Earnings call transcript: WW Grainger Q2 2025 sees stock drop despite revenue beat

WW Grainger Inc. reported its financial results for the second quarter of 2025, revealing a mixed performance that led to a significant drop in its stock price. While the company surpassed revenue expectations with $4.55 billion against a forecast of $4.53 billion, it missed its earnings per share (EPS) target, reporting $9.97 compared to the anticipated $10.06. As a result, shares fell by 8.91% in pre-market trading. According to InvestingPro data, the company maintains strong financial health with a GOOD overall score, though it’s currently trading at a high P/E ratio of 24.08 relative to its near-term earnings growth.

Key Takeaways

• Revenue exceeded expectations, reaching $4.55 billion.
• EPS fell short of forecasts, coming in at $9.97.
• Stock price dropped by 8.91% pre-market.
• Operating margins decreased by 50 basis points.
• The company updated its full-year guidance to reflect market conditions.

Company Performance

WW Grainger showed resilience in its revenue performance, posting a 5.6% year-over-year increase to $4.6 billion, maintaining its position as a prominent player in the Trading Companies & Distributors industry. The company’s diverse product segments, particularly in high-tech solutions and endless assortment, contributed to this growth. While operating margins were pressured, decreasing by 50 basis points to 14.9%, influenced by inventory valuation and tariff-related issues, InvestingPro analysis shows the company maintains strong profitability with a return on equity of 57% and healthy cash flows that sufficiently cover interest payments.

Financial Highlights

• Revenue: $4.6 billion, up 5.6% year-over-year
• EPS: $9.97, up 2.2% year-over-year
• Operating cash flow: $377 million
• Dividends and share repurchases: $336 million returned to shareholders

Earnings vs. Forecast

WW Grainger reported an EPS of $9.97, missing the forecast of $10.06 by 0.89%. Despite the earnings miss, revenue surpassed expectations with a $4.55 billion actual versus a $4.53 billion forecast, a surprise of 0.44%.

Market Reaction

The market reacted negatively to the earnings report, with WW Grainger’s stock dropping 8.91% pre-market to $945. This decline reflects investor concerns over the EPS miss and the company’s decreased operating margins, despite the revenue beat. The stock remains within its 52-week range but is significantly off its high of $1,227.66. Based on InvestingPro’s Fair Value analysis, the stock appears overvalued at current levels, though it’s worth noting that GWW has maintained dividend payments for 55 consecutive years and recently increased its dividend by 21.51%. Discover more insights and 12 additional ProTips with an InvestingPro subscription, including access to the comprehensive Pro Research Report covering what really matters about GWW through intuitive visuals and expert analysis.

Outlook & Guidance

The company revised its full-year guidance, projecting EPS between $38.50 and $40.25 and operating margins between 14.7% and 15.1%. WW Grainger anticipates a recovery in gross margins by 2026, with pricing actions expected to contribute around 1% to the high-touch business.

Executive Commentary

CEO D. J. Macpherson emphasized the company’s role during uncertain times, stating, "In times of uncertainty, our role becomes even more important." CFO Dee Meriwether noted, "Gross margin will improve since we’re on LIFO because pricing will start to take hold," highlighting future margin recovery expectations.

Risks and Challenges

• Inventory valuation and tariff-related cost pressures
• Continued muted demand in the MRO market
• Potential supply chain disruptions
• Competitive pressures in the high-tech solutions segment
• Macroeconomic uncertainties impacting customer spending

Q&A

During the earnings call, analysts inquired about the impact of LIFO accounting and the company’s pricing strategy. Executives addressed concerns regarding tariff-related cost increases and provided insights into the performance of Zoro and MonotaRO, two of its key business segments.

Full transcript - Grainger W.W. (GWW) Q2 2025:

Conference Operator: Greetings, and welcome to the W. W. Grainger Second Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Please note that this conference is being recorded. I will now turn the conference over to your host, Kyle Bland, Vice President, Investor Relations. Thank you. You may begin.

Kyle Bland, Vice President, Investor Relations, W. W. Grainger: Good morning. Welcome to Grainger’s second quarter twenty twenty five earnings call. With me are D. J. Macpherson, Chairman and CEO and Dee Meriwether, 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 eight ks and other periodic reports filed with the SEC. Results for the second quarter of twenty twenty five are consistent on both a reported and adjusted basis, but will be compared to adjusted results from the prior year period, which were normalized for restructuring costs incurred in the 2024. Definitions and full reconciliations of our 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 is a public company and follows Japanese GAAP, which differs from U. S. GAAP and is reported in our results one month in arrears. As a result, the numbers discussed will differ from MonotaRO’s public statements. Now, I’ll turn it over to DG.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Thanks, Kyle. Good morning, everyone, and thank you for joining today. In the second quarter, the external environment continued to present a degree of uncertainty. What we’re observing in the field though is largely business as usual, with a sharp focus on execution. Customers are seeking reliable partners who can help them manage the current complexity and Grainger is proud to be that partner.

