Q2 2022 W W Grainger Inc Earnings Call
Greetings, ladies and gentlemen, and welcome to the W. W. Grainger second quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note that this conference is being recorded.
I will now turn the conference over to our host Kyle Bland, Vice President of Investor Relations. Thank you you may begin.
Good morning, welcome to Grainger second quarter 2022 earnings call with me are D. G Macpherson, chairman and CEO and deep Meriwether Senior Vice President and CFO .
As a reminder, some of our comments today may include forward looking statements actual results may differ materially as a result of various risks and uncertainties, including those detailed in our SEC filings.
Conciliations of any non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our Q2 earnings release, both of which are available on our IR website.
This morning's call will focus on our second quarter 2022 results, which are consistent on both a reported and adjusted basis for the respective quarterly periods presented we will also share results related to monitor them. Please.
Please remember that monitor was a public company and follows 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 somewhat from motto tireless public statements now.
Now I'll turn it over to D G.
Thanks, Kyle good morning, and thank you for joining us.
Today I'll provide an overview of our second quarter performance and pass it to <unk> to walk through the financials.
Before I get to the quarter I'd like to start with our Grainger edge framework, which guides, our strategy and behaviors across the company and with our customer and supplier partners.
Over the last several years. This has been critical to our response to Covid and our efforts to gain share.
Importantly, these principles that you see here for the basis of what we expect of each other team members have embraced these principles to build better customer solutions focused on what matters and move faster to deliver value.
They're more than words on a page there how we work together to support our customers and team members.
One example of the Grainger edge, helping guide our efforts around ESG.
Our principles are starting with the customer investing in our success and doing the right thing heavily influenced our approach at Grainger, we operate sustainably and with a long term approach to critical issues. Our ESG approach, which we have reported on now for 11 years is tightly integrated into the Grainger edge and increasingly tied to our daily operations.
Our recently published 2022 ESG report, we discussed how we are organizing our environmental social and governance practices as well as our four near term priorities, which is where we believe we can make the most impact.
These near term focus areas, our diversity equity inclusion, making sure. The Grainger is a place where each team member feels welcome and able to get their best work.
Energy and emissions, we continue to make great progress on improving our carbon footprint and we have significant plans moving forward Custer.
Customer sustainability solutions, helping customers reduce energy and water consumption, and finally supplier diversity, which helps us identify and support great supplier partners to propel the business.
Our team members have brought and will continue to bring these priorities into their work with our customers, helping them to achieve their ESG goals and creating even more value.
As highlighted in the 2022 ESG report, we have recently worked with the state University to retrofit parking garage lighting, creating over 200000 in annual energy savings.
Assisted a CPG company as we built out their supplier diversity program and partner with the nationwide hospital system and identifying the roofing vendor to install biobased materials on roughly 500000 square feet of rooftop, which will reduce greenhouse emissions by 39 million pounds over a 40 year period.
These are just a few examples of ESG in action and I am incredibly proud of how our teams are continuing to live our principles. Each day, that's at work with our customers suppliers and each other to further our efforts in this area.
Hope you will take some time to review our full 2022 ESG report.
Which can be found on Grainger ESG dotcom.
Turning now to our second quarter results, we had another strong quarter with sales growth of 19, 6% or 22% on a daily constant currency basis. Our results were driven by strong performance in both segments. This included 1000 basis points of market outgrowth in our U S high touch business fueled by continued solid execution on our strategic.
It is.
And strong returns on our inventory and supply chain investments.
Total company gross profit finished the quarter at 37, 6% expanding 255 basis points over the prior year second quarter, the largest driver of our expansion in the quarter was lapping the prior year pandemic related inventory adjustment, even when excluding that adjustment. However, we were still up around 60 basis points year over year with both segments contributing to that.
Favorable results.
We delivered 13, 9% operating margin an increase of 350 basis points over the prior year second quarter. This is primarily a result of the improved gross margin performance as well as our ability to continue to drive SG&A leverage on the top line growth in.
In the quarter, we delivered adjusted ROIC see a 45% a significant increase over the 29.2% generated in the second quarter of last year. We also returned 219 million to shareholders through share repurchases and dividends it.
