Q1 2025 WW Grainger Inc Earnings Call
Operator: Greetings and welcome to the WW Grainger first quarter 2025 earnings call. At this time, all participants are in a listen only mode.
Greetings and welcome to the W. W. Grainger first quarter 2025 earnings call at this time, all participants are in a listen only mode.
Operator: A 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. As a reminder, this conference is being recorded.
<unk> session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Kyle Bland: I would now like to turn the conference over to your host, Mr. Kyle Bland, Vice President and Vest Relations. Thank you. You may begin.
Kyle Bland: I would now like to turn the conference over to your host Mr. Kyle Bland.
Kyle Bland: President of Investor Relations. Thank you you may begin.
D.J. MacPherson: Good morning. Welcome to Grainger's first quarter 2025 earnings call. With me are D.J.
Speaker Change: Good morning, welcome to <unk> first quarter 2025 earnings call with me are D. G Macpherson, chairman and CEO and Dean Meriwether Senior Vice President and CFO.
D.J. MacPherson: Macpherson, Chairman and CEO, and Deane Merriweather, 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 8K and other periodic reports filed with the SEC.
Speaker Change: As a reminder, some of our comments today may include forward looking statements that are subject to various risks and uncertainties.
Speaker Change: 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.
D.J. MacPherson: This morning's call will focus on results for the first quarter of 2025, which are consistent on both the reported and adjusted basis. 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.
Speaker Change: This morning's call will focus on results for the first quarter of 2025, which are consistent on both a reported and adjusted basis.
Speaker Change: Initial 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.
D.J. MacPherson: We will also share results related to Monetaro. Please remember that Monetaro 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 Monetaro's public statements.
Speaker Change: We will also share results related to monetize.
Speaker Change: Please remember that monetary or 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 discussed will differ from monetize public statements now.
D.J. MacPherson: Now I will turn it over to DG. Thanks, Kyle. Good morning, and we appreciate everyone joining the call. Despite the unpredictable environment, the first few months of 2025 have panned out much like we expected. The business continues to perform well as our team stays focused on serving our customers and delivering value to our stakeholders. While tariffs are certainly a topic of conversation, customers remain acutely focused on running their businesses safely and efficiently. I recently had the chance to visit a large corporate campus where we work alongside a facilities maintenance organization to support this customer. Our team shows up as a trusted partner helping the customer solve the challenges they face on the ground each day, including ordering, organizing and managing their MRO and It was again apparent that local onsite execution is critical to creating value for our customers.
D. G.: Now I will turn it over to D. G.
Speaker Change: Thanks, Kyle good morning, and we appreciate everyone joining the call. Despite the unpredictable environment. The first few months of 2025 fifth panned out much like we expected the business continues to perform well as our team stays focused on serving our customers and delivering value to our stakeholders.
Speaker Change: While tariffs are certainly a topic of conversation customers remain acutely focused on running their businesses safely and efficiently.
Speaker Change: I recently had the chance to visit a large corporate campus, where he worked alongside of facilities maintenance organization to support this customer our team shows up as a trusted partner, helping customers solve the challenges they face on the ground each day, including ordering organizing and managing their MRO inventory.
It was again apparent that local onsite execution is critical to creating value for our customers. This visit with a good reminder, that no matter what the external environment. It is important to stay focused on what we can control to ensure that we capitalize on the significant opportunity in the market.
D.J. MacPherson: This visit was a good reminder that no matter what the external environment, it is important to stay focused on what we can control to ensure that we capitalize on a significant opportunity in the market. Although it's largely business as usual on the ground, the external environment remains highly fluid. We're working closely with our supplier partners to understand the full impact that announced tariffs will have on our business. Fortunately, the investments we've made in our product information and pricing capabilities, our scale, and the depth of our sourcing know how position Granger to effectively navigate this situation.
Speaker Change: Although it's largely business as usual on the ground the external environment remains highly fluid.
Speaker Change: We're working closely with our supplier partners to understand the full impact of announced tariffs will have on our business. Fortunately the investments we've made in our product information and pricing capabilities, our scale and the depth of our sourcing knowhow position grainger to effectively navigate this situation.
D.J. MacPherson: As we move forward, we remain committed to ensuring transparency with our customers and adhering to our core pricing tenets, offering market relevant pricing while targeting price cost neutrality over Distributors generally benefit from modest inflationary environments, and depending on the depth and duration of the tariff uncertainty, it may play out that way, but the situation remains highly unpredictable. In any case, we expect to play a key role in helping our customers navigate this current challenge. And I'm confident in the team's ability to remain agile in this dynamic environment.
Speaker Change: As we move forward, we remain committed to ensuring transparency with our customers.
Speaker Change: And adhering to our core pricing tests.
Speaker Change: Operating market relevant pricing, we're targeting price cost neutrality overtime.
