MRO Insights from Grainger and Fastenal

Grainger and Fastenal shared their Q1 earnings reports recently. Given that both focus on the MRO market and, from an industrial MRO viewpoint, are considered relatively comparable competitors, they can serve as a proxy for the MRO market, although electrical is not a larger percentage of their business (usually about 10%-15%).

Grainger

According to Grainger’s Q1 earnings transcript and their presentation, this MRO distributor reported:

• Seeing positive signs of growth on non-pandemic products in their High Touch Solutions segment (Grainger and its branches. This highlights that businesses are ordering to fulfill MRO needs.)
• Endless Assortment segment (Zoro and MonotaRO (Japan)) grew 27.4%. Key is adding SKUs (hint to distributors … you want more SKUs on your site, whether the manufacturer represents a small percent of your sales or not … consider your website as your opportunity to capture discretionary business.  And if you don’t have public pricing on your site at a reasonable price, you may be missing an opportunity.)
• Organic sales growth of 5.9% on a constant currency basis, otherwise 7%
  • Having to take some inventory write-downs on COVID-related products and will complete in Q2 (note to distributors … something you should do at some point? Drop the price to clear out the inventory!)
  • High Touch Solutions segment had daily sales increase of 3.4%
    • 3.5% in the US
    • Canada was up 3.3% in USD, down 2.8% in CAD and local days
    • Large customers up 2%
    • Midsize customers up 11%
  • Endless Assortment
    • Sales up 27.4%. GP expanded 35 basis points
      • In March, sales were up 15.2%, driven by customer acquisition
      • As of Q1, Zoro had 6.7 million SKUs online
      • Zoro has 5,854,000 registered users
  • US represents 70% of sales
• Key customer segment performance
  • Heavy manufacturing, 30% of High Touch sales, 29% Endless) up low single digits
  • Light manufacturing down low single digits
  • Commercial / institutional (9% of High Touch, 15% Endless sales) down mid single digits
  • Natural resources down high single digits
• Gross margin is good and, gross margin in Endless Assortment expanded (hint to distributors)
• Believe that the US MRO market grew .5-1.5% in Q1
• Expect Q2 to have sales of 14-15% (remember WESCO’s forecast for the year? And their industrial business is MRO-related. They are in the single digits.)
  • For the year projecting 8.5-11% growth.
    • High-Touch Solutions expected to grow 7-9% based upon MRO market growth of 6.5-9.5%.
• Seeing “modest cost inflation”

Insights from the analyst questions:

• “A lot of the economy is really back and running fairly smoothly.”
• Continuing to invest in technology and marketing; also getting back “into the field” with their sales organization.
• Seeing growth in their KeepStock program.
• Expect PPE / pandemic related products to decline to 20% of sales by the end of the year.
• Targeting “price cost neutral” for the year. Working closely with suppliers to make sure “based on facts” and will pass on to customers “as needed.” (Which gets one thinking, are larger companies more aggressive in this? Are they gaining an unfair advantage? Are suppliers reluctant to “upset the apple cart”? Is there anything marketing groups, collectively, can do on this on behalf of their members – are their supplier committees / supplier VPs negotiating pricing … should they? Or, if you are a distributor, do you feel “it is what it is”?)
• Return on Invested Capital (ROIC) is very strong for an online business as the number of SKUs increase as able to leverage inventory investments and technology.
• Expect the Endless Assortment business to grow about 20% annually.
• Zoro focused on small to medium-sized customers.
• Using better, more analytical discounting strategies in the Zoro business to improve profitability (highlights how analytics can drive profitability)
• Most SKU growth on Zoro is 3^rd party sales … products not currently sold via Grainger (which means it could be an opportunity for manufacturers who do not sell to Grainger … and we know some that have taken advantage of this, profitably.) Grainger also tracks revenue / SKU and revenue / SKU when advertising the SKU to see the uptick.

So, it looks like the MRO business is recovering and Grainger, via Zoro, is picking up either “discretionary hard to find item”business or those who desire to be “self-serve”.

Fastenal

Given Fastenal’s comparability, in the eyes of customers, with Grainger, an earnings comparison is warranted (and if you want to read about Fastenal’s beginnings, here’s a article with the history.)

From their earnings call and their presentation:

• Net sales up 3.7% and, on a daily basis, up 5.3% (so, comparable to Grainger)
  • Company does about $23M / day and Q1 had 1 less day) and impacts the bottom line by about $7-9M/day lost
  • Texas winter storm cost the company 50-100 basis points
  • Demand improved for manufacturing and construction customers (growth in MRO and construction business.)
    • Manufacturing up 5.6% and up 10.8% in March.
    • Construction -7.5% for quarter but flat in March.
  • Seeing a decline in COVID product growth rates.
• And a COVID-related write-down (like Grainger)
• Believe the economy is “healing” as evidenced by increasing 14% in March!
• In January and February experienced fastener growth … another indicator of economic growth.
• Experienced increase in Onsite signings (inventory management for customers)
• eCommerce daily sales increase 35% during the quarter. EDI customer sales up almost 38%, web sales up 29%
• Q2 forecast
  • Expect flat as expect a decline in PPE sales vs LY, representing $350M+
• Gross margin is 45.4%, down 120 basis points
• Shared they are experiencing “significant material cost inflation. Not a material impact in Q1 but expect to have in Q2. Have tools to show increases to customers and to try to push back against suppliers.

Insights from analyst questions

• Expect overall price increases to average 0-2%. Commented that “customers are really busy”.
• Empower field to source product, if needed, for customers.
• Doing some advance purchase planning … considering longer lead times at suppliers so placing orders a little earlier than would normally.
• Only 6% of Fastenal workforce can work remotely because they are in supporting roles.
• Fastenal is tracking non-PPE sales of new customers who initially purchased PPE … converting them to longer-term customers. (the power of analytics and marketing)

Fastenal Customer Profile

• 39% manufacturing
• 23.4% heavy equipment manufacturing
• 11.3% construction
• 8% reseller
• 8.1% government / education
• 6.9% transportation

So, the question to distributors, especially industrial distributors, becomes, “do you have customers buying from them? Have you asked?”

In looking at these two MRO distributors it can be seen that the MRO market, which is important in industrial accounts, is rebounding. The question becomes, “who will win the electrical MRO business … WESCO, Grainger or Fastenal, or independent distributors?”