![]() ![]() Gross margin fell by about 80bp from the prior year and 40bp from the prior quarter to 35%, missing by about 60bp. business was undermined by headwinds from pandemic-related sales, as pandemic-related sales declined 28% while non-pandemic sales rose more than 31%. High-Touch North American revenue rose 13% on a core basis (with 11% volume growth), while Endless Assortment grew 24%, with 19% growth at MonotaRO and 33% growth at Zoro. Revenue rose 15% in the quarter, a very slight miss relative to expectations. Even allowing for a larger-than-expected inventory writedown related to PPE for the pandemic, underlying/adjusted margins were still a little softer than the Street expected, and Endless Assortment margins are just sorta “hanging in there” for now. Margins are the big debate on Grainger, and that’s also where the company came up short in the second quarter. Mixed Results In Q2, With Weaker Underlying Margins I see Grainger as a mid-single-digit return prospect now over a longer-term holding period, which isn’t bad for industrials, but isn’t really compelling either. I like the company’s strategic moves (and priorities), and while I don’t think the bulls are completely right on gross margins, I also don’t think the bears are completely right. I’m still stuck in a valuation grey zone with Grainger shares. Looking at a year-to-date or trailing-year comparison, Grainger’s stock performance falls between Fastenal ( FAST) and MSC Industrial ( MSM ), which feels right on several levels (quality, market exposures, etc.). I was leaning bullish on Grainger back at the time of my last article, and the shares have kept pace with the wider industrial market since then, giving back some outperformance since reporting disappointing second quarter earnings where, surprise!, margins were an issue. Obviously I’m being glib, but the bulls don’t often offer much up for their pro-margin argument beyond “management says so” and a few vague comments about future scale advantages in the Endless Assortment operations. Grainger ( NYSE: GWW) (“Grainger”) hasn’t really changed much in recent years and boils down to – “competition from the likes of Amazon ( AMZN) will continue to drive down their gross margins” vs. Jetcityimage/iStock Editorial via Getty Images
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