Speaker Change: Attributed generally benefit from modest inflationary environment, and depending on the depth and duration of the tariff uncertainty. It may play out that way, but the situation remains highly unpredictable.
Speaker Change: In any case, we expect to play a key role in helping our customers navigate this current challenge and I'm confident in the team's ability to remain agile in this dynamic environment.
D.J. MacPherson: Moving to Q1 results. While the band environment remained muted, we delivered another quarter solid growth and profitability in line with the quarterly financial targets we communicated for the company in January. We continue to leverage technology, our product and customer information advantage, and analytical capabilities to drive differentiated value for our customers in both segments. Total company reported sales for the quarter were up 1.7% or 4.4% on a daily constant currency basis. Operating margins for the company remain healthy at 15.6%. And diluted EPS finished a quarter of $0.24 to $9.86. Operating cash flow came in at $646 million, which allowed us to return a total of $380 million to Grainger shareholders through dividends and share repurchase.
Speaker Change: Moving to Q1 results, while the demand environment remained muted we delivered another quarter of solid growth and profitability in line with the quarterly financial targets, we communicated for the company in January.
Speaker Change: We continue to leverage technology product and customer information advantage and analytical capabilities to drive differentiated value for our customers in both segments.
Speaker Change: Total company reported sales for the quarter were up one 7% or four 4% on a daily constant currency basis.
Speaker Change: Operating margins for the company remain healthy at 15, 6% and diluted EPS finished the quarter up 24 cents to $9.86.
Speaker Change: Operating cash flow came in at $646 million, which allowed us to return a total of $380 million of green to shareholders through dividends and share repurchases.
D.J. MacPherson: Lastly, I want to mention that yesterday we announced a 10% increase to our quarterly dividend marking the 54th consecutive year of expected dividend This reflects our continued commitment to returning cash to shareholders through a balanced and return focused approach. Overall, the quarter finished largely in line with expectations and we remain on track to deliver our 2025 guidance.
Speaker Change: Lastly, I want to mention that yesterday, we announced a 10% increase to our quarterly dividend, marking our 54th consecutive year of expected dividend increases. This reflects our continued commitment to returning cash to shareholders through a balanced and return focused approach.
Speaker Change: Overall, the quarter finished largely in line with expectations and we remain on track to deliver our 2025 guidance I will now turn it over to Steve.
Deane Merriweather: I will now turn it over to Deane. Thank you, DG. Turning to slide seven, you can see the high level first quarter results for the total company, including $4.3 billion in sales, up 4.4% on a daily cash and currency basis. Within the period, we saw gross margin improvement across both segments, which mostly offset SG&AD leverage and high touch. This led to total company operating margins of 15.6% for the quarter, down 20 basis points compared to 2024, but above our communicated first quarter expectations, largely due to the timing of certain SG&A items. Diluted EPS for the quarter of $9.86 was up 24 cents or 2.5% higher compared to the prior year period.
Steve: Thank you D G.
Speaker Change: Turning to slide seven you can see the high level first quarter results for the total company, including $4 3 billion in sales up four 4% on a daily constant currency basis.
Speaker Change: Within the period, we saw gross margin improvement across both segments, which mostly offset SG&A deleverage and high touch.
Speaker Change: This led to total company operating margins of 15, 6% for the quarter down 20 basis points compared to 2024, but above our communicated first quarter expectations largely due to the timing of certain SG&A items.
Speaker Change: Diluted EPS for the quarter of $9 86 was up 24 cents or two 5% higher compared to the prior year period.
Deane Merriweather: Moving to segment level results, the high touch solution segment got off to a slower start as weather, holiday timing and some government softness across January and February impacted results to begin the year. In total, sales are down 0.2% on a reported basis, or up 1.9% on a daily constant currency basis. Results were driven by continued volume growth and modest price contribution within the segment, and we delivered growth across all geographies and local days, local currents.
Speaker Change: Moving to segment level results the high touch solutions segment got off to a slower start as weather holiday timing and some government softness across January and February impacted results to begin the year.
Speaker Change: In total sales were down 2% on a reported basis or up one 9% on a daily constant currency basis.
Speaker Change: Results were driven by continued volume growth and modest price contribution within this segment and we delivered growth across all geographies and local days local currency.
Deane Merriweather: In the U.S. specifically, we saw strong performance with contractors and healthcare customers, which helped to offset slower growth in other areas, including manufacturing. For the segment, gross profit margin finished the quarter at 42.4% of 60 basis points versus the prior year. In the quarter gross margin benefited from favorable product mix and supplier funding tail when related to the annual Granger sales meeting. Each of these items contributed roughly half of the year-over-year gross margin favorability. For the quarter price cost was roughly neutral. SG&A costs for the segment increased over the prior year period, as we continue to invest in demand generating activities and reflect the P&L impact of the annual Grainger sales meeting, which was an equal offset to the favorability we saw in gross margin.