It was an excellent quarter all around as a result of the strong performance and the continued momentum we are seeing through July we are raising our full year 2022 guidance, which Dave will discuss in more detail and with that I'll pass it over to Dean.
Thanks D G.
Turning to slide eight we covered revenue and margin at a total company level, but I'd like to highlight a few other key point.
Our total company SG&A as a percent of sales was 23, 7% and 95 basis point improvement over the prior year second quarter as we drove leverage from our top line performance.
We continue to invest in our strategic initiatives, but remain committed to not adding unnecessary cost to the business.
And our resulting EPS in the quarter was $7 of 19th that 68% versus the second quarter of 2021.
Turning to our high touch solutions segment for the second quarter. We continued to see strong results with daily sales up 22, 2% compared to the second quarter of 2021.
We saw broad based double digit growth across all geographies and over 20% growth in both mid sized and large customers in the U S.
In the U S. We continue to see strong double digit volume growth and price realization of around 11% all helping feel 23, 1% daily sales growth.
Canadian Daily sales were also strong up 11, 1% or 15, 5% in local days in local currency.
It's been a long journey and we are proud of the traction that Canadian team has gained what they're now fifth consecutive quarter of profitability.
For the segment.
GP margins finished the quarter at 39, 7% up 275 basis points versus the prior year, driven primarily by lapping of the $63 million pandemic product inventory adjustment in the prior year period.
Excluding this inventory adjustment, we achieved gross margin expansion of over 25 basis point as favorable product mix and largely neutral price cost spread were partially offset by heightened freight costs.
As we manage through this highly inflationary period.
While there will be quarter to quarter fluctuations due to timing our goal is to remain price competitive while achieving price cost neutrality.
Increased SG&A spend was driven primarily by higher variable compensation expense as well as continued investment in marketing payroll and benefits to support growth.
Even with the increased investment we delivered 150 basis points of SG&A leverage year over year.
And when combined with strong gross margin recovery Q2 operating margin of 15, 6% was up 425 basis points versus the prior year period.
Overall the performance in our high Tech solutions business remains strong as our powerful value proposition continues to resonate with customers.
Looking at market outgrowth on slide 10, we estimate that the U S MRO market, including both volume and price inflation grew between 12, five and 13.5%, indicating that we achieved roughly 1000 basis points of market outgrowth in the quarter.
While we know that our advantage supply chain contributes to our success. We also continue to see strong growth with our strategic investments.
We are excited about the returns that we are seeing on these investments most notably with our remark re merchandising and our data driven marketing programs.
Our continued success gives us confidence in our ability to consistently achieve three to 400 basis points of annual market outgrowth on our uncle on an ongoing basis and through the cycle.
Moving to our endless assortment segment.
Reported in daily sales increased 11, 4% up 21, 1% on a daily constant currency basis after normalizing for significant impact of the depreciating Japanese yen.
In local currency and local day monitor all achieved 21, 9% growth at Zoro U S daily sales were up 23, 2%.
The segment growth continues to be driven by new customer acquisition at both zoro, and monarch tower, and enterprise and repeat customer growth at Monticello and impressive quarter of growth across the segment.
Gross margin expanded 100 basis points versus the second quarter 2021, and was primarily driven by freight efficiency as average order values increased at both zoro and Monticello as both continues to focus on B to B customers.
As planned segment operating margin declined 25 basis points in the quarter consistent with the fourth first quarter. This decline was primarily a result of the new D. C and monitor all coupled with continued investment in technology marketing and payroll costs to support growth at zoro.
Despite the increased investment zoro operating margin still improved 85 basis points over the second quarter of 2021 as strong G. P on strong GP improvement.
As a reminder, the increased costs at Mt. Todd will continue for the remainder of 2022 as they transition to their new in a gala D C.
I anticipate that the business will return to more normal operating margins in 2023.
In addition, we also continue to see positive results with our key endless assortment operating metrics.
On Slide 12, you can see total registered users are cross monetize <unk> and zoro come.
Combined are up 18% over the prior year period.
On the right we show the continued growth of our upstream portfolio.
We are targeting about 2 million SKU additions in 2022.
It will likely exceed that given our progress after the first six months.
At the end of the second quarter, we have around 10.2 million active skews on the website.