I recently spent some time with manufacturing and industrial customers in Salt Lake City. These conversations consistently focused on how Grainger can help them drive efficiencies, lowering their purchasing costs and improving inventory management. In times of uncertainty, our role becomes even more important. We are uniquely positioned to help our customers strengthen their purchasing processes and overall operations. To that end, we continue to collaborate closely with our supplier network to uphold our standard of getting customers the right products when and where they need them.

We’ve built a strong foundation anchored by a world class supply chain and enhanced by strategic investments in product information and digital capabilities. These efforts combined with our scale, deep supplier relationships and ability to provide alternative product solutions allow us to deliver unmatched value in any environment. Beyond serving our customers’ operations, we also recognize our broader responsibility to the communities we serve. In times of need, we remain steadfast in our commitment to supporting local communities with emergency response and recovery efforts. It’s a part of who we are and how we show up every day.

I am proud of the resilience and dedication demonstrated across our organization and remain confident that our team will continue to deliver value for our customers, our communities and our shareholders. In the second quarter, we delivered solid results that in total were largely in line with our May verbal guide. Total company reported sales for the quarter were nearly $4,600,000,000 up 5.6% or 5.1% on a daily constant currency basis. Operating margins for the company were 14.9% and diluted EPS finished the quarter up $0.21 to $9.97 Operating cash flow came in at three seventy seven million which allowed us to return a total of $336,000,000 to greater shareholders through dividends and share repurchases. Importantly, while the headline results for the second quarter played out largely as expected, they do reflect our estimate of tariff related LIFO inventory valuation headwinds.

As Dee will discuss, without this LIFO impact, our operating margin would have been flat year over year in the period. As we look ahead, we anticipate that continued LIFO headwinds along with further price cost timing pressures will impact our performance in the back half of the year. And as a result, we are updating our earnings outlook for 2025, which Dee will detail in a moment. Importantly, these accounting and timing impacts are mostly transitory. And our expectation is that gross margin will begin to recover over time as we work back toward our price cost neutrality target.

And with that, I’ll turn it over to Deeve to go through the details.

Dee Meriwether, Senior Vice President and CFO, W. W. Grainger: Thank you, DG. Turning to slide seven, you can see the high level second quarter results for the total company including $4,600,000,000 in sales, up 5.1% on a daily constant currency basis. Within the period, we saw gross margin softness from segment mix and from the aforementioned tariff related impacts within the high touch business including noise from LIFO inventory accounting. This led to total company operating margins of 14.9% for the quarter, down 50 basis points compared to 2024, but roughly in line with our communicated expectations. Diluted EPS for the quarter of $9.97 was up $0.21 or 2.2% higher compared to the prior year period.

Moving to segment level results. The High-tech Solutions segment delivered solid growth in the quarter. In total, sales were up 2.5% on a reported basis or up 2.8% on a daily constant currency basis with growth across all geographies and local days local constant currency. Results were driven by continued volume growth and modest price inflation in the segment. From an end market perspective, our indicators suggest the MRO market remained muted but was softer than expected.

We saw strong performance with contractor and healthcare customers, which helped to offset slower growth in other areas of the business. For this segment, gross profit margin finished the quarter at 41%, down 70 basis points versus prior year. In the quarter, we saw a negative price cost spread as we progressed negotiations with suppliers and elected to not pass any off cycle price increases on to our customers. This caused timing related lumpiness in the period. However, as pricing catches up, starting with our regular September cycle, we expect price costs will begin to recover.

Further, because we are on LIFO, we had to pull through the current estimated impact of all effective cost increases known to date, putting further pressure on margins in the quarter. These two tariff related impacts were only partially offset by favorable mix in freight in the period. And I would note that if we were not on LIFO, our gross margin rate would have been flat compared to the prior year quarter. On SG and A, we slightly delevered in the quarter as we continue to invest in marketing. These costs along with our annual merit increases that went live to start the quarter were only partially offset by productivity gains and sales leverage.

Taking all of this together, operating margin for this segment finished at 16.6%, down 90 basis points versus the prior year quarter. Now focusing on endless assortment segment. Sales increased 19.7% or 16.3% on a daily constant currency basis, which normalizes for the FX tailwinds realized in the period. Zoro U. S.

Was up 20%, while Monitaro achieved 16.4% growth in local days local constant currency. At a business level, Zoro continues its strong momentum driven by growth from its core B2B customers along with improving customer retention rates. At MonotaRO, sales growth remained strong with continued growth from enterprise customers coupled with solid acquisition and repeat purchase rates with small and mid sized businesses. On profitability, operating margins for the segment increased by 200 basis points to 9.9%, with both businesses contributing to the favorability. MonotaRO’s margins remained strong at 13.2 as they continue to gain operating leverage.