Speaker Change: In the U S. Specifically, we saw strong performance with contractors and health care customers, which helped to offset slower growth in other areas, including manufacturing.
Speaker Change: For the segment gross profit margin finished the quarter at 42, 4% up 60 basis points versus the prior year.
Speaker Change: In the quarter gross margin benefited from favorable product mix and supplier funding tailwind related to the annual Grainger sales meeting.
Speaker Change: Each of these items contributed roughly half of the year over year gross margin favorability for.
Speaker Change: For the quarter price cost was roughly neutral.
Speaker Change: SG&A costs for the segment increased over the prior year period, as we continue to invest in demand generating activities and reflect the P&L impact of the annual green.
Speaker Change: Greens yourselves meeting.
Speaker Change: Which was an equal offset to the favorability we saw in gross margin.
Deane Merriweather: These costs, coupled with the softer top line and one fewer selling day in the current year, led to SG&AD leverage of 80 basis points for the quarter. If you normalize for one fewer selling day and the impact of the Grainger sales meeting, SG&A only slightly delevered year over year. Taking all of this together, operating margin remained healthy at 17.7%, down 20 basis points versus Q1 2024, but ahead of our expectations to start the year.
Speaker Change: These costs, coupled with a softer topline and one fewer selling day in the current year led to SG&A Deleveraged 80 basis points for the corner.
Speaker Change: If you normalize for one fewer selling day and the impact of the Grand yourself meeting SG&A only slightly delever year over year.
Speaker Change: Taking all of this together operating margin remained healthy at 17, 7% down 20 basis points.
Speaker Change: Versus Q1, 2024, but ahead of our expectations to start the year.
Deane Merriweather: Looking at market outgrowth on slide 9, on a volume-only basis using the manufacturing subcomponent of industrial production as a proxy, implied growth for the US MRO market volume was 1 to 1.5% in the quarter.
Speaker Change: Looking at market outgrowth on slide nine on a volume only basis using the manufacturing sub component of industrial production as a proxy implied growth for the U S. MRO market volume was one to one 5% in the quarter.
Deane Merriweather: With our high touch solutions US business driving 1.3% volume growth, this would suggest mathematical market outgrowth on a volume basis was roughly flat in Q1, which was surprising to us, even with our slower start in January and February. While tariffs have not had a meaningful impact on our business to date, they seem to be inflating the underlying IP benchmark, likely reflecting trade related noise as manufacturers react abnormally given the unique environment.
Speaker Change: With our high touch solutions U S business, driving 1.3% volume growth.
Speaker Change: This would suggest mathematical market outgrowth on a volume basis basis was roughly flat in Q1, which was surprising to us even with our slower start in January and February.
Speaker Change: While tariffs have not had a meaningful impact on our business to date, they seem to be inflating the underlying IP benchmark.
Speaker Change: Likely reflecting trade related noise as manufacturers react abnormally given the unique environment.
Deane Merriweather: The IP benchmark has been a strong, accessible indicator of our overall MRO industry performance over multiple cycles, but its ability to capture the dynamic and unprecedented nature of the current economic environment is uncertain. As we've been discussing over the last year, we run a separate internal model in parallel to help triangulate around MRO volume growth. This internal model pulls in several supply and demand factors, including MRO product shipments, import-export dynamics, and end-user activity to formulate a comprehensive view of the MRO landscape, including segments outside of manufacturing.
Speaker Change: The IP benchmark has been a strong accessible indicator of our overall MRO industry performance over multiple cycles.
Speaker Change: But its ability to capture the dynamic and unprecedented nature of the current economic environment is uncertain.
Speaker Change: As we've been discussing over the last year, we run a separate internal model in parallel to help triangulate around MRO volume growth.
Speaker Change: This internal model pulls in several supply and demand factors, including MRO product shipments import export dynamics and end user activity to formulate a comprehensive view of the MRO landscape, including segments outside of manufacturing.
Deane Merriweather: This internal view suggests that the MRO market volume actually declined in the low single digits during the first quarter, implying we drove several hundred basis points of outcome.
Speaker Change: This internal view suggests that the MRO market volume actually declined in the low single digits. During the first quarter, implying we drove several hundred basis points of outgrowth.
Deane Merriweather: While the two different models have been highly correlated during normal business cycles, the divergence calls into question the relevance of our quarterly outgrowth disclosure, given the uncertain environment. It is likely that this quarterly disconnect will persist so long as trade policy and tariffs continue to influence the manufacturer's production decision.
Speaker Change: While the two different models have been highly correlated during normal business cycle. The divergence calls into question the relevance of our quarterly outgrowth disclosure given the uncertain environment.
Speaker Change: It is likely that this quarterly disconnect will persist so long as trade policy and tariffs continue to influence the manufacturers production decisions.
Deane Merriweather: With this, moving forward, we're pivoting to our annual disclosure of our outgrowth metric. We believe this decision will create less quarter to quarter noise and allow us to stay focused on discussing the drivers of our growth while keeping an eye on a relative performance compared to competition.
