W.W. Grainger, Inc. (NYSE:GWW) Q4 2023 Earnings Call Transcript

W.W. Grainger, Inc. (NYSE:GWW) Q4 2023 Earnings Call Transcript February 2, 2024

W.W. Grainger, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the W.W. Grainger Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions]. I will now turn the conference over to Kyle Bland, Vice President of Investor Relations. Thank you. You may begin.

Kyle Bland: Good morning. Welcome to Grainger’s Fourth Quarter and Full Year 2023 Earnings Call. With me are D. G. Macpherson, Chairman and CEO; and D. Merriwether, Senior Vice President and CFO. As a reminder, some of our comments today may include forward-looking statements that are subject to various risks and uncertainties. Additional information regarding factors that could cause actual results to differ materially is included in the company’s most recent Form 8-K and periodic reports filed with the SEC. This morning’s call will focus on our adjusted earnings for the fourth quarter and full year 2023, which excludes the loss on the divestiture of our E&R Industrial sales subsidiary. We have also included a daily organic constant currency growth metric to normalize for the impact on revenue.

Definitions and full reconciliations of these non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our earnings release, both of which are available on our IR website. We will also share results related to MonotaRo. Please remember that MonotaRO was a public company and followed Japanese GAAP, which differs from U.S. GAAP, and as reported in our results one month in arrears. As a result, the numbers disclosed will differ from Monotaro’s public statements. Now I’ll turn it over to D.G.

Donald Macpherson: Thanks, Kyle. Good morning, and thanks for joining the call. In 2023, the Grainger team continued to drive our strategy forward. by remaining focused on what matters most, providing our customers with a great experience and exceptional service. The customers we serve play a vital role in keeping their businesses and institutions running and everything we do is focused on making their jobs easier. We made meaningful progress this year in building new capabilities in both segments to help our customers and team members support the work they do. We’ve done this by investing in technology, our supply chain network and our High-Touch growth engines to ensure we can provide the best experience as possible. As a result of this focus, we delivered record sales and earnings for the year.

I’m incredibly proud of the progress we’ve made and want to take a few minutes to highlight some of this progress in more detail. The Grainger High-Touch solutions model has undergone a digital transformation over the past several years with strategic investments in our infrastructure, talent and the development of custom capabilities to support our customers. We have built key technology infrastructure capabilities focused on 2 main domains that affect customer experience: one, knowing our products better than anyone else and 2 knowing our customers better than anyone else. These endeavors include the development of homegrown software assets around product information management, or PIM and Customer Information Management or CIM, which allow us to store, codify and scale our data assets.

See also 35 Smartest Countries with the Highest IQ in the World and 15 Highest Quality Bluetooth Speakers for 2024.

Q&A Session

These investments may seem simple and obvious, but in the MRO industry context, product and customer integration is very challenging. We offer millions of products with many technical attributes unique to each product category and then deliver these products to millions of customers across a wide range of industries. We have made great progress here, but the exciting part is that we still have a long way to go. We have invested in additional technology talent that can partner with our MRO subject matter experts to bring Grainger’s industry know-how to life. This partnership of talent is yielding significant benefits and helping us generate high-quality proprietary data insights through PIM and CIM. These insights are fueling our growth engines and helping us drive share.

For example, our ability to capture detailed product attributes allows us to bid on more relevant keywords that could ultimately yield higher returns on our marketing spend. In addition, having this detailed product information, coupled with customized workflows and processes, means we’re able to work with more granularity to gain confidence that our products are competitively priced, and we can do that at scale. Honestly, what we know about our customers’ business operations through CIM, alongside our detailed product data, allows us to better match products to customers saving in time and increasing confidence in their purchase. These are just a few examples where we have leveraged our data investments in an ecosystem where talent and technology work together to drive great outcomes.

This work is serving as a great foundation for the value we deliver through our high-touch strategic growth engines. Starting with merchandising, we’ve reviewed roughly 80% of the overall product portfolio at least once, and plan to finish collectively reviewing the entire assortment by the time we close out 2024. We continue to see strong revenue lift equating to several hundred basis points per remerchandise category. Our second and third passes through the assortment have a broader lens in the first pass as we continue to leverage learnings, evolve our PIM capabilities, as we add other relevant areas to our review process. We are seeing strong results from this Evergreen initiative, which we believe sets us up well to continue to drive share gain through this work stream in the future.

Shifting to marketing. We continue to make progress through this initiative. This year, we’ve put a particular emphasis on leveraging CIM and expanding top of funnel marketing efforts to TV and streaming channels to increase brand awareness. We have seen positive results in many areas and plan to continue to increase investment at attractive returns going forward. Our sales force remains an important demand generator for Grainger. As mentioned at Investor Day, [indiscernible] the use of our enhanced CIM data to redraw seller territories to better serve underpenetrated customer locations. With this, for the first time in several years, we’ve added about 200 salespeople to the organization over the last 1.5 years. It takes anywhere from 18 to 24 months for these new team members to ramp to a profitable level.

But with the results we’ve seen so far, we are on the right path and expect this initiative to contribute to outgrowth over the next few years. To ensure that our sales force is most effective, we’re investing in tools and technology, which leverage information from PIM and CIM to provide insights to our sellers at scale to help them better plan the day-to-day interactions with customers. We are piloting several different capabilities here in 2024. Lastly, with our enhanced customer information, we are finding additional opportunities to embed our solutions and reinforce the value we bring to customers. This includes bolstering our value-added services offering and advancing our inventory management capabilities to improve keep stock processes and technology, both of which increase stickiness with customers, improve our productivity and drive share.

This has been a multiyear journey, which is creating a significant competitive advantage for our business. As we layer on further enhancements and leverage machine learning and AI capabilities, we will continue to power our growth engines, drive share and deliver customer value. Moving to the end assortment model, despite more muted top line growth in 2023, the proven flywheel continues to fell forward. MonotaRO continues to execute well. They’ve seen strong growth with enterprise customers continue to expand with small and midsized customers and are gaining operating leverage as they ramp into their distribution center in Gala. In January, I had the opportunity to visit MonotaRo and was able to see the progress within the Gala, which has been supported by a tight partnership between our U.S. supply chain organization and our Japanese counterparts.

The team has progressed on their strategy, expanding their assortment, attracting new customers and improving B2B customer retention. While repeat rates improved in 2023, the team continues to focus on this evergreen initiative. This includes presenting and personalizing our most advantaged assortment, assessing our price competitiveness and proactively communicating delivery times to highlight where we are advantaged. For many of these efforts, the team continues to work with their MonotaRO peers to share best practices that work together to move the business forward. Now let’s turn to Grainger’s advantaged supply chain. We’ve made great progress to return service back to near normal levels following the unprecedented global supply chain disruption that our industry experienced over the last few years.