Now looking to the back half of the year.
With another very strong quarter, and what's July total company daily sales up 19% or 21% in constant currency, we are raising our 2022 full year outlook.
While we acknowledge that the broader market conditions remain uncertain, we have not seen a slowdown in demand in our business and continue to hear positive sentiment from our customers further supporting our revised outlook.
Our updated outlook for the full year 2022 includes expected daily sales growth between $14, five and 16, 5% and EPS between $27 and 25% and $28.75, a 41% increase year over year.
Year at the midpoint.
We've also updated our supplemental guidance in the appendix, which reflects improved segment operating margin.
It ranges for all other metrics.
While it is not typical for us to change our guidance this frequently.
Our objective is to provide our most up to date with each earnings cycle.
Given the strong revenue and profitability performance to date, we felt it was necessary to update our metric again this quarter.
With that I will turn it back to D. G for some closing remarks.
Thank you D before I open it up for questions I would make just a few comments.
While we may not know exactly what the rest of this and next year will bring from a market perspective, I'm confident in our team's ability to execute drive market outgrowth and invest in the areas that matter most.
The time that I've spent with customers. This past quarter has reinforced the prior to having the grainger team and our ongoing commitment to remain customer focused I hear consistently that we have delivered to keep our customers working as a result of our team's efforts, we have deepened customer relationships, becoming the trusted partner to many.
We performed extremely well in the quarter and I am confident that we will produce a strong finish to 2022 and remain well positioned to serve our customers for the years to come.
And with that let's open the lineup for questions.
Thank you and ladies and gentlemen at this time, we will be conducting our question and answer session.
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Our first question comes from Ryan Merkel with William Blair. Please state your question.
Thanks, Good morning, and very nice quarter.
Thank you Hi, Ryan.
So I wanted to ask a question on the share gains which have been really impressive.
I guess, it's a two part question. So first is the key driver of the share gains.
The advantaged inventory that you have or heavy initiatives also maybe added a couple of hundred basis points above that three to 400 target.
Yes, it's a great question. Thanks for asking yes, we with your initiatives and have added more than three or 400 basis points. We do on many of the initiatives, we do a b tests and we're able to track.
The initiatives are bringing and they've been very very.
Very effective the last year or so so we continue to see very strong game from the initiatives. We are getting some tailwind from our inventory position as well, but the initiatives have been very strong in terms of their performance.
Okay.
And I guess the follow up is you know why.
Mike why don't you raise the share gain target if these initiatives are adding more than.
304 hundred is it is it not sustainable or you just don't have enough evidence yet.
Yeah, I think more time, well will help us understand if this is gonna be if we're going to get to a new norm in terms of higher share gain thus far we've committed to the share gain targets.
And we'll continue to talk to you about what we expect going forward.
Perfect. Thank you.
Thanks.
Our next question comes from Tommy Moll with Stephens. Please state your question good.
Good morning, and thanks for taking my questions.
Alright.
Well I was going to ask if you'd seen any slowdown in demand in deep beat me to the punch.
So I guess I'll ask it a different way.
Is there any.
End market or customer anecdote.
Not as positive as you could even hope for at this point.
Is there anything at all that has changed I just want to circle back on that because.
Your your comment you haven't yet seen a slowdown was pretty clear at the same time investors are searching closely for any sign of anything that's changed and there have been at least a few macro indicators that are.
Yeah, Yeah, no. So let me let me just.
Or not.
Experts on every segment, but I will give you some some observations and a lot of this probably has to do with what we've seen through the pandemic and coming out of the pandemic. So if you look at our segment performance in the appendix of the materials.
You'll see that slower growth markets, but still growth markets, our retail which is a lot of distribution centers typically for us.
That market was way up the last couple of years, so that has certainly slowed down but still growing.
Health care and government have are are still growing in it and that sort of accelerated recently again, but they were there. They are not as strong as general manufacturing in the industrial parts of the economy are certainly growing faster for us than the non industrial parks right. Now so that would be that would be my observation I think that's that's certainly consistent with what we're hearing.
From from others as well.
But I think the nice thing here is that we are seeing growth in all segments and the share gains helping us.
Yeah, that's great. Thank you.
Uh huh.
Pivoting.