Speaker Change: With this moving four we're pivoting to an annual disclosure of our outgrowth metric.
Speaker Change: We believe this decision will create less quarter to quarter noise and allow us to stay focus on discussing the drivers of our growth while keeping an eye on our relative performance compared to competition.
Deane Merriweather: We'll consider reintroducing the quarterly disclosure when the macro environment stabilizes. And in the meantime, look forward to sharing our annual progress on volume outgrowth at the end of the year. It's important to note that, despite the noise and the metrics, we still delivered on our first quarter sales expectation, and this change in disclosure has no impact on the full-year high-tech segment sales guidance we discussed back in January. Moreover, nothing is changing with our long term earnings algorithm, including our annual volume outgrowth target, which remains at four to 500 basis.
Speaker Change: We will consider reintroducing our quarterly disclosure when the macro environment stabilizes and in the meantime look forward to sharing our annual progress on volume outgrows at the end of the year.
Speaker Change: It's important to note that despite the noise in the metric we still delivered on our first quarter sales expectation and this change in disclosure has no impact on the full year of Hi Tech segment sales guidance, we discussed back in January.
Speaker Change: Moreover, <unk>.
Speaker Change: Nothing is changing with our long term earnings algorithm, including our annual volume Outgrows target, which remains at four to 500 basis points.
Deane Merriweather: Now focusing on endless assortment. Sales increased 10.3% or 15.3% on a daily constant currency basis, which is just for the impact of the depreciated Japanese yen. Your US was up 18.4%, while Manotaro achieved 13.6% growth in local days, local current. At a business level, Zorro continues its momentum, once again delivering strong growth underpinned by its core B2B customers and improving retention. At Montetaro, sales growth remains strong with enterprise customers, coupled with solid acquisition and repeat purchase rates with small and mid-sized businesses.
Speaker Change: Now focusing on endless assortment.
Speaker Change: Sales increased 10, 3% or 15, 3% on a daily constant currency basis, which adjust for the impact of the depreciated Japanese yen.
Speaker Change: So our U S was up 18, 4%, while monitoring achieved 13, 6% growth in local days local currency.
Speaker Change: At the business level zero continues its momentum once again delivering strong growth underpinned by its core b to b customers and improving retention rates.
Speaker Change: And monetize sales growth remained strong with enterprise customers, coupled with solid acquisition and repeat purchase rates with small and midsized businesses.
Deane Merriweather: On a reported basis, these results were partially offset by foreign exchange, as the yen devaluation represented a headwind year over year. On profitability, operating margins for the segment increased by 80 basis points to 8.7 percent with both businesses contributing to the favorability. Montero margins remain strong at 12% with continued DC efficiencies driving improved operating leverage. At Zorro, operating margins were up 240 basis points to 5.2%, aided by growth margin flow through and strong top line leverage. Gross margins outpace expectations, as we made some non-tariff related pricing changes in the quarter, the benefit of which we expect to moderate slightly as the year continues.
On a reported basis. These results were partially offset by foreign exchange as the yen devaluation, representing a headwind year over year.
Speaker Change: Profitability operating margins for the segment increased by 80 basis points to eight 7% with both businesses contributing to the favorability.
Speaker Change: Monetize margins remained strong at 12% with continued D C efficiencies driving improved operating leverage.
Speaker Change: S. Zoro operating margins were up 240 basis points to five 2% aided by gross margin flow through and strong topline leverage.
Speaker Change: Gross margins outpaced expectations as we made some non tariff related pricing changes in the quarter the benefit of which we expect to moderate slightly as the year continues.
Deane Merriweather: Overall, we're encouraged by the strong progress made in the quarter and expect to continue our momentum across.
Speaker Change: Overall, we are encouraged by the strong progress made in the quarter and expect to continue our momentum across the segment.
Deane Merriweather: Given the environment, I think it would be helpful to share an overview of how we see the current terror On slide 12, there are a few things to call out. First, it's early innings and things are constantly adjusting. Even with the original Chinese tariff, which have been in effect for nearly 60 days, we're only recently recently completing negotiations with a subset of our supplier partners regarding tariff related cost increases. So while we've seen a swift pace of tariff-related headlines, things are progressing more slowly on the ground.
Speaker Change: Given the environment.
Speaker Change: It would be helpful to share an overview of how we see the current tariff landscape.
Speaker Change: I thought slide 12, there are a few things to call out.
Speaker Change: First it's early innings and things are constantly adjusting.
Speaker Change: Even with the original Chinese tariffs, which have been in effect for nearly 60 days. We're only resist recently completing negotiations with a subset of our supplier partners regarding tariff related cost increases.
Speaker Change: So while we've seen a swift pace of tariff related headlines things are progressing more slowly on the ground.
