W.W. Grainger, Inc. — 2024 Q1

This is Quinn Fredrickson on for Dave. First, can you update us on -- you made some comments about taking some pricing actions. I think before you were saying 0% to 1% price in High-Touch this year. Can you update us on that? And then just any gross margin implications from here?

Yes. So I'll provide a few comments, and then Dee can provide any details. So as you mentioned, inflation has been a bit stickier than we expected. Originally, we thought inflation would be 0% to 1%. It's likely to be 1% to 2% at this point. That outlook is lower than the headline PPI index because our industry-specific factors are different than the PPI index, and that difference has contributed to lower market outgrowth the last few quarters. And we do see these short-term disconnects from time to time. We saw it in 2022 as well. But they smooth out over time.

That's helpful, D.G. Maybe on the Endless Assortment segment. Any color you can share just on that, the B2C portion? I guess, are you seeing that kind of progressed as you would expect and still anticipating that inflecting positively in the back half of the year? And then, obviously, you reported that 10% segment growth even in spite of that. So any change to the 7% to 10% constant currency growth assumption for the year?

No, we don't have any change. I think we will still have a bit of a headwind for consumers, B2C and B2C-light customers through the second quarter. We think that will go away as the year moves on, and that could become a positive. But generally, that's all built into the 7% to 10%.

So yes, I'll start with the first part of your question. So the majority of MonotaRO's COGS are in the end. They do have some U.S.-denominated, but it's a much smaller portion of their COGS. And they've done a really nice job over the last several years of being able to pass on inflation through price to account for the disaggregation between the yen and the dollar.

Sure. Yes. I think the first 2 statements you made were correct. And as we look at the balance of the year, starting in the second quarter with the actions that D.G. noted that we are in the process of taking, we expect price/cost to continue to improve from here. And we expect to end the year close to price/cost-neutral. So that team is working really hard, making sure they're following our 2 core tenets, which is, first and foremost, remaining price-competitive, but then also looking through our assortment and estimating the continued cost increases that we're going to experience that we can time that as close to possible as we can so that we can end up price/cost-neutral.

Yes. They're progressing well. Most of the focus is on -- so Zoro has always been a very good acquirer of new businesses, and they continue to do that well. We look at the Japanese business and Zoro when we compare notes, and the repeat business has been lower historically at Zoro than it's been at Japan. But we steadily increased that. And that is a lot of sort of marketing science, looking at what to present to customers after the first order, how to understand who those customers are, presenting the right products and the right offers after we get that first order.

So I would say it was a couple of things. So one, D.G. talked a little bit about like misjudging the path of inflation here. We started to lower some prices at the end of last year. And so probably did that a little too quickly. And then when we started and assessed the 2024 increases in Q1, probably a little softer there.

I would say that it's all planned. There hasn't been any change in the path. And we invest in many ways, I'd say. But from a cash perspective, supply chain investments, we've talked about the new building in the Northwest and Houston. Those are in full swing. We also invest in technology. That's the other primary investment we make from a cash perspective. And then from an expense perspective, marketing is a big part of it.

So we expect to maintain the course on our capital allocation strategy. We feel it's been working well for the investment community. It helps us maintain good level of financial flexibility. But we're targeting to return any excess cash after we have invested to drive long-term growth back to shareholders in the form of the dividend and share repurchase. Those 2 vehicles, we feel, are both efficient for us and efficient for shareholders.

Yes. So what I would say is that they're both relatively small for us. And so in utilities in particular, there's a single customer that has had some challenges, and that has had a big impact there. So it isn't really a sector. We don't play big enough in utilities to really be a sector barometer. So I would say it's sort of noise there.

Yes. I mean a lot of the things that we're doing around the business, certainly, we have a supply chain that's built very effectively for both large and midsized customers. We have a lot of our resources attached to large customers, all of our sales force, our inventory management teams and some of our support teams. And that is the lion's share of our revenue.

Deane, so yes, let me start with the last one, which is January weather. So I would say the impact of January weather for us, we started off a little slower than normal, and then it impacted the quarter a little bit. But by the time we got to the end of the quarter and started to ramp up, it's really immaterial for the overall quarter.

No, I don't think there's any change in outgrowth expectations. We talked earlier, if you weren't on, about the fact that price in our market has been a little lower than PPI. Sometimes the broad metrics may not track exactly to our market, but that evens out over time. But our volume growth has been very strong through the quarter, and we're taking action to improve the pricing environment starting May 1. So I think really there's -- we don't think there's really any change dynamic.

Yes. No onetime items to call out in nature. I think as we provide color and provide the guide, we've been pretty consistent in noting that as we move through the year, we expect to continue to invest in demand-generating growth engines. And so a lot of the step-up in the quarter was investing in the areas that D.G. kind of called out a couple of questions ago, sorry if you missed that, like marketing and our investments and capacity, those -- that kind of fall into the expense line versus the marketing line.

Yes. I mean -- so we've been on a several year journey to improve our customer information. What I would say is customer information in our market is really messy. So there isn't clean data sources that tell you who customers are and what they do and how many team members they have and that type of thing. So we've been building our own.

Well, you would expect it to flow into April to the extent that we could pick that up, yes. And the answer is yes to your first question because I think you noted it excludes FX.

Organic.

Yes. Thanks. What I would say is that we are very focused on productivity improvements throughout the business. I think we are seeing productivity improve. The last few years have been a bit odd, to say the least, in terms of some of the challenges that everybody has had to deal with. And we have really sort of refocused our attention on getting better, getting more productive in every part of the operation. We're going to continue to do that.

All right. Thanks for joining, everybody. Really appreciate it. I would just highlight that in general, I would say everything in the quarter was as we expected, and we feel very confident in the path we're on. There's not a lot of new news in this quarter, but we do feel good about the path. We do feel good about our ability to gain share, to become more productive and to make sure we remain price/cost-neutral over the long term. So all things point to really good results for the year.