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Grainger Slumps as Citigroup Sees Amazon Threat: Chicago Mover

W.W. Grainger Inc. (GWW) had its biggest two-day loss in more than three years, on concern that its revenue and profit growth will be crimped by Amazon.com Inc. (AMZN)’s foray into online tool distribution.

Grainger slid 3.4 percent to $204.01 in New York, resulting in a two-day retreat of 7.2 percent that was the most since December 2008. The shares have gained 36 percent in the past 12 months.

Amazon’s AmazonSupply website began operations yesterday, allowing business and industrial customers to purchase more than 500,000 items, including abrasives and hand dryers. That creates a new competitor to Grainger’s online business serving similar buyers.

“Amazon’s entry has potential to slow Grainger’s online sales growth and margin expansion,” Deane Dray, a Citigroup Inc. analyst in New York, said yesterday in a note to clients. Amazon is the “800-pound gorilla,” said Dray, who has a sell rating on Lake Forest, Illinois-based Grainger.

Online sales make up about 27 percent of Grainger’s revenue, and have been growing twice as fast as the company’s U.S. branch-based business, Dray said.

“Grainger’s management has been questioned repeatedly over the past couple of years as to ‘what happens if Amazon becomes a serious online competitor?’” he said. “Looks like that day has come.”

High-Value Proposition

Maintenance, repair and operations products such as the ones Grainger sells are a service and relationship business, according to Ryan Merkel, an analyst at William Blair & Co. in Chicago. Amazon’s greatest challenges will be breaking existing distributor relationships, matching the high-value proposition that professionals demand, and earning the trust of business-to- business customers, Merkel said.

Still, “the Amazon threat has certainly increased with this dedicated and improved website,” Merkel, who rates Grainger shares outperform, said in a note to investors published yesterday.

First-quarter net income was $187.5 million on revenue of $2.2 billion, the company said April 17. Per-share profit rose 18 percent from a year earlier to a record $2.57, spurring the company to raise its full-year target to $10.40 to $10.80 a share.

Grainger isn’t concerned by the arrival of Amazon, said Robb Kristopher, a spokesman for the company. Grainger has expanded its catalog of maintenance, repair and operations products about fivefold in the past five years to better serve customers, he said.

‘Highly Fragmented’

“This market is highly fragmented,” Kristopher said in a telephone interview. “Over the years we have seen many online retailers entering this market. Customers have told us they really value the fact they can lean on us to help them navigate toward more productivity.”

Grainger has 413,000 professional maintenance, repair and operations products in the company’s print catalog, Kristopher said in an e-mail. Through Grainger.com, business and institutional customers have access to more than 800,000 products.

Mary Osako, a spokeswoman for Seattle-based Amazon, declined to comment on what the retailer expects from its new website.

Amazon rose 1.1 percent to $190.33.

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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