Two question on your technology investment for a high touch.
Did.
Did you you've talked for some time about some of the investments you've made and the.
Website, the product information systems customer database, etc.
Can you bring us up to speed on on those initiatives what inning are we in for this investment cycle and what.
I was going to ask yes.
Any of the fruit that's been borne out of these initiatives, which you've already touched on a little bit, but maybe you could give a few more examples.
Yeah, and I would say and ill just plug for the analyst day, we'll talk a little bit more about this during analyst day for sure, but what I would say is the things. We started earlier have proven to be very very valuable around product information and publishing which allows us to.
Hum helps our merchandising efforts and website efforts and print publications as well and so we've seen really good results from that we started to see really good results from the investments in customer information as well in terms of things like improving seller coverage.
Proving marketing outreach, making sure we're sending the right message to the right customer. So we'll talk more in September .
Sort of what we have planned to work on from a technology transformation, but we really like the signs we've seen so far and we've had some very significant results.
Thank you.
And our next question comes from Deane Dray with RBC capital markets. Please go ahead.
Good morning, everyone, Hey, just a first a clarification for D. On the price cost neutrality, just is that on the margin basis I Trust.
So that is on product cost and so if you kind of go back a while we've talked over a period of time, we try to focus on the the inflation that comes through product versus what comes through.
Like transportation and what we have noticed is that we our goal is over the cycle or any cycle is to be price cost neutral as it relates to our product costs.
And to.
Cover a majority of any incremental freight costs on a go forward basis and as you all probably know we saw significant acceleration of fuel pricing during the quarter.
And we are working very hard to look for ways to cover some of that incremental freight costs.
No. It is not when we say price cost neutrality, we're not talking about overall gross margin.
It is a component within gross margin. Okay. That's that's helpful. Thanks for that and this is more of a nuance, but you lowered the high end of the buyback guidance and this quarter share count creep was up.
And it costs you three cents I don't know that.
It's more of a nuance, but just why would you lower the buyback and how do you feel about trying to contain our share creep.
Yeah. So thanks for the question and you know we were generally always in the market from a repurchase perspective, we're not specifically looking to attempt to try to time the market with our repurchases and we really tried to balance that with our cash generation.
And so it was nothing more than you know Q1 and Q2, we had some large cash pay outs during those periods as it relates to our bonuses tax payments. So it was generally just timing right.
Got it thanks for all the color.
Our next question comes from David Manthey with Baird. Please state your question.
Yeah. Thank you good morning, everyone.
The the high touch gross margin is seasonality so I get the second half operating margin guidance relative to the first half but in endless assortment.
Op margin looked like it averaged about $8 three in the first half your guidance for the second half implies lower than that.
I'm just wondering if you can outline what what are the key factors that are pressuring second half profitability relative to the first half in endless assortment.
Well I'll start.
Well generally you know, we're continuing as it relates to monetize to ramp up.
Our investments there and fund those investments for carrying to D C and again, our and our Nagasaki at the same time. So those ramp costs continued to have an impact on us and you know similar to the high touch segment. The zoro business is continuing to invest and marketing.
Payroll costs as well as technology to drive the long term our.
Revenue growth. So it is just investments during the period of time and as we get into 2023, specifically for Minotaur, we expect.
Their operating margins to normalize.
Back to historic levels.
And so we'll we will see some settling out at that point.
Okay. Thank you for that and then second.
Could you outline the impact of LIFO accounting and your results. We don't talk much about that but if you could talk about sort of gross margin impact in the current quarter. The recent past.
The near future.
Sure you know, we generally speak to or share our LIFO impact on an annual basis.
So what I will say is that with <unk>.
Staying in an inflationary period.
Important as you can imagine to stay on top of a standard cost increases with what product and so we are doing that.
And so we continue to has increased.
Cost inflation.
Within our inventory and Cogs related to LIFO, but we felt like were fairly on top of that and now that we've been in this situation for going on two two well I won't say two years close to a year your year now.
So materially in the quarter it was really immaterial impact, but because we continue to update our standard cost on our inventory and cover cover that LIFO impact with price.
Thank you. Our next question comes from Hamzah <unk> with Jefferies. Please state your question.
Hi, This is Hans Hoffman filling in for Hamzah.
