Why WW Grainger’s guidance cuts could be a bad sign for industrials

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WW Grainger sounded an ominous start to the earnings season for industrial stocks after the supplier of maintenance and repair equipment cut its full year sales and earnings forecasts.

Shares in the company tumbled by 11 per cent – the most since August 2015 – to a 14-month low of $198.54 as the industrial parts distributor warned that sales would grow only between 1-4 per cent this year, down from its previous guidance of 2-6 per cent growth.

Earnings per share expectations for 2017 have also been lowered to $10-$11.30, from $11.30-$12.40, as the group’s campaign of aggressive discounting eats into profitability.

Still weak commodity prices and lacklustre industrial growth has limited WW Grainger’s ability to raise prices on customers in recent years as companies hold off on capital expenditure investments. In a bid to ramp up customer growth, WW Grainger started cutting prices across its product ranges this year.

While the promotional activity has helped boost sales volume during the first quarter, this has come at the expense of its top and bottom lines.

For the three months to end of March, net sales rose 1.3 per cent to $2.54bn, falling short of the $2.56bn the market was expecting. Net income meanwhile fell to $173.3m, compared to the $184.9m recorded in the prior year period. Adjusted net income of $171.6m, or $2.88 per diluted share, also came in below forecasts of $177.1m or $2.99 a share.

“Overall, the first quarter clearly fell short of our expectations, driven primarily by the stronger than anticipated customer response to our US strategic pricing actions, with a greater volume of products sold at more competitive prices,” said chief executive DG Macpherson.

As WW Grainger supplies the construction and industrial companies, its results are sometimes seen as a harbinger for the wider industrial sector, with Honeywell and General Electric among those scheduled to report their earnings this week.

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