At Zoro, operating margins accelerated sequentially and were up three eighty basis points year over year to 5.8%, aided by gross margin flow through and strong top line leverage. As sales comps become more pronounced for Zoro in the back half of the year, we do anticipate this margin outperformance will moderate slightly as the year continues. Beyond the results, you will see in the appendix that the team took steps in the period to optimize Zoro’s assortment. Specifically, net SKUs declined by 1,100,000 in the quarter, driven by the elimination of some low volume, low service items. This near term reduction is part of an ongoing effort to further improve the customer experience at Zoro and has no impact on our go forward strategy or expected financial performance.

Looking forward, our optimization efforts will continue over the next several quarters, but we expect net assortment growth for the business over time. Overall, we had an exceptional first half across endless assortment and we remain confident in the team’s ability to continue delivering strong results going forward. As we look to the back half of the year, I thought it would be helpful to share a brief update on where we are with tariffs. As we shared during our first quarter earnings call, we took initial pricing actions in May primarily related to Section two thirty two and the first wave of announced tariffs on China. These initial pricing actions only apply to a small portion of our products, largely those where Grainger is importing the product directly.

As part of this initial weigh, we did not take any pricing action on the reciprocal escalations. Consequently, we expect our initial pricing actions to hold as they relate to tariff levels that remain in place today. At this point, it’s a bit early to get an accurate elasticity read, but as the full competitive set takes price through the cycle, we still expect these May price actions will approach the previously discussed one to 1.5% net annualized price inflation run rate for the high touch business. On the vast majority of our remaining products where Grainger is not the direct importer, we continue to work with our supplier partners regarding tariff related cost increases. We’ve finalized negotiations on a number of impacted SKUs, but expect conversations to be iterative throughout the balance of the year as the tariff environment remains highly fluid.

Looking ahead to the third quarter, we expect to adhere to our regular cycle with our next pricing action slated to go live in early September. This round will include some further increases on products directly imported by Grainger to reflect current tariff rates, which are higher than what we passed in May. The September cycle will also include initial pricing actions on supplier imported products where we have finalized negotiations. The pass price from this round is expected to result in net annualized incremental price of 2% to 2.5% on a run rate basis for the HITUCH business. Note that these run rate price figures are annualized and on a cumulative basis will lay across the full year 2025 to deliver close to 1% price in total for the high touch business.

As we wait on pricing actions until September, we do anticipate continued headwinds from price cost and further LIFO inventory valuation impacts in the third quarter. But as we pass price, we expect gross margin will recover to more normal levels over time. The team continues to stay nimble as the cost environment evolves, and we take actions as needed over the remainder of the year and into 2026. Despite the anticipated lumpiness, we remain focused on adhering to our two core pricing tenets to remain price competitive and to achieve price cost neutrality over time. Now moving to the updated outlook for the remainder of 2025.

First, we’re adjusting our sales outlook to reflect both the latest FX rates and the aforementioned pricing actions, the latter of which we expect will contribute around one percent in total for the HITUCH business in 2025. These tailwinds are partially offset by the softer than expected MRO market we’ve seen to date, which we don’t expect will recover in the back half of the year. More notably, as DG mentioned at the beginning of the call, we’re updating our outlook to reflect the tariff related price cost timing headwinds and our current full year estimate for the LIFO valuation impact. Consequently, we’ve lowered our gross margin guide with the total company now expected to be between 38.638.9% were down 80 basis to 50 basis points year over year. Our SG and A outlook remains largely unchanged and therefore this gross margin pressure will flow through to operating margins where we now expect the total company will finish between 14.715.1%.

This all translates to earnings per share between $38.5 and $40.25 up roughly 1% year over year at the midpoint. Updates were also made to our supplemental guidance, which included $100,000,000 increase in expected capital expenditures due to timing of DC network investments and a related offset to our share repurchase outlook. This updated outlook assumes no changes to the effective tariff schedule as of July 31. The third quarter is off to a solid start with preliminary total company July sales up slightly north of 6% on a daily constant currency basis aided by softer comps in the prior year period. We expect growth will moderate as the quarter goes on and anticipate total company sales for the third quarter to be up north of 5% on a daily constant currency basis.

As discussed, gross margin will see further pressure in the quarter, driving a sequential decline in total company operating margin to around 14.5%. With that, I’ll turn it back to DG.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Thanks, Dee. Overall, I’m encouraged by how the team continues to manage through this uncertain and evolving environment. Although we did slightly lower our 2025 outlook, it is primarily the result of the softer than expected market and transitory impacts on gross margin, neither of which change our view of how the business is operating overall. I remain confident in our strategy and our ability to drive long term value for all stakeholders. And with that, we’ll open it up for Q and A.

Conference Operator: Thank you. And your first question comes from David Manthey with Baird. Please state your question.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Thank you. Good morning, everyone. First question on LIFO accounting and the operating income impact. Looks like it was about, I don’t know, 50 basis points or something. And I guess the question that’s out here is, if you were on average cost for accounting here in book, would your second half outlook have changed at all?

Or is this just the timing factor of the LIFO and price increases, etcetera?