On the endless assortment segment, specifically zoro, where do you think profitability can go longer term from where we sit today and where SKU count kink out and then just what does the competitive set or competition look like for zoro. Thanks.
Yes, so so with zoro.
When we talked about as we were in the past 10 million items this year unique skus.
We expect profitability to get to the high single digits over the next several years, it's not a very good path to do that.
And you know from a from a return on invested capital perspective, it's obviously very profitable.
Given given it doesn't it doesn't have the inventory position so.
Stability is getting better its going to continue to get better. We think we can get to probably 20 million skus at a minimum three zorro over time, but that's sort of a long term.
Effort, probably four or five year effort to get there we would expect them.
Yeah, So our competitive set wise, there's a lot of digital players that we see are and theres a lot of them out there, but you know we we continue to perform well and think we can gain share consistently through that model.
Got it thanks, and then could you just talk about how youre thinking about headcount additions going forward.
What youre seeing in terms of labor inflation turnover and labor availability.
Yeah. So it's been a it's been a challenging labor market to say the least over the last year or year and a half I'd say.
We feel like we are in a good position from a staffing perspective, particularly in areas that are so important like our distribution centers, we've been able to add significantly to our head count.
We still need to to manage that effectively on an ongoing basis and we're looking at what what turnover, we have typically with a distribution center.
Our biggest turnovers in the first year of people come in they don't realize the jobs as challenging as it is and then they don't like the job. So we do see high first year turnover once we get people through that first year. They typically stay.
And and become long term team members that continues to be dynamic, but it's been certainly challenge that we've had to we've had to hire a lot over the last couple of years and we have had turnover in this population pools.
Generally you know where where I'm very focused on making sure that we have the right staffing levels for the volume that we see and then not at any cost where it doesn't make sense in the business. So we are being careful about sort of head count additions outside of areas that are sort of volume dependent.
Thank you. Our next question comes from Nigel Coe with Wolfe Research. Please state your question.
Thanks, Good morning.
I've got a couple of clarifications and then one question on endless assortment.
Just on the on the market outgrowth.
Definition.
Is that the 12% growth in the market. This quarter is that price and volumes or was that just volume just want make sure we're comparing like for like.
That's price price and volume to 12 per cent okay great.
So and then.
Just on the price cost so it's essentially it's an invoice price so basically youre invoice minus supplier invoice, that's how you define it.
Uh huh.
Well are you talking about price inflation price cost. So youre definition that you said, it's based on product price months protocols. So that affects a minute okay like the envoy spread basically yes, okay great.
Just on the endless assortment.
The.
Growth in users is pretty consistent and pretty impressive quarter by quarter. Just wondering what is the typical profile of the active users you're adding how do you reach these uses.
Kind of acquisition because of any kind of help there would be helpful.
And then just you know kind of how do you expect.
You know zorro to perform in a recession. If these are smaller users do you expect it to be more volatile most of them are perhaps so what do you think that the underlying structural growth in that business can offset any pressures in a downtown.
Yeah, So what I would say is the typical.
Customer that we acquire is a small business customer we have actually gotten out of some of the lower value market places, where we weren't getting business users as frequently as you want so most of the business customers and relatively small business customers.
We are then really focused on getting those customers to repeat and we've seen really nice results through Matar Island Zorro over the last year in terms of increasing repeat rates for it for existing customers and so that's been a nice trend in a very positive trend.
In terms of of a downturn, we would expect the underlying growth to be able to power through the downturn, we would be affected by the downturn, but we still think we'd have significant outgrowth from the from the zoro model.
Given the way the model works and what we've seen at other downturns and monitoring and other places.
Thank you.
Our next question comes from Christopher Glynn with Oppenheimer. Please state your question.
Thank you our great first half and.
So on the second half outlook, the H T S margin guide.
Implies a little bit of a softer sort of tail.
Tail off in the margin versus your normal seasonality I know last year was a little differently, so looking past that but.
The taper is usually a little more than whats implied here. So curious if you could comment on that.
So you know.
This is again another year, that's been difficult to forecast based upon what's going on in the marketplace.
But as you know seasonally Q.
Q3 is a a lower gross margin point for.
And high touch U S. A.
And where.