Deane Merriweather: Second, understanding the full impact of the tariffs have on our business is not straightforward and needs to be quantified at a granular level. You can see our total U.S. cause exposure on the left-hand side of the slide. with around 50% being domestically sourced and the remainder comprised of import products, including bills from China. As others in the markets have discussed, this view of COGS is on a country of origin basis and does not further deconstruct individual product components by their respective country of origin. What we can do is take the announced tariff rates and apply that to our total COGS exposure to estimate the impact.
Speaker Change: Second.
Speaker Change: Understanding the full impact of the tariffs have on our business, it's not straightforward and needs to be quantified at a granular level.
Speaker Change: You can see our total U S cause exposure on the left hand side of the slide.
Speaker Change: With around 50% being domestically sourced and the remainder comprised of import products, including belts from China.
Speaker Change: And other than the market's having discussed this deal of Cogs is on our country of origin basis, and does not further deconstruct individual product components by their respective country of origin origin.
Speaker Change: What we can do is take the announced tariff rates and apply that to our total cogs exposure to estimate the impact.
Deane Merriweather: You have to go through each product and evaluate its composition and cost structure. This includes answering questions like where do the input components and where are they sourced? How much of their cost is freight related, etc. You need to do this byproduct to grasp what elements are subject to tariff as you adhere to the government tariff schedule and engage in cost conversations with our supplier.
Speaker Change: You have to go through each product and evaluate its composition and cost structure.
Speaker Change: This includes answering questions like what are the input components and where are they sourced how much of their cost is freight related et cetera, you need to do this byproduct to grasp what elements are subject to tariffs as you adhere to the government tariff schedule and engage in cost conversations with our supplier base.
Deane Merriweather: Given the investment we've made in product information, the tools we've built, and the product teardown work we've completed over the last several years, we feel we are well equipped to navigate this challenge. As we gain clarity on costs, we'll work to pass along these increases to our customers, similar to what we do for other cost increases we receive. With this earlier today, we took initial pricing actions primarily related to Section 232 and the first wave of announced tariffs on China, which did not include any increases related to the recent reciprocal escalation. These initial pricing actions only apply to a small portion of our products, largely those where Grainger is importing the product directly.
Speaker Change: Given the investment we've made in private information the tools, we've built and the product tier down work. We've completed over the last several years, we feel we are well equipped to navigate this challenge.
Speaker Change: As we gain clarity on costs will work to pass along these increases to our customers similar to what we do for other cost increases we received.
Speaker Change: With this earlier today, we took initial pricing actions primarily related to section 232, and the first wave of announced tariffs on China, which did not include any increases related to the recent reciprocal escalations.
Speaker Change: These initial pricing actions only applied to a small portion of our products largely bowls, where granger is importing the product directly.
Deane Merriweather: On the vast majority of our products, where we don't directly import, we are taking a measured approach and we'll wait to pass price until we have clarity on the amount and timing of cost increase. Our goal here will be to mitigate impacts to our business and achieve price cost neutrality over time.
Speaker Change: On the vast majority of our products, where we don't directly import we are taking a measured approach and we're waiting to pass price until we have clarity on the amount and timing of cost increases.
Speaker Change: Our goal here will be to mitigate impacts to our business and achieve price cost neutrality overtime.
Deane Merriweather: Obviously, if the heightened reciprocal tariffs persist, we would need to consider source of supply and overall product economics to determine what course of action we would need. It goes without saying, but this remains a very fluid situation, and we're working side-by-side with our suppliers and customers alike. Importantly, as we look across our assortment today, we don't believe we're uniquely exposed to these tariffs compared to our competitive set. In any case, our team is focused on adhering to our two core pricing tenets to remain price competitive and achieve price cost neutrality over time, and I have full confidence in our ability to remain agile while we execute on these objectives.
Speaker Change: Obviously, if the heightened reciprocal terrorists persists, we would need to consider sources supply and overall product economics to determine what course of action, we would need to take.
It goes without saying, but this remains a very fluid situation and we're working side by side with our suppliers and customers alike.
Speaker Change: Importantly, as we look across our assortment today, we don't believe we are uniquely exposed to these tariffs compared to our competitive set.
Speaker Change: In any case, our team is focus on adhering to our two core pricing tenants to remain price competitive and achieved price cost neutrality over time and I have full confidence in our ability to remain agile while we execute on these objectives.
D.J. MacPherson: As Dede mentioned at the beginning of the call, After our solid start to the year, we're reaffirming our 2025 guidance. From a tariff perspective, we've included price cost impacts we are seeing today and assume any go forward incremental pricing actions passed on price cost neutral basis will be offset by lower demand. Well, the tariff inflation in a vacuum would provide a net tailwind to our business.
D. G.: As D. G mentioned at the beginning of the call.
D. G.: After a solid start to the year, we're reaffirming our 2025 guidance.
D. G.: From a tariff perspective, we've included price cost impacts we are seeing today and there's some any gulfport incremental pricing actions passed on price cost neutral neutral basis will be offset by lower demand.
