GWW Q2 2025 EPS +2% vs +6% ex-LIFO; 80bp margin drag
- Pricing Resilience and Future Upside: Management highlighted that excluding LIFO impacts, EPS would have been up by over 6% year-over-year, and they expect additional price increases in September to further recover gross margins, indicating strong pricing power and potential margin improvement going forward.
- Operational Strength and Market Share Gains: The team noted solid high-touch share gains and robust demand across key segments, even in the face of tariff and cost headwinds. This reflects a resilient business model and effective execution in a challenging environment.
- Strategic Efficiency Initiatives: Ongoing SKU optimization and targeted supply chain investments are aimed at enhancing customer experience and long-term operational efficiency, positioning the company well for sustainable growth beyond current cyclical pressures.
- LIFO Impact on Margins: The significant negative effect of LIFO inventory valuation, which compresses gross margins by approximately 80 basis points this quarter and translates into lower EPS compared to a FIFO scenario, poses a sustained risk to profitability.
- Tariff and Pricing Uncertainty: Ongoing uncertainties around tariff-related cost increases and the judicious, delayed pricing actions create a risk that further cost pressures may not be fully passed through to customers, potentially resulting in continued margin weakness.
- Weak Price Realization: The reported pricing increases have not fully materialized in the quarter—partly due to timing issues and differing SKU-level elasticity—as evidenced by lower than expected incremental pricing, suggesting that price-driven margin improvements may be slower to materialize.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Sales Outlook | FY 2025 | no prior guidance | Adjusted to reflect the latest FX rates and pricing actions, expecting 1% contribution for the High Touch business | no prior guidance |
Gross Margin | FY 2025 | no prior guidance | 38.6% to 38.9%, down 80 to 50 basis points year over year | no prior guidance |
Operating Margins | FY 2025 | no prior guidance | 14.7% to 15.1% | no prior guidance |
EPS | FY 2025 | no prior guidance | $38.50 to $40.25, up roughly 1% year over year at midpoint | no prior guidance |
Capital Expenditures | FY 2025 | no prior guidance | Increased by $100 million | no prior guidance |
Share Repurchase Outlook | FY 2025 | no prior guidance | Adjusted downward | no prior guidance |
Third Quarter Sales | Q3 2025 | no prior guidance | Expected to be up north of 5% on a daily constant currency basis | no prior guidance |
Third Quarter Operating Margin | Q3 2025 | no prior guidance | Anticipated to decline sequentially to around 14.5% | no prior guidance |
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LIFO Impact
Q: How does FIFO compare to LIFO impact?
A: Management explained that without LIFO, the cost of goods sold wouldn’t absorb negative pricing adjustments—meaning earnings per share could have risen to nearly 6% instead of only about 2%, highlighting how LIFO currently depresses margins and outlook. -
Margin Breakdown
Q: What part of 50 bp margin drag is LIFO?
A: They clarified that roughly 80 basis points of the gross margin headwind are attributable to LIFO effects, with only a minor additional impact from price‐cost timing adjustments. -
Future Margin Outlook
Q: Will margins improve in 2026?
A: Management expects exit margins in the fourth quarter to reach the high 38% range and anticipates a normalization toward around 39% in 2026, assuming no dramatic tariff changes. -
Pricing Timing
Q: Why delay price increases until September?
A: The decision was driven by a desire to stick to a regular cycle for customer stability, allowing pricing actions and tariff adjustments to roll out in a measured way that aligns with market conditions. -
High-Touch Pricing Realization
Q: Is high-touch pricing hitting 1–1.5% run rate?
A: Management noted that early pricing moves, initiated in May, are expected to yield an annualized run rate of 1–1.5%, even though the full impact is spread out over several quarters due to timing factors. -
CapEx Shift
Q: What drives the $100M CapEx increase?
A: The reallocation is mainly for long-term supply chain and network evolution investments, positioning the company for future operational improvements. -
Long-Term Price Strategy
Q: Does delaying pricing boost market share long-term?
A: By deferring price increases, management is aiming to enhance customer loyalty and long-term share gains, ensuring pricing actions are well aligned with customer expectations. -
Government Dynamics
Q: Any impact from government contract cancellations?
A: Overall, cancellations were minimal. While non-military federal business showed some softness, the military and state/local segments remained stable. -
Zoro SKU Pruning
Q: What’s the impact of Zoro SKU pruning?
A: The SKU optimization removed low-velocity items, thereby streamlining the assortment to improve the customer experience without adversely affecting overall performance. -
Private Label Economics
Q: Are tariffs affecting private label economics?
A: Tariff effects differ at the SKU level; some private label items become less competitive while many remain strong, with a more detailed evaluation expected in the coming quarters. -
Government Pricing Data
Q: Why do reported pricing rates differ from government data?
A: Grainger’s robust scale and deliberate pricing measures are projected to deliver a 3–4% annualized run rate by year-end, which contrasts with mid-single-digit inflation figures reported elsewhere. -
Customer Demand Sluggishness
Q: Why are supply chain tailwinds muted?
A: Unlike the COVID disruption that spurred extra demand, current supply chains are functioning well—so while share gains remain solid, overall volume growth is moderate. -
Volume Response to Price
Q: Will customers stay loyal with price hikes?
A: Despite the inflationary environment, management expects customer loyalty to hold strong, with steady volumes maintained due to their service excellence and ongoing share gains.
Research analysts covering W.W. GRAINGER.