We're planning and forecasting after that to be the case.
And and then we usually see a deceleration seasonal deceleration with customers.
On the top line and in Q4.
So we feel confident in how we have planned out and provided the updated guidance.
We're high touch.
Nothing to read into that other than.
We don't think the last couple of years are necessarily a great benchmark and so we've gone back and looked at longer term trends to actually forecast, how we believe the high touch U S business will perform for the remainder of this year taking into account you know our jump.
I appoint from from from H one.
Great.
Just starting on this price level getting you know 10 or 11%.
What scenarios within reason would you see maybe price, giving back in and we're seeing a little bit or are you pretty confident this is a new baseline.
Well you know.
But what we're seeing right now is it's fairly steady I you know, it's hard to see it reversing itself and I think if you go back and look over a number of prior prior prior cycles.
There I think there's only one instance, where there may have been a true give back versus just a slowdown.
And price inflation.
But I think time will tell.
Thank you.
Our next question comes from Josh <unk> with Morgan Stanley . Please state your question State your question.
Hey, good morning, all.
Martin just a question on the inbound inflation that youre seeing sort of how that's progressed over the last couple of months I think you're starting to see some of the PPI indicators, yeah kind of.
Plateau, a little bit you know obviously you guys are diverse across your purchases. So just wondering what that looks like.
In terms of what you're seeing today in the marketplace as you go out to make purchases and maybe how that's trended over the last quarter.
So do you mean, inbound transportation or inbound product cost or all of it.
All in but I guess more product and transportation.
Okay. Yeah, Yeah. So you know we have not we've seen a stabilizing of purchase prices from our suppliers.
We have had fewer requests for price increases in the last.
Several weeks than we had several months ago for sure.
But we really haven't seen any backtracking a at this point so it's it's stabilized but still.
Still not not going down going up slightly going up less than it was go ahead.
Got it and on.
On the I guess kind of related to that on availability I think theres, probably a point in time.
Further back in the pandemic when there's a wider spread between what grainger to get and maybe what some of your smaller competitors can get you know how would you characterize that spread today.
Well of course, we don't know exactly what our competitors can get so this is this is all speculation it's still a pretty challenging availability market there still is.
You know certainly that the China shutdown didn't help anything in there still.
Areas of supply that are that are challenged so.
I suspect we still have an advantage on some level and you know I think some of the things we've done with our product information management system that helped us get to crosses which has been very important in the last year and a half to be able to cross too.
<unk> equivalent so we can get if a product is not in stock we can actually get customer solution. So I think we have some advantages and and I would say that we are not out of the woods.
For our global supply chain in our industry, yet because it takes them a while to get to get out of this.
Our next question comes from Jacob Levenson with Melius Research. Please go ahead.
Good morning, everyone.
Yeah.
At the risk of beating a dead horse here on price.
Certainly 11 points, we got in the high touch those losses, those quite a bit higher than we're saying that some of your peers, but.
I realize they're going to be some nuances, but if we peel back beyond that I guess the question is what what's really changed this cycle. That's that's a while ago. So to stay ahead of cost because certainly that's usually when you. When you took over that maybe that muscle memory wasn't there. So just curious what's happening under the under the Hood If you will.
Well I think I think one thing I would just say is that it's there's the signal to noise in some cases, it's probably lower than than than you'd like if you're looking from the outside because some competitors have taken price at different times.
And so what what's changed is we know we are market price competitiveness.
And we spent a lot more time focused on that and the pricing changes we've made and then.
In line with market that we may have taken them at different times later earlier, depending on how things go but we were very confident that we are market priced at this point and that's that's that's our primary tenant for pricing.
Okay. That's helpful.
Changing gears a bit on zoro.
Still saying that growth accelerate over time.
A different tone I guess from what we're hearing from from our other ecommerce players from a Broadway, but I guess the question is this.
How much of this is that you've built a better mousetrap.
The investments we've made over the years and the attitude and the buying experience itself or how much of that is SKU additions or or be a matter of spending on advertising just trying to get a sense of what you feel like those.
Contributing to that success there.
Yeah, I think I think SKU additions are a big part of it I also think that.
Yeah, the customers, we're going after our business customers and so I think most of what you would see as compares in the digital space would not be business focused so.