Dee Meriwether, Senior Vice President and CFO, W. W. Grainger: So our performance if we were on FIFO would have been different, as you noted. However, as it relates to the outlook, our outlook would not have included the negative impacts of LIFO. But our underlying operations, I will say, are still very similar when you look at our ability to estimate the price increases outside of the LIFO impact and the timing of our cost changes. Those things, I believe, will have remained the same. So the only real difference is that we would not have had this LIFO accounting impact flow through COGS and through the P and L in the way it is flowing through today.

When you look at specifically our EPS year over year just comparing ourselves to ourselves instead of being up 2%, EPS would have been up north of six

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Yes. That makes sense. And then as we’re looking forward, Dee, you gave us some insight into third quarter. I think you said gross margin would step down again in the third quarter and operating income would come in at 14.5%, if I heard you correctly. Could we think about the progression from there?

So I know operating income usually takes a step down seasonally in the fourth quarter, but not necessarily gross margin. So anything directionally you can talk to us about how the P and L is going to move from the third quarter to the fourth quarter just so we incorporate that correctly?

Dee Meriwether, Senior Vice President and CFO, W. W. Grainger: Yes. I do believe seasonally stepping from Q3 to Q4, we will still see the revenue trend through normal seasonality. But the point you make related to pricing, pricing will continue to build with our September pricing change heading into the fourth quarter. And so we will start to see improvement in gross margins and expect to exit the year with improved price cost. And that’s what helps with Boeing operating earnings at the end of the year.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Great. That’s very helpful. Thanks a lot, Dee.

Conference Operator: Your next question comes from Tommy Moll with Stephens. Please state your question.

Tommy Moll, Analyst, Stephens: Good morning and thank you for taking my questions.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Hi,

Dee Meriwether, Senior Vice President and CFO, W. W. Grainger: Hi, Tommy.

Tommy Moll, Analyst, Stephens: It sounds like there was a judgment call made on the timing of when you’re going to push through the second batch of inflationary factors here. And I think you referenced that you’re just going to take it on the normal cycle in September. I’m just curious what went into that decision making process? Did you consider pushing in a more real time fashion? Have you seen others do that in the marketplace?

What were some of the gives and takes there on arriving at the decision you did?

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Yes. So we considered all kinds of different options here. We decided to keep our price increase on a normal schedule. We think it’s the best thing from a customer stability point standpoint and we’re hearing very good things from our customers about that decision. We will be a little bit upside down in price cost, but there are other factors that are actually moving sort of positively as well.

And as Dee discussed, really the LIFO impact is the biggest impact on our GP right now. And so we felt like ex stat, we could manage this by going to 9.1 and awaken another.

Tommy Moll, Analyst, Stephens: Following up on Zoro, good update this quarter. It sounds like you did some pricing optimization and then also reduced the SKU count. If you can bring us into that decision making process, how long have those initiatives been under consideration? And what’s the lay of the land there as we go forward? Thank you.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Yes. And I the pricing decision has been in the works for the better part of a year. We’ve been considering that and made some changes and have learned our way into what we actually did. It’s a bit different tilt on pricing, which provides a better experience for customers. The SKU count one, when you have millions and millions and millions of products, 12,000,000, 13,000,000 products, it’s healthy to go through and say which products are actually noise and not creating a great customer experience.

So we basically identified a set of products, a fairly large set of products that we got rid of. We will continue to expand the assortment, but want to make sure we do it in ways that actually improve the customer experience. So that’s really what that was all about.

Tommy Moll, Analyst, Stephens: Thank you for the insight. I’ll turn it back.

Conference Operator: Your next question comes from Chris Snyder with Morgan Stanley. Please state your question.

Chris Snyder, Analyst, Morgan Stanley: You. D. C, in your opening remarks, you talked about how in times of uncertainty customers lean more heavily on Grainger. And we certainly saw that through COVID and all the supply chain disruption that followed. But it doesn’t seem like we’re seeing that same impact here in this current period of disruption.

Outgrowth remains sluggish. There seems maybe a little bit of less conviction in pushing price to get value for that supply chain partner status. So I guess, I mean, maybe you would disagree with that. But why do you think, maybe we’re not seeing those tailwinds that we saw in other times of disruption?

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Well, I think the pandemic disruption was very much a supply disruption, which is less the case this time. I think there hasn’t been many as many challenges getting supply. So we may have seen some tailwinds there. I would say a couple of things. One is, I don’t think we have any, lack of confidence in passing price.

I think we’re just trying to time it correctly for customers and marry it up so it actually makes sense. And so we still feel like we’re going to be able to pass price through this period. We may not see as much cost as others as well. So our price headline prices might not be as big, but there’s mix issues and all kinds of things that drive that. And in terms of share gain, actually the second quarter looked better from a high touch share gain and we continue to see significant disruption between our internal metric and the one unit metric, the external one.

