Killjoy

Amazon Will Spoil It for Grainger

The industrial distributor's results were OK, but the company still faces an uphill climb.
Photographer: Fox Photos/Getty Images
AMAZON.COM INC
+32.73
At Closing, January 22rd
1327.31 USD

Investors are applauding W.W. Grainger Inc.'s latest results. Unfortunately, they're but a brief reprieve.

The distributor of parts that keep factories running has seen nearly a fifth of its market value wiped out over the past year as it has struggled to profitably adapt its business to the digital age and competition from Amazon.com Inc. But it had a spot of good news when it reported third-quarter results on Tuesday. Earnings and margins didn't decline quite as much as analysts had feared. And Grainger didn't lower its full-year EPS guidance any more than it already has. 

Amazon Is Conquering More Than Just Kale

The shares climbed as much as 5.6 percent.  Hey, take the good news while you can I guess, but it's a little early to draw any big conclusions from it. 

Overall third-quarter sales, for example, were slightly weaker than expected and Grainger had to cut its revenue outlook for the year. It now expects sales growth of 1.5 percent to 2.5 percent, down from a previous call for revenue gains of as much as 4 percent. That's not a great sign. Rival Fastenal Co. reported an 11.8 percent spike in sales when it disclosed third-quarter results last week. And Fastenal didn't implement the massive price cuts that Grainger was forced to carry out to make its products more competitive with those that can be found elsewhere online.

Calm in the Storm

Enjoy your optimism while it lasts Grainger investors

Source: Bloomberg

The price reductions shaved 5 percentage points off Grainger's U.S. sales growth. For now, that's being offset by volume gains. But there's a legitimate question as to whether Grainger is taking Amazon seriously enough and whether it may need to make even more price cuts next year. It's worth noting that Amazon Business expanded into the U.K. and Japan earlier this year, putting Grainger's operations in those countries in its cross hairs as well. RBC analyst Deane Dray has estimated Grainger would need a 5 percent boost in sales volume to counteract an additional 1.5 percentage point impact from price cuts.

For Grainger, it's still a uphill climb. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Brooke Sutherland in New York at bsutherland7@bloomberg.net

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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