Yeah, we think business customers are probably doing better than consumers online right now and so that's a big part of it too.
Thank you and our next question comes from Chris Snyder with UBS. Please go ahead.
Thank you I wanted to ask about customer inventory levels are one of the concerns that investors have on the distributors is that industrial companies are reporting outsized inventory levels. Obviously, a good chunk of that is priced below depreciate any color or views you have on an MRO inventory at your customer base.
Yeah just to.
Well I'll try that and try to take this one I think that.
The industrial manufacturers that are reporting higher inventory levels. My guess is that most of that is actually with them. When you visit customers. Now there are many cases in which our product is not not MRO product I will get them or approximate at the product generally are sitting around and you see it and the reason is sitting around as they do.
Have everything they need to actually produce so they have strong demand, but they just can't get it out the door because they don't have everything they need to produce and I've seen that abate at many many customers that I visited in the last three or four months I think that's the bigger issue.
We don't our customers don't have stockpiles of MRO product.
That's not the way it works and in fact, our value proposition is to make sure they have only what they need and so.
Our inventory management solutions and such to make sure that we don't have too much stock and so.
I don't talk with any customer it was a backlog of MRO product I I do see supply.
Supply chain driven work in process inventory issues at a lot of a lot of manufacturers.
Appreciate that color I guess I wanted to follow up for my second question on previous commentary around product availability across the industry. So at your competitors I guess as you know industry wide product availability gets better and starts to normalize them. You know what do you think that means for your business at Sao.
Like some of the market outgrowth could compress back to the target range do you think that carries any risk of a price cost as I'd imagine maybe some of those smaller competitors will have to get back their market share and any thoughts on that would be helpful. Thank you.
Yeah, I mean of course of course, we haven't really gone through a period driven by a pandemic like this so any answer here is speculative I would say that more more customer visits that I'm on our ability to keep customers going has actually led to a lot stickier relationships led to us.
Connecting more directly from a digital perspective led to us managing our inventory pools.
We see very strong growth with our keeps talking and so things that were doing on cider are really valued right now so I'm not overly concerned that that will be a detriment you know are we going to grow.
Outgrowth of a 1000 basis points every quarter now or not but we feel like we can gain share consistently and that we've built the right relationships and processes to do that.
Thank you. Our next question comes from Chris Dankert with Loop capital. Please go ahead.
Hey, good morning, Thanks for taking the question.
It looks like the the operating cash flow guidance increase is based principally on that better sales and profitability outlook here.
Anything changed as far as working capital requirements for expectations into the back half of the year here.
Well I mean, as you can kind of see our.
Working capital needs have kind of grown with trying to.
And sure we have the right inventory in and in fact to meet demand and to support our customer sales and so we see that trend continuing I will say you know some of the AAR growth is starting to stabilize here for us a little bit and.
You know just inside collections are strong so we have no issues with collecting from our customers, but it's more a matter of ensuring that we have the right inventory on a go forward basis. You know, we still will have strong growth as you know in the back half that's implied by the guidance. So.
No big material changes I would just say a little bit more stability as it relates to working capital needs.
Okay, and then I guess inventory specific we had expected some of those purchases to taper a bit or flatten out a bit is that kind of still the case.
Well I mean based on what you just heard you say you know, we we still as our customers continue to operate they will still need MRO product and we're building inventory on some skus and on some skus, we still can't quite a build inventory so.
So we will continue to attempt to get inventory levels back to where we feel they need to be to meet demand.
Got it got it okay, and I guess switching gears to tell its assortment.
It is the value per order there continue to trend higher and I guess, how does that.
Trend on value per order compared to what kind of the internal targets are for that metric.
We've seen nice increases in average order value for this business and I think a lot of that has to do with who we're targeting we're targeting only business customers.
And we found ways to avoid acquiring consumers I would say it through that process that helps average order value, we expect that to continue to get a little bit better.
As we continue to refine our processes continue to get more repeat business from those business customers, but.
We feel like we're on a trend it's been a little bit better than we expected actually this year from an average order value, so probably a little better than I expected, but we're basically out of passing a lot of them.
Thank you. Our next question comes from Ken Newman with Keybanc capital markets. Please go ahead.