And the internal one would suggest we gain quite a bit of share in the second quarter. And there’s been surveys from your peers that have suggested the market was down two or three even in the quarter. So I think actually share gain we feel pretty good about again. So I don’t know that we feel like we’re not gaining share. We do feel like we’re gaining share.

Chris Snyder, Analyst, Morgan Stanley: Thank you. Appreciate that. And then I guess just on the gross margin, the 50 basis points guide down. Could you just kind of maybe talk about how that splits between the LIFO pressures, which it sounds like are higher than were expected in April despite general de escalation versus how much of that pressure is just from price cost timing into the back half? Thank you.

Dee Meriwether, Senior Vice President and CFO, W. W. Grainger: So I just want to step back a little bit. So thanks for that question. I think it ties back to the last question too a little bit, which is back in Q1 when we were looking at the guide, there was information in the market related to tariffs. One piece of information was like China tariff was like at 135%, which it is nowhere near today. And so when DG talked about being really prudent about the timing of when we’re going to take price, this is what we mean.

Like if we would have taken that assumption, which was very high level, very hard to measure at that point in time and then roll that through our estimates, we would have had some jarring changes And then now having had a whole quarter of better information, a little bit more certainty around tariffs and then being able to actually estimate their near term impacts, I think has put us in a better position. And then that has also allowed our pricing team to take that information and then make better pricing decisions with our customers at this time. Back to your question related to how much is LIFO versus how much is price cost. The vast majority of the impact to us or like as an example to high touch in this quarter is the LIFO impact, like 80 basis points.

And so there is impact to price cost, but much smaller than the impact of LIFO. And we believe that will continue to be the case as we move through the year because as we’ve noted, we will, in September, be then updating for the incremental increase that had been announced on aluminum and steel plus some of the other changes that have occurred. And so that will also continue to flow through as subsequent LIFO adjustments. But as it relates to gross margin, none of that reverts unless we have deflation, which we don’t see any coming. But gross margin will improve since we’re on LIFO because pricing will start to take hold.

And so if there’s one thing to walk away with those of us that are on LIFO have a hotter impact or more negative impact to gross margin at the beginning of these cycles because we restate our entire inventory to the latest price or cost of goods and that flows through the P and L immediately. Over time, as pricing takes hold and that LIFO impact normalizes, our gross margin starts to recover and improve. Different than those on FIFO, who have the opportunity to flow through their lower cost inventory while they’re taking price, leading to higher gross margin that then starts to mitigate through the cycle. So over time, our gross margins will become much more comparable to others based upon the differences in our accounting treatment. So we expect our gross margin and specifically our price cost, which is not the biggest impact here, it is a timing difference, to moderate as we go through the 2025 and into early twenty twenty six as we continue to take price.

Chris Snyder, Analyst, Morgan Stanley: Thank you. I appreciate that.

Conference Operator: Your next question comes from Jacob Levinson with Melius Research. Please state your question.

Jacob Levinson, Analyst, Melius Research: Hi, good morning everyone.

Dee Meriwether, Senior Vice President and CFO, W. W. Grainger: Good morning. Good morning.

Jacob Levinson, Analyst, Melius Research: I realize these tariffs are a moving target. But if you’ve got if you have a 30% tariff on China today and obviously different rates than some of the other major manufacturing centers, does is the economics of private label really changing versus the branded side? Because I assume it’s probably not necessarily straightforward because you’ve got branded stuff that’s also being made in China or Vietnam. But I’m just trying to get a sense of whether there’s been a real shift in terms of economics of private label.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Yes. So I guess, first of all, I would say that we do have a lot of U. S. Private label production, so that is not affected. Certainly, China component of private brand is could be impacted.

It really depends without sort of giving you a direct answer here, it really depends on the SKU level analysis. So there are some SKUs for which a 30% tariff might make them much less competitive to the national brand. And there’s many where it doesn’t matter, you’re still more competitive coming from China. So really it’s happening at the SKU level. We’re watching it very closely.

I suspect once we get through the next quarter, we’ll have a lot more to say about what we’re seeing. It’s still really, really early, in terms of what we’re seeing from the cost increases on our private brand. But it’s going to vary dramatically by SKU and we’ll have a better perspective over time.

Jacob Levinson, Analyst, Melius Research: Okay. That makes sense. And just on a brighter note, Zuora seems to be heading in stride there. I know Tommy asked about it as well. But can you just help us understand like what’s really changed in that business?

I know there’s been a lot of cross pollination with MonotaRO, but it seems like they’re finally kind of getting the flywheel going there.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Yes. Yes. I think, I’d point to few things. One is, I think they’ve done a nice job of improving, who target to acquire and then getting to repeat business with those customers. And that includes how they think about what products they promote, how they think about evaluating customers initially and then how they think about, basically marketing to those customers that are attractive.

And so a lot of what Monotaro has done to be successful, they built and ported over the logic. It’s a little bit different in this context, but to basically get to that repeat business. And that repeat rate is really, really important. That’s up about 200 basis points year over year, which is a big deal to that business. The other thing I’d say is, as they grow, they had already built out a lot of the capabilities.