D. G.: While the tariff inflation in a vacuum would provide a net tailwind to our business.
D.J. MacPherson: It is unclear at this stage what the duration of the tariff will be and what impact they will ultimately have on customer demand. With this, we assume these impacts will offset and are leaving our outlook unchanged, but we'll check and adjust as the year progresses. From a seasonal perspective, we expect the year-over-year sales growth will improve slightly in the second quarter, reflecting normal seasonality and including a modest tailwind from the first wave of tariff-related pricing actions that went into effect today. Preliminary April sales are up approximately 5.5% on a daily cash and currency basis, which includes a 30 basis points headwind from the timing shift of the Good Friday holiday.
D. G.: It is unclear at this stage, what the duration of the tariffs will be and what impact they will ultimately have on customer demand.
D. G.: With this we have sold these impactful offset and are leaving our outlook unchanged, but we'll check and adjust as the year progress.
D. G.: From a seasonal perspective, we expect the year over year sales growth will improve slightly in the second quarter, reflecting normal seasonality and including a modest tailwind from the first wave of tariff related pricing actions that went into effect today.
D. G.: Preliminary April sales are up approximately five 5% on a daily constant currency basis, which includes a 30 basis points headwind from the timing shift of the good Friday holiday.
D.J. MacPherson: All told, we expect the total company sales for the second quarter to be just north of $4.5 billion, or approximately 5% on a daily cash-on-currency basis.
D. G.: All told we expect total company sales for the second quarter to be just north of $4 5 billion or approximately 5% on a daily constant currency basis.
Deane Merriweather: From a profitability perspective, there are a number of moving pieces that we know will impact second quarter results. Moving sequentially from the first quarter, we know growth margins will structurally trend downwards, generally in line with normal seasonality. We've layered in the tariff related price and cost impact that we know of today or can reasonably expect based upon conversations we've had to date with our supplier partners. On SG&A, we expect some leverage improvements sequentially as productivity and sales leverage partially offsets increased costs. We will continue to invest in demand generation. And as with every year, Merit increases went live to start the quarter.
D. G.: From a profitability perspective, there are a number of moving pace pieces that we know will impact second quarter results.
D. G.: Moving sequentially from the first quarter we.
D. G.: You know gross margins will structurally trend downwards.
D. G.: Generally in line with normal seasonality.
D. G.: We've layered in the tariff related price and cost impact that we know of today or can reasonably expect based upon conversations we've had to date with our supplier partners.
D. G.: On SG&A, we expect some leverage improvement sequentially as productivity and sales leverage partially offset increased cost.
D. G.: We will continue to invest in demand generation and as with every year Merit increases went live to start the quarter.
Deane Merriweather: Further, as we've discussed, some expenses that were planned for the first quarter are shifting to the second, creating a sequential headwind. These items are in addition to the previously discussed noise that occurred in the first quarter from the Granger sales meeting. This impact will flip sequentially in the second quarter and become a headwind to gross margin, but an offsetting tailwind to SG&E. Taking all these moving pieces into account, we are targeting second quarter operating margin to be at or near 15% for the total company. Again, this is obviously a highly fluid environment, but we believe our outlook covers a reasonable set of potential outcomes.
D. G.: Further as we've discussed some expenses that were planned for the first quarter are shifting to the second creating a sequential headwind.
D. G.: These items are in addition to the previously discussed noise that occurred in the first quarter from the Grand yourself meeting.
D. G.: This impact will flip sequentially in the second quarter and become a headwind to gross margin and an offsetting tailwind to SG&A.
D. G.: Taking all these moving pieces into account, we are targeting second quarter operating margin to be at or near 15% for the total company.
D. G.: Again this is obviously a highly fluid environment, but.
D. G.: But we believe our outlook covers a reasonable set of potential outcomes.
D.J. MacPherson: With that, I'll turn it back to DG. Thanks, D. Overall, I'm encouraged by how the team has managed through what is a very dynamic environment and how we continue to show up for our customers every day.
D. G.: With that I'll turn it back to D G.
D. G.: Thanks, Steve overall I'm encouraged by how the team has managed through what is a very dynamic environment and how we continue to show up for our customers every day before.
D.J. MacPherson: Before I close, I want to take one more opportunity to acknowledge the strength of the Grainger culture. This four months into the year, we've received several recognitions, including world's most admired companies, glass doors, best places to work, and for our first time ever, the world's most ethical company. Each of these achievements are special individually, but together, I believe they showcase why team members choose to grow their careers with Grainger. Congratulations to the team for earning these notable awards.
D. G.: Before I close I want to take one more opportunity to acknowledge the strength of the grandeur culture. This four months into the year, we received several recognitions, including world's most admired companies glass doors best places to work and for our first time ever the world's most ethical companies. Each of these achievements are special individually, but together.