Hi, good morning.
Hi, good morning.
Yep.
Wanted to follow up on the comments you made earlier in the call about your retail and E. Commerce sales I think they were up mid single digits in the quarter, but could you just talk a little bit.
What's embedded in the sales outlook for that point.
Polio, and maybe just a little bit more color on how customer behavior has changed through the quarter and into July .
And so we we really aren't changing and the outlook for I believe you're talking about our endless assortment. So I don't know.
Yeah, I got it so you're you're talking about our retail segment within Grainger, just just to make sure you understand what that is that is it that has a lot of distribution centers. Some E. Commerce. Some is not so we do do a lot of work with big retailers that are that are that are traditional as well in terms of helping them.
We don't we expect.
That segment to grow slower the rest of the year.
Versus other segments for sure we don't typically give out sort of segment level growth guidance, but we certainly are seeing trends that everybody is seeing and again I think there's the the signal to noise, there's probably not not that as strong as it might otherwise be because what we saw during the pandemic was those channels just explode.
So a lot of our growth was in retail government health care and now that's reversed because the compares are so high. So I don't think it's I don't think it's like activities not strong. It is it's just not growing as fast as some of the other segments are.
Understood. So it's a deceleration rather than a true year over year decline within that customer mix is that fair.
Got it.
And then for my follow up I know theres been a lot of questions on pricing in this call.
Again can you just help me.
And what are the expectations for pricing momentum in the second half will stay at high touch.
And I think.
We are closer to pricing, peaking here within the second half or how we already approached that.
So.
As we go through the Q3 I kind of noted it ended up being a.
Our low point for GE and for US we're looking at continuing to pass on any inflation.
That we may see and we have another opportunity to potentially do that within the third quarter, but it will be nowhere as meaningful as like our first quarter increases I had been.
So we're looking to.
From a full year perspective for price to and you know around the 9% to 10% range and we're a little bit higher than that now and so we're just looking to in the year price cost neutral.
Which is our overall goal and so as D. G noted, while remaining price competitive and the other thing I would say there to add to what he said is that the the.
The slowdown in inflation in the second half isn't really.
Resetting prices with log prices, it's basically the comparisons because we started taking inflation last year in the back half we did yeah. So it's basically just the on the compares to last year, but that's the reason.
Thank you.
And our next question comes from Patrick Baumann with Jpmorgan. Please state your question.
Oh, hi, the the math on the guide suggests you expect SG&A to level off in the second half of the year versus what you just reported in the second quarter and $900 million.
Maybe my math is off but that's kind of what I was coming to it looks like in prior years those costs tend to increase second half versus the second quarter. So the question is if my math is right, which might be wrong and you could just tell me, it's wrong, but if its right, though what causes those costs to be flat sequentially. This year.
So you know I think it's just timing of our investments and so you know earlier this year like in most years.
You know we have you know our variable comp payout and this year based upon performance.
We were able to accrue some of those expenses based upon how we were running an H one.
And settled out in line with our guidance and our forecast. So we don't see a lot of incrementally in the second half from that perspective, and you know we're continuing to invest at a more steady rate and again as D. G noted we started some of those investments.
A little hotter than last year and in the second quarter. So we're comping some of that year over year from an SG&A perspective.
But the good numbers all right.
Okay. So my math is right got it helpful color.
And then.
So in the past you've been more specific on month to date trends you know when you report the quarter is there any way to put a finer point on July when you say that there is no slowdown in demand can I take that to mean that July sales are still running 20% plus at constant currency.
Yes. It was in our script, we noted that yeah yeah.
It is in the script I think you said we were running.
Close to 21 on a constant currency basis, that's correct.
Thank you.
Ladies and gentlemen, there are no further questions at this time I'll hand, the floor back over to D. G. Macpherson for closing remarks, Thank you alright.
Alright, well thanks for joining us it's a pleasure to have you on I hope you all get to enjoy the rest of your summer as a quick reminder, we are hosting our investor day on Wednesday September 21st we hope you can join us in person if possible of our northeast distribution center in new Jersey, or or virtually we really look forward to spending time with you there and again.
Thanks for the time and take care.
Thank you. This concludes today's conference all parties may disconnect have a good day.