They get good really good leverage when they grow at this point, because they don’t need to add nearly as much cost. So those two things are really working in their favor.

Jacob Levinson, Analyst, Melius Research: All right. Good color. Thank you, Djeev. I’ll pass it on.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Thanks.

Conference Operator: Your next question comes from Ryan Merkel with William Blair. Please state your question.

Ryan Merkel, Analyst, William Blair: Thanks. Hey, all. So it sounds like a key message here on gross margin is that the update is more about LIFO than it is price cost. So my question is the new 50 basis point headwind to gross margin for the year, how much of that is LIFO and how much of that is price cost timing?

Dee Meriwether, Senior Vice President and CFO, W. W. Grainger: I will say the majority of that is LIFO. And again, I think we’ll really start to see the pricecost portions of that unwind into 2026. There is a component there, but as I noted, I kind of noted the impact of High Touch in this quarter is significant. It is the main event when you look at the year over year decline to High Touch gross margin.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Yes. I would we’ve just said this a few times, RGP would have been flat year over year, which is actually better than we expected to start going into the year if we didn’t have LIFO. So, while we have some price cost headwinds, we have other things that have been positive as well. And so, LIFO on the math basis is the entirety of what we’re seeing right now.

Ryan Merkel, Analyst, William Blair: Okay. That’s helpful. And then my follow-up, this might be kind of a hard question, but there’s new tariffs being announced today. And one of the questions I’m getting from clients is, is there going to be more price cost risk now in the second half if you have more tariff driven inflation?

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Hard to tell. So I mean clearly China is the most significant trade partner we have, at this point. So some of the countries that are being announced have much smaller impacts than China does. And Mexico hasn’t changed. They are a significant trade partner as well.

So it just depends which countries have that happened to them. And right now there’s obviously risk depending on what happens, or opportunity as well depending on what happens going forward. But China is the biggest one we have to watch. And so, so far, I don’t think the things that have been announced today would have a huge impact on us based on what I know.

Ryan Merkel, Analyst, William Blair: Got it. All right. Thanks. I’ll pass it on.

Conference Operator: Your next question comes from Christopher Glynn with Oppenheimer and Company. Please state your question.

Christopher Glynn, Analyst, Oppenheimer and Company: Hey, good morning, DGT.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Good morning.

Christopher Glynn, Analyst, Oppenheimer and Company: So you mentioned a great description of the decision making process with deferring on price a bit. And you talked about the customer benefits and the good feedback there. I wanted to talk about maybe what long term strategic goals you might have had in mind there along the way as well. Is this sort of a nice arrow in the quiver as you go through next rounds of contract negotiations? And does it play into the wallet share strategy?

D. J. Macpherson, Chairman and CEO, W. W. Grainger: I think, our long term share strategy is based much more on providing exceptional service, helping customers take out costs, helping them with their purchasing process, helping them manage inventory. We but we do recognize that you don’t want to winning the tariff transition is not really a thing for us. For us, it’s are we doing the right things for the customers and making sure we continue to build loyalty and trust. And so that’s a big part of what we do and we think that does help us in the long term. This wasn’t really a specific point we were trying to make around share gain, but we do think it does help.

We do think it helps us over time.

Christopher Glynn, Analyst, Oppenheimer and Company: Okay, great. And just a follow-up on Zoro. It’s had tremendous sequential momentum in the last few quarters. I think the high end of your guidance has kind of flattish through the back half. Is that just conservatism relative to Yes.

Dee Meriwether, Senior Vice President and CFO, W. W. Grainger: Last year, they’re cycling some tough comps. So it’s just a modest deceleration, but nothing to worry about. We’re still very bullish on their outlook.

Christopher Glynn, Analyst, Oppenheimer and Company: Okay. Thank you.

Conference Operator: And your next question comes from Deane Dray with RBC Capital Markets. Please state your question.

Deane Dray, Analyst, RBC Capital Markets: Thank you. Good morning, everyone.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Good morning.

Deane Dray, Analyst, RBC Capital Markets: I’d like to circle back on the Zoro SKU pruning. I consider this to be a very healthy process, but I’d love to hear just a bit more detail on the algorithm, the approach here? Is it simplification? Do you look at returns by SKU, the volume that’s being done and maybe frequency of ordering? It’s probably all of the above, but what’s the net impact?

D. J. Macpherson, Chairman and CEO, W. W. Grainger: The net impact is basically nothing. These are basically these weren’t moving. And frankly, we’re, probably not helping searchability on the website. And so, these are very low risk, like no risk financial decisions that were made in the quarter.