D. G.: They showcased by team members choose to grow their careers with Grainger congratulations to the team for any of these notable awards.
Operator: And with that, I will open it up for Q&A. Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. In the interest of time, we ask that you each keep to one question and one follow-up. Thank you.
D. G.: With that I will open it up for Q&A.
D. G.: Yeah.
D. G.: Thank you if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
D. G.: You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
D. G.: In the interest of time, we ask that you each keep to one question and one follow up. Thank you are.
David Manthey: Our first question comes from the line of David Manthey with Baird. Please proceed with your question. Thank you. Hi, good morning.
Speaker Change: Our first question comes from the line of.
Speaker Change: David Manthey with Baird. Please proceed with your question.
D.J. MacPherson: First off, let me ask about Zorro, looked like a great quarter and terrific SG&A leverage there. Is the improvement that you're seeing there just based on stronger than expected sales this quarter? Or are you starting to find an equilibrium between revenues and OPEX so we continue to see a higher level of profitability there? Yeah, most most of it is what we think is sustainable revenue growth. So we're seeing nice repeat rates in the business and that that's gotten a lot better. And and we don't have to grow expenses with that revenue growth given where we're at.
David Manthey: Thank you hi, good morning.
Speaker Change: Good morning.
Speaker Change: First off let me ask about Zorro looks like a great quarter and terrific SG&A leverage there is.
Speaker Change: Is the improvement that Youre seeing there just based on the stronger than expected sales this quarter or are you starting to find that equilibrium between revenues and opex. So we continue to see a higher level of profitability there.
Speaker Change: Yes, most of it most of it is.
Speaker Change: But we think it's sustainable revenue growth. So we're seeing nice repeat rates in the business and that's gotten a lot better.
Speaker Change: And we don't have to grow expenses with that revenue growth given where we're at and we're.
D.J. MacPherson: We're in good shape to get leverage if we continue to drive that drive that That's great to hear.
Speaker Change: We're in good shape to get leverage to continue to drive to drive that revenue growth.
D.J. MacPherson: And then second, you've in the past said that you could achieve 20% consolidated contribution margin at kind of a mid single digit rate of growth or higher. If we have this situation where volume and tariff driven pricing net each other out, is it possible you could do that at a slightly lower rate because price is coming through at a higher contribution margin? The short answer is yes, that is true. Obviously, if, if you don't have significant demand degradation with the increased prices, then yes, we would have a lower rate of growth to get that that through that through Terrific.
Okay, that's great to hear.
Speaker Change: And then second you've in the past said that U.
Speaker Change: You can achieve 20% consolidated contribution margin at kind of a mid single digit rate of growth or higher.
Speaker Change: If we have this situation where volume and tariff driven driven pricing net each other out is it possible you could do that at a slightly lower rate because prices coming through at a higher contribution margin.
Speaker Change: The short answer is yes that is true.
Speaker Change: Obviously it is.
Speaker Change: If you don't have significant demand degradation with increased prices and yes, we would do it at a lower rate of growth to get that that drove that pull through.
D.J. MacPherson: Thank you.
Speaker Change: Terrific. Thank you.
Jacob Levinson: Our next question comes from the line of Jacob Levinson with Melius Research. Please proceed with your question.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question comes from the line of Jacob <unk> with Melius Research. Please proceed with your question.
D.J. MacPherson: Good morning, everyone. DJ, I realize you folks have quite a broad product offering here, but can you maybe just speak to your, I guess, your ability to flex your sourcing, given the tariff headwinds, and maybe how you're balancing that versus taking a price, especially given all the inflation we had over the past few years? Yeah, so the good news is we've done a lot of work to understand sources and alternative sources. We've already moved some things over the last few years to allow us to have a more resilient supply chain. The challenge is there are certain categories for which there are really no alternatives, where everything comes from China.
Speaker Change: Hi, good morning, everyone.
Speaker Change: Good morning.
Speaker Change: Uh huh.
Yeah.
Speaker Change: You folks have quite a broad product offering here, but can you maybe just speak to your I.
Speaker Change: I guess your ability to flex your sourcing given the tariff headwinds and maybe how youre balancing that versus.
Speaker Change: Taking a price, especially given all the questions I had over the past few years.
Yes. So the good news is we've done a lot of work to understand sources and alternative sources. We've already moved some things over the last few years to it to allow us to have a more resilient supply chain.
Speaker Change: The challenge is there are certain categories for which there are really the alternatives where everything comes from China for instance.
D.J. MacPherson: And so, you know, that that gets harder, because that takes time, a lot of time, in some cases, to actually move somewhere else. We're talking with our own suppliers on private brand and our brand suppliers. And we're hearing people talk about potentially moving things, but it's not immediate. You know, our hope is that We don't completely shut down trade between China and the US for a long period of time, because obviously we wouldn't have everything we need to support our customers. We do have inventory on hand, and we're doing some creative things to make sure we have the right inventory to support our customers without taking extra costs on.
