidance, which included a $100 million increase in expected capital expenditures due to the timing of DC network investments and the related offset to our share repurchase outlook. ... the vast majority of that is in the supply chain investment, and it was -- there was an opportunity to make an investment for the future. It's not going to be near term, but it's longer term. And so we're thinking about the longer-term network evolution, and there was just an opportunity to add some money to the budget.

    Risks & headwinds

    4
    Tariff-related LIFO Inventory Valuation HeadwindsQ2 FY25, continuing into back half of 2025 and Q3 FY25

    Estimated 80 basis points impact on High-Touch gross margin in Q2; caused total company operating margin to be down 50 bps YoY.

    Mitigation: Expected to be transitory; gross margin will begin to recover over time as pricing catches up and LIFO impact normalizes.

    Price/Cost Timing PressuresQ2 FY25, continuing into back half of 2025 and Q3 FY25

    Negative price/cost spread in High-Touch Solutions segment in Q2.

    Mitigation: Adhering to regular September pricing cycle; expect price/cost to begin to recover as pricing catches up; focused on achieving price cost neutrality over time.

    Softer-than-expected MRO MarketQ2 FY25, back half of 2025

    MRO market remained muted and softer than expected in Q2; not expected to recover in back half of 2025.

    Mitigation: Focus on execution, providing value to customers, and gaining market share; internal metrics suggest share gains despite market softness.

    Moderating Endless Assortment margin outperformanceBack half of 2025

    Expected to moderate slightly as sales comps become more pronounced in the back half of the year.

    Mitigation: Continued focus on strong momentum, customer acquisition, and repeat purchase rates; SKU optimization efforts.

    What to watch in Q3 FY25

    5

    Gross Margin Recovery

    Q3 FY25 and into Q4 FY25
    Current14.9% operating margin (Q2 FY25), 41% High-Touch gross margin (Q2 FY25)
    TargetRecovery towards more normal levels, sequential improvement from Q3's ~14.5% operating margin.

    Why it matters

    Gross margin recovery is key to overall profitability and achieving price/cost neutrality, especially given the LIFO and price/cost timing headwinds.

    But as we pass price, we expect gross margin will recover to more normal levels over time⏳.

    Q&A highlights

    6

    How much of the operating income impact was LIFO, and would the second-half outlook change if on average cost accounting?

    The LIFO impact is significant and would not exist with FIFO/average cost. Without LIFO, Q2 EPS would have been up over 6% instead of 2.2%. The underlying operational estimates for price increases and cost changes would remain similar.

    “So the only real difference is that we would not have had this LIFO accounting impact flow through COGS and through the P&L in the way it is flowing through today. So when you look at, specifically, our EPS year-over-year just comparing ourselves to ourselves instead of being up 2, EPS would have been up north of 6%.”

    asked by David Manthey · answered by Deidra Merriwether

    2 min read6 chapters

    Detailed Narrative

    01

    External Environment and Customer Focus

    The external environment remains uncertain, but Grainger's operations are focused on execution. Customers are seeking reliable partners to manage complexity, drive efficiencies, lower purchasing costs, and improve inventory management. Grainger leverages its world-class supply chain, product information, and digital capabilities to provide value, especially in times of need with emergency response. The company's role becomes even more important in uncertain times, helping customers strengthen purchasing processes and overall operations.

    02

    LIFO Accounting and Margin Impact

    A significant theme in Q2 was the impact of tariff-related LIFO inventory valuation headwinds. Without this LIFO impact, the company's operating margin would have been flat year-over-year, and EPS would have been up over 6%. The LIFO impact is estimated at 80 basis points for the High-Touch segment's gross margin in Q2. These impacts are considered transitory📎, with gross margin expected to recover as pricing actions catch up📎 and the LIFO effect normalizes over several quarters.

    03

    Pricing Strategy and Tariff Response

    Grainger implemented initial pricing actions in May, primarily for Section 232 and the first wave of China tariffs, affecting directly imported products. The company chose to adhere to its regular September pricing cycle for broader increases, including current tariff rates and supplier-imported products, to maintain customer stability. This strategy aims for price/cost neutrality over time⏳, despite near-term lumpiness and a negative price/cost spread in Q2, with total price contribution for High-Touch expected to be close to 1% for FY25.

    04

    Endless Assortment Momentum

    The Endless Assortment segment, including Zoro U.S. and MonotaRO, demonstrated strong momentum. Zoro's growth was driven by improved targeting for customer acquisition and repeat business, leveraging insights from MonotaRO, leading to a 200 basis point increase in repeat rates year-over-year. The segment also benefited from operating leverage as growth outpaced cost additions. Zoro optimized its assortment by eliminating 1.1 million low-volume, low-service SKUs to improve customer experience, with plans for net assortment growth over time⏳.

    05

    MRO Market Softness and Share Gains

    The MRO market was softer than expected in Q2 and is not anticipated to recover in the back half of the year. Despite this, Grainger believes it is gaining share in the High-Touch segment, supported by internal metrics and external surveys suggesting a market decline of 2-3%. The company's ability to provide supply chain stability and service is seen as a differentiator, even if the current disruption is less supply-driven than the pandemic, contributing to solid volume share gains.

    06

    Capital Allocation Adjustments

    The company increased its full-year 2025 capital expenditure outlook by $100 million, primarily for long-term supply chain network investments, specifically DC network investments. This increase is offset by a corresponding adjustment to the share repurchase outlook, reflecting a strategic decision to invest in future capabilities and network evolution rather than near-term capital returns.

    AI-generated summary of the company’s earnings call. Not investment advice.