Deane Dray, Analyst, RBC Capital Markets: Great. Is there any would you be following a similar practice with the core Grainger offerings? Has that have you done any meaningful calling of the SKUs and maybe just kind

D. J. Macpherson, Chairman and CEO, W. W. Grainger: of size that process for us Yes. We do that on an ongoing basis. That is not new for us. We probably have 80,000 SKUs followed every year roughly or something like that and then we add a little bit more than that to get to the net assortment number. But that is a very well trod path and the analytics to make those decisions are very clear and have been in place for a long time.

I think with Zoro the difference is you’ve added so many so fast. We’ve added things that we didn’t know if they were going to sell or not. And so if they didn’t then we made the decision.

Deane Dray, Analyst, RBC Capital Markets: That’s real helpful. Thank you.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Thank you.

Conference Operator: Your next question comes from Chris Danker with Loop Capital Markets. Please state your question.

Kyle Bland, Vice President, Investor Relations, W. W. Grainger: Hey, good morning. Thanks for taking the question. I guess just and sorry to come back to pricing here again, but just on high touch pricing specifically, you’d flag one to 1.5 points of kind of target price for the quarter. We came in basically flat. Was that fully offset by negative mix?

Or was it a measure of weak realization on the price front there?

Dee Meriwether, Senior Vice President and CFO, W. W. Grainger: So when we laid out what we thought we would realize the 101.5%, that was on an annualized run rate basis. And so you’re right, in the quarter, you’d have to look at how much of that the next quarter you would actually realize. Well, one, the actions were taken in May, so we didn’t have the full quarter. So that’s an impact. And then when you compare it to prior year 2024 actions, there’s no offset there year over year because last year’s increase was larger than the one we took this year.

So that explains a portion of it. The rest of it though we believe has to do with the fact that ourselves and others are taking price on different SKUs at different times and it’s really hard to read elasticity. Based upon what we continue to see even including in this month that is improving. And so we have conviction that on a run rate basis, we will get on an annualized basis to the 1% to the 1.5%. And as it relates to September, with that continued conviction and then the new an additional pricing of tariffs and other negotiated costs, we plan to pass enough to realize an additional 2% to 2.5% on an annualized run rate basis to cover those increases.

And then as we stated in our prepared remarks, when you look at that across all of 2025, we expect to realize about 1%. The combination of those two with the timing because we do we are starting to see competitors take more price. And so we feel like we’ll be in a more normalized environment and realization will get back to what we have seen historically.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Got it. Thank you so much for that Dee.

Kyle Bland, Vice President, Investor Relations, W. W. Grainger: I guess just as a follow-up here. Noticed you moved about $100,000,000 from the buyback towards CapEx investment in the guide here. Just maybe some color on what we’re spending on, what kind of projects are moving forward here that look more attractive today?

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Yes. What I would say is the vast majority of that is in the supply chain investment and it was there was an opportunity to make an investment for the future. It’s not going to be near term, but it’s longer term. And so we’re thinking about the longer term network evolution and there was just an opportunity to make to add some money to the budget. Got it.

Thanks so much.

Conference Operator: Thank you. Our next question comes from Sabrina Abrams with Bank of America. Please state your question.

Kyle Bland, Vice President, Investor Relations, W. W. Grainger0: Hey, good morning, everyone.

Dee Meriwether, Senior Vice President and CFO, W. W. Grainger: Good morning. Good morning.

Kyle Bland, Vice President, Investor Relations, W. W. Grainger0: Apologies. I’m also going to go back to pricing. But if I look at like the government pricing data for nondurable wholesalers, like the smaller machinery equipment and supplies wholesalers, the industry data is closer to like mid single digits up year over year. And I just want to understand maybe it’s something in the definition of how you report pricing, but just want to understand like maybe the difference between what the government data suggesting inflation is running at versus reported pricing for you guys? Thank you.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Yes. I mean, I think that’s an interesting view. Obviously, we look at first of all, we think we’ve got better scale and opportunity to not have the cost increases maybe that others might take. And so we tend to match try to match our cost with our pricing. And that’s what you’ll see us do over the next few years.

What Page what Dee did talk about though is we will be run rate 3% to 4% at the end of the year for this year. So you will see us increase prices, but we’re not having to take them maybe as soon as others do. That’s not unusual for us when there’s an inflationary environment that’s been the history.

Kyle Bland, Vice President, Investor Relations, W. W. Grainger0: Thank you. Then just on the high touch volume, were better I guess than what I had in my model in the quarter. I think we have like the monthly sales. I think July, you said came in a little bit better on easier costs. Anything to call it on like cadence of demand in the quarter?

Like I understand you guys don’t have a ton of you guys don’t really have like big capital project exposure, but I think what we’re hearing from some of the other manufacturers is you did feel a little bit better about the macro in July. So just any color there?

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Yes. I mean, it’s hard to talk about the macro. I think the macro has been one day. But we think we’ve like I said before, we are doing better on share gain and volume share gain was pretty solid in the quarter. And again, we’d expect that in July.

So it doesn’t feel like a huge change frankly. It feels like the demand environment is still relatively muted. We do feel like we’re doing reasonably well in that environment.

