W.W. Grainger, Inc. 2026 Q2 Earnings Call

Good morning. Welcome to Grainger's second quarter 2026 earnings call. With me are D.G. Macpherson, Chairman and CEO, and Deidra 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 other periodic reports filed with the SEC. This morning's call includes non-GAAP financial measures, which reflect certain adjustments in previous periods as noted in the presentation. There were no adjusting items in the second quarter of 2026 period. We have also included organic revenue adjustments in the presentation, which normalize sales growth to reflect our exit from the U.K. market, including the Cromwell divestiture and the closure of Zoro U.K., both of which were completed in the fourth quarter of 2025.

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 US 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 D.G.

Thanks, Kyle. Good morning, everyone, thanks for joining today. Building on our momentum from the start of the year, we delivered strong performance in the second quarter by executing well and delivering exceptional service to customers. Despite ongoing uncertainty, sales remained strong in both the High-Touch and Endless Assortment segments, and core operating profitability was in line with expectations. While the external landscape remains fluid, we're confident in our ability to manage the impact while remaining committed to our pricing tenets. We also saw continued strength in demand environment during the period, with most end markets showing acceleration. As I spend time with customers, I can see this playing out in the way we serve them on-site and inside their operations. Recently, I visited several manufacturing customers where our teams are closely connected to the day-to-day work.

We're helping them manage inventory in ways that fit their specific needs, and that is contributing to strong year-over-year growth at these locations. More and more customers are asking us to help them run their operations more efficiently and solve specific challenges, including areas like safety. With one customer, our safety expertise was the catalyst for accelerating that partnership. We're also seeing solid growth from our national accounts in both the U.S. and Canada. On Canada specifically, we have seen tremendous improvement over the past several years as a team to stay focused on two things: serving customers well and building a stronger, more profitable business. They've made great progress improving service, resetting their sales force, and revamping their website, while also diversifying their customer end markets and product offering.

These efforts have driven strong sales growth and operating margin recovery to the highest levels we have seen in nearly a decade. Now turning to our second quarter results. We delivered another quarter of strong growth and profitability. Results benefited from ongoing operational execution across both segments and an improving market, which helped accelerate volume growth in the period. We are pleased with what we are seeing from our High-Touch growth engine and from our efforts within the EA segment to continue propelling the flywheel. Total company reported sales for the quarter were up 10.3%, or 13.7% on a daily organic constant currency basis. Operating margin was strong at 16.1%, and diluted EPS finished the quarter up over 20% inclusive of the impact of IEEPA tariff refunds recognized in the period.

Operating cash flow came in at $444 million, which allowed us to return a total of $341 million to Grainger shareholders through dividends and share repurchases. Lastly, we are excited to announce that our new Northwest distribution center in Oregon began outbound operations in July. This new technology-enabled building gives us another way to get more of the products customers need closer to where and when they need them. Overall, we're encouraged by the progress we've made across the business. After our strong first half performance and continued momentum, we are increasing our outlook for the year. With that, I'll turn it over to Dee for a closer look at our financials from the quarter.

Thanks, D.G. Turning to slide seven, you can see the high-level results we had in the second quarter with total company sales of 10.3%, or 13.7% on a daily organic constant currency basis, which included strong growth across High-Touch Solutions and Endless Assortment. Growth margin for the quarter was healthy at 39.5%, up 100 basis points versus the prior year period, as we saw expansion in both segments and recognized a 90 basis point tailwind from IEEPA tariff refunds on products directly imported by Grainger. Operating margin was 16.1%, up 120 basis points year over year, as growth margins flow through and leverage in Endless Assortment contributed to results. Both growth margin and operating margin benefited from our exit of the U.K. market.

If you were to normalize for the tariff refund benefit realized in the period, operating margins were in line with our verbal guide, aided by better-than-expected top-line leverage. Overall, results were strong for the quarter, we delivered diluted EPS of $12.01, which was up over 20% versus the prior year period.

Moving to segment level results. The High-Touch Solutions segment delivered sales growth of 11.9% on a reported basis, or 11.7% on a daily constant currency basis. Results were driven by strong volume growth and healthy price contribution to revenue, and also benefited from some project-based spend. From an end market perspective, MRO market demand continued to improve in the period. For Grainger, specifically, we saw broad-based acceleration across nearly all customer groups with strong contributions from manufacturing and government sectors. This was alongside outsized growth in our contractor and retail end markets, which are both benefiting from data center activities as new facilities are stood up. On profitability, gross profit margin finished the quarter at 41.8%, up eighty basis points versus the prior year.

Results were driven by the benefit from IEEPA tariff refunds and slightly positive mix, although mix came in less favorable than expected on a higher volume of lower margin products and project related spend. These impacts were partially offset by private label cost hit wins and unfavorable freight as we absorbed the higher cost in the period. Price cost was roughly neutral during the quarter. On SG&A, we delivered slightly year-over-year as strong sales and productivity were offset by continued marketing investment and higher payroll and benefits expense, including higher incentive-based compensation, given our strong top-line results. Taking all of this together, operating margin for the segment finished at 17.3%, up 70 basis points versus the prior year quarter. All told, we are pleased with the continued strength across the High-Touch segment as we move into the second half of the year.

Now focusing on Endless Assortment segment. Sales increased 13.5% on a reported basis, or 20.6% on a daily organic constant currency basis, which normalizes for the closure of our Zoro U.K. business and adjusts for the impact of the depreciated Japanese yen. Zoro U.S. was up 18.4% on a daily basis, while MonotaRO achieved 24% growth in local days and local constant currency. At a business level, Zoro saw strong growth from its core B2B customers, along with higher customer retention rates as our marketing program, both targeted and efficiency, continued to improve. The team remains focused on delivering our core foundational capabilities to improve the assortment, search experience, pricing, and delivery. At MonotaRO, sales were strong with continued growth from enterprise customers coupled with solid acquisition and repeat purchase rates with small and mid-sized businesses.

Additionally, MonotaRO benefited from customer pre-buying of certain petroleum-related products ahead of anticipated shortages due to the conflict in the Middle East. This behavior has fully subsided, and our updated guide reflects slower growth in the back half of the year as this benefit moderates. On profitability, operating margins increased by 160 basis points to 11.5%, with favorability across the segment. MonotaRO margins were strong at 14% up 80 basis points, and Zoro margins improved to 7.6% up 180 basis points, with both businesses benefiting from healthy top-line leverage. Overall, another great quarter for the Endless Assortment team. As we look to the back half of the year, I want to share a brief update on the inflationary environment. We continue to manage the business with the goal of maintaining price-cost neutrality over time. With ongoing shifts in the tariff environment, we've had to remain nimble.

In the second quarter, we adjusted prices to reflect the changing tariff landscape, including the rollback of IEEPA tariff pricing and offsetting Section 232 tariff impacts. While we made several changes across our assortment, our May pricing actions were net neutral in total. Also in the quarter, we recognized refunds from the federal government for previously paid IEEPA tariffs, where Grainger was the importer of record. The majority of this benefit was recognized during the second quarter as a reduction to our cost of goods sold, with a small remainder expected to flow through over the next couple of quarters. When considering these refunds, it's important to remember that they relate only to tariffs paid directly by Grainger and represent only a small portion of the many tariff costs that we faced over the last year and a half.