Second, as we [indiscernible] shadowed last quarter, we expect to maintain elevated gross margins in the High-Touch Solutions segment, which is underpinned by the confidence we have in executing against our 2 core pricing [indiscernible] remaining market price competitive while maintaining price cost neutrality. Adding these together, net-net, we end at roughly the same outlook as we discussed at Investor Day. Strong earnings growing in double digits annually. When we drive these results, the business with [indiscernible] considerable amount of cash, which we will allocate through a consistent and turn driven approach. This includes continuing to invest in the business at an elevated level for the next few years as we add incremental supply chain capacity and continue to build out our technology capability.
And all this up, and we think this represents an attractive return profile, we remain well positioned to drive significant value creation for our shareholders. With that, I’ll turn it back to D.G. for some closing remarks.
Donald Macpherson: Thank you, Dee. Grainger continues to build deep trust with our customers as we partner with them to fulfill their MRO needs. While we expect the market in 2024 to be more muted, the Grainger team will continue to focus on what matters advancing our growth drivers to improve the customer experience and providing the exceptional service we are known for. When we live our principles, we can be successful in the man of the cycle. I have full confidence that we will deliver strong results again this year. With that, we will open up the line for questions.
Operator: [Operator Instructions]. Our first questions come from the line of Ryan Merkel with William Blair.
Ryan Merkel: I wanted to start with gross margin, and I guess it’s a 2-parter. Your gross margins are up about 100 basis points since 2019, and I’m just curious what the drivers are. And then for the ’24 guide at the high end, you’re holding gross margins flat, but I think, you mentioned 50 basis points of onetime price costs that you’re going to have to lap. So what backfills that?
Deidra Merriwether: Let me start with the first question first, and then maybe I’ll have you reask the second part of it to make sure I don’t forget anything. So when we go back to 2019, I think we’ve done a pretty good job on just product gross margins in general and being able to prophetize customers based upon the services that we provide from the High-Touch Solutions business. In addition to that, the pricing strategy change has taken allow to be completely executed as we said over a number of years, and that included making sure that we could get pricing right on all of our for — all of our customers. So some of that evidence also flows into our product GP. And then as of late, we’ve continued to gain quite a bit of supply chain efficiencies from coming out of the pandemic as well as some other COGS efficiencies related to supplier rebates related to negotiations.
Those would be some of the key differences between where we are today and where we were in 2019. So can you repeat your second part of the question for me, please?
Ryan Merkel: Yes. The guidance for gross margins in ’24, it’s flat at the high end at 39.4%. And I think you mentioned you’ll be lapping 50 basis points of onetime price cost help in ’23. So what are the offsets? .
Deidra Merriwether: Yes. So some of the offsets we made to the fact that as we go into this year, we’re going to have a faster pricing environment. And based upon that, we want to make sure that we’re providing a range such that is realistic for us to hit also in a softer volume environment for the overall business. And so those are some of the 2 primary reasons why being officially flat we would expect to be closer to the high end. We’ve got some tailwinds that will continue to normalize after some of the disruptions that we’ve had over the past few years, specific to supply chain and mix, and that will help as well.
Operator: Our next question comes from the line of Tommy Moll with Stephens.
Thomas Moll: I wanted to expand on the gross margin conversation with what’s perhaps the obligatory question here. But I just want to make sure that I’m tracking the message correctly over time. So if we go back to your Investor Day, the anchor for your high-touch business was in that 40% range. Since that time, you’ve outperformed it significantly and indicated that maybe that was too low a number. And if I’m hearing the message correctly today, in 2024 at the midpoint, you’re somewhere a little bit north of 41% and 25% and thereafter stable around that range. So I just want to make sure I’ve tracked all that correctly or if there’s anything you’d like to amend there.
Donald Macpherson: You’ve tracked that. I think you tracked that correctly. The only other thing I would add is that when we — during the Investor Day when we said 40%, I think we probably knew that there was — the supply chain efficiencies is a big bucket. We probably knew that there was a lot of inefficiency. I think we probably maybe have been surprised at how much in efficiency and as we’ve gotten back to normal, that’s been a big a big tailwind for us. And so we probably — if we had known, it was just difficult to see all that. We probably would have had a higher number of back then as well.
Thomas Moll: Sure. Pivoting to the commentary you offered today on service levels earlier in your remarks, D.G. So it sounds like you’re back to roughly your own pre-pandemic service levels. You’ve invested and will invest substantially in the capacity and automation and other areas as well. So I’m just curious, strategically, do you feel more confident in leaning into these forms of investment and versus what you’ve communicated in the past, should we read from today that with that increased confidence, you see this as a repeatable and sustainable advantage that you can repeat pretty consistently to take share?
Donald Macpherson: Yes. And I appreciate the question. In terms of returning to near normal service, I would say everything that we directly control is back to normal in terms of our own internal cycle times transportation is back to normal. There’s still some elongated supplier lead times, which is the reason we’re still probably a little shy of where we were. But from a competitive standpoint, that’s all that really matters is a competitive standpoint, we’re doing quite well. In terms of the investments we’re making, we’re filling in gaps where we’ve grown to the point where having buildings in those locations make sense. And they make sense not only to improve service, but to improve cost in some perspective. So if you think about the Northwest.
Most of our product today comes out of California has to clear the mountains and get in there and that’s a long haul. We now have enough volume to be able to improve the service dramatically in the Northwest and actually lower transportation cost pretty substantially. So we look at all those factors, service and cost and when we make these decisions, but we’re very confident in what we’ve outlined and announced so far that those are the right things to do for the health of the business.
Operator: Our next questions come from the line of Jake Levinson with Melius Research.
Jacob Levinson: Good morning, everyone. I know you have some margin headwinds here in ’24, and there’s been obviously a lot of improvement in the last couple of years. But just on the on the productivity side, I know these you touched on a couple of levers earlier in your prepared remarks, but can you just help us get a sense of the levers that you have or maybe where you’re most focused here in ’24 that can help offset some of those headwinds?
Donald Macpherson: I mean I’ll start and Dee, if you want to add in, you can. I think the thing to note is that we tend to look at productivity from a core productivity standpoint. So distribution centers, contact centers, seller productivity, all those levers. And we really see opportunity across the business. And I think we’re going to see really nice core productivity this year. The headwinds are more around the growth investments, which we think are absolutely the right thing to do, they’re high return growth investments. But we are spending more money in marketing and we’re investing in the sales force. And so those things make it — the headline number looked a little more challenging. And it’s a time in place when we are investing in those things and believe that’s the right thing to do.