Dee Meriwether, Senior Vice President and CFO, W. W. Grainger: Thank you. I’ll pass it on.

Conference Operator: Your next question comes from Ken Newman with KeyBanc Capital Markets. Please state your question.

Kyle Bland, Vice President, Investor Relations, W. W. Grainger1: Hey, good morning guys. Thanks for squeezing me in. Maybe to piggyback morning. Maybe to piggyback on that last question, look, it does sound like you feel confident around the net price realization into the back half on all the negotiations that are already finalized. I guess, is the confidence that volumes don’t have another or don’t have a negative response as you introduce these price increases really just driven by net customer adds?

Or is it that you think there’s also a stickiness to your current customers as it relates to volumes today?

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Well, I mean, I guess, what we would say is we think that price increases in general and inflation in general is going to have an impact on market demand. So we do have some we have the market demand not doing as well in the back half as we had in the first half. So that’s where you see that impact. We don’t think we are uniquely exposed. We think everybody is doing the same thing and so we feel confident in our ability to realize prices with that lower market demand.

Kyle Bland, Vice President, Investor Relations, W. W. Grainger1: Got it. Okay. And then just for my follow-up, switching gears to endless assortment. I think the total revenue guide kind of implies endless assortment grows similar on a total sales, maybe like in that high teen to low 20% in the back half, but maybe the incrementals are slightly lower than what we saw in 2Q. V, is that right?

And if so, just any comments on what’s driving that deleverage?

Dee Meriwether, Senior Vice President and CFO, W. W. Grainger: Yes. You do have that right. And again, we talked a little bit earlier about the fact that some of it is the comp that Zoro is cycling through because they had a stronger back half last year after some of the actions they took the prior year. And so when you look at it on a two year basis, we feel like the numbers are in the right realm. So it’s really a comping issue for EA.

Kyle Bland, Vice President, Investor Relations, W. W. Grainger1: Okay. Understood. Thanks for the clarification.

Conference Operator: And your next question comes from Patrick Baumann with JPMorgan. Please state your question.

Kyle Bland, Vice President, Investor Relations, W. W. Grainger2: Hi, good morning. One quick one on gross margin. So it looks like the exit rate on gross margin in the fourth quarter is maybe in the high 38% range. Given the timing of the price increases coming through, which I think you said we’re going to annualize at 3% to 4%, maybe that hits at some point in 2026, but starting in late twenty twenty five, I guess. And then also the LIFO impacts to 2025, do you think 2026 will be a year of gross margin expansion back to that 39% level, just based on all those things and this LIFO dynamic that sounds like it’s timing related?

Dee Meriwether, Senior Vice President and CFO, W. W. Grainger: I would say that would be reasonable all things equal and no other dramatic changes around tariffs and things like that are announced.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Today, we would say that would be very likely. Obviously, things could change. But yes, that is the way this should flow.

Kyle Bland, Vice President, Investor Relations, W. W. Grainger2: I mean, I’ll take that an encouraging sign because I actually wasn’t really expecting a response from you on that. The next question was on government customer dynamics. It looks like things were relatively stable in the quarter after slowing a bit in the first quarter. Can you talk about whether you’ve seen contract cancellations at all impact your business there and whether you’ve been able to backfill that with other activities? Just any dynamics within government customer, federal versus state, local versus military, however you want to talk to it?

D. J. Macpherson, Chairman and CEO, W. W. Grainger: Yes. I mean, so certainly the place we’ve seen, we don’t have contracts canceled. We don’t we typically are transacting in small orders with our customers basically. But, the non military federal business certainly has been struggling, it’s down. The military business has been good.

State and local has been okay. Some states doing well, some not. So it really other than that, the small portion, we’re 70% state and local, 30% federal, most are federal to military. We aren’t that impacted by this. It’s a very small portion that has some impact.

Ryan Merkel, Analyst, William Blair: Thank

Conference Operator: you. And there are no further questions at this time. So I’ll hand the floor back to management for closing remarks.

D. J. Macpherson, Chairman and CEO, W. W. Grainger: All right. Thanks for joining us today. We really appreciate it. It’s interesting moment. From our perspective, obviously, MS assortment had a really good quarter, has a lot of momentum.

We feel like the high touch model is gaining share and the volume looks pretty healthy. And our underlying performance would have been pretty good and quite good actually had it not been for LIFO, but we are on LIFO. So the reality is we have altered our guide based on largely on that as we discussed, and that will cycle through. It’s going to be several quarters until that cycle through and that goes away as an issue. And also we do believe that market demand is going to be relatively muted and we’ve taken that down as well.

And that’s just a reflection of what we think tariff price increases are likely to do for the market. We also think that’s temporary. None of those neither of those things changes the way we think about the business or run the business. And like I mentioned, we run it for long term health and success. So we feel pretty confident about what we’re doing and how we’re doing it.

And appreciate you joining today. Thank you.

Conference Operator: This concludes today’s conference. All parties may disconnect. Have a good day.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.