Speaker Change: And so you.
Speaker Change: You know that that gets harder because that takes time a lot of time in some cases to actually move somewhere else.
Speaker Change: We're talking with our own suppliers on private brand and our brand suppliers and we're hearing people talk about potentially moving things, but it's not immediate.
Speaker Change: You know our hope is that we.
Speaker Change: We don't completely shut down trade between China, and the U S for a long period of time, because obviously, we wouldn't have everything we need to support our customers. We do have inventory on hand.
Speaker Change: We're doing some creative things to make sure we have the right inventory to support our customers without taking extra cost on that I think thats probably did the trick right now our teams are working very hard to make that happen.
D.J. MacPherson: And I think that's probably the trick right now. Our team's working very hard.
D.J. MacPherson: Okay, that's helpful. And is that, I mean, does that apply to your private label offering? Or maybe sort of different ways? I assume the economics change quite a bit with the tariffs as they stand today. They do. I mean, you know, I give you one hypothetical example that plays out a lot. It depends, of course, whether or not the national brand and the private brand are only produced in the same location or whether there's alternatives. But in an example, if a private brand product is and the national brand is made in Indonesia, let's say, if there's different tariffs, that can change the economics.
Okay. That's helpful.
Speaker Change: I mean does that apply to your private label offering or maybe sort of.
Speaker Change: Different, whereas I assume the economics change quite a bit.
Speaker Change: Uh huh.
Speaker Change: They do I mean I gave you gives you won a hypothetical example that that plays out a lot of it depends of course, whether or not the national brand and private brands are only produced in the same location or whether there are alternatives, but.
Speaker Change: An example, if a if a private brand product is made in China and the National brand has made in Indonesia lets say if theres different tariffs that can change the economics and we can be in a position where the private brand doesn't really make any sense anymore and raising the price. They would actually just stop all volume and so there are some cases like that there are some cases that aren't like that.
D.J. MacPherson: And we could be in a position where the private brand doesn't really make any sense anymore. And raising the price there would actually just stop all volume. And so there are some cases like that. There's some cases that aren't like that. And you have to do it on the Okay, that's great.
Speaker Change: And you have to do it on a case by case basis.
D.J. MacPherson: Thank you very much. Good luck, guys. Thank you.
Speaker Change: Okay. That's great. Thank you very much good luck guys.
Ryan Merkel: Our next question comes from the line of Ryan Merkel with William Blair. Please proceed with your question. Good morning. Thanks for taking the question. I want to start off just high level on the macro. It sounds like you haven't seen any slowdown yet in the business just based on the guide you gave for daily sales.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from the line of Ryan Merkel with William Blair. Please proceed with your question.
Ryan Merkel: Hi, good morning, Thanks for taking the question I wanted to start off just high level on the macro it sounds like you haven't seen any slowdown yet in the business just based on the guide you gave for daily sales and then D. G. I don't know what any feedback that you found interesting when youre speaking with customers as it relates to the outlook and what people are concerned about.
D.J. MacPherson: And then DG, I don't know what any feedback that you found interesting when you're speaking with customers as it relates to the outlook and what people are concerned about. Yeah, so so actually, we've seen as the years gone, we've seen actually some accelerated growth April was our best month yet. So we haven't seen a slowdown yet. That said, you know, the the way this works on the tariffs is it takes we have inventory, obviously, and it takes months for that to sort of flow through. So we wouldn't expect to see any tariff related impact on demand yet.
Ryan Merkel: Yes, so actually we've seen as the years ago, we've seen actually some accelerated growth April was our best month, yet so we haven't seen any slowdown yet that said the the way. This works on the tariffs as it takes.
Ryan Merkel: Inventory, obviously and it takes months for that to sort of flow through so.
We wouldn't expect to see any tariff related impact on demand yet.
D.J. MacPherson: And probably starting this quarter, we might see a little bit but but we don't think it's going to be that much and more would happen later. I think shake out and there's a lot of uncertainty there. You know, I say, you know, I think most customers are are embedding modest tariffs into their their thinking. They don't expect it to be significant trade challenges. They think they're going to be able to get product at this point. And they're really focused on running their operation. keeping their people safe and doing the things that they do every day.
Ryan Merkel: Yet and probably starting this quarter, we might be a little bit, but we don't think it's going to be that much more would happen later, depending on how things shake out and there's a lot of uncertainty. There you know I'd say I think most customers are embedding modest tariffs into their thinking they don't expect it to be significant trade challenges.
Ryan Merkel: They think they're going to be able to get product at this point, they're really focused on running their operations in <unk>.
D.J. MacPherson: It hasn't been a lot of conversations about tariffs specifically with my customer interactions. And I think that's primarily because they think this likely gets worked out some way, but nobody knows which way.
Ryan Merkel: Keeping their people safe and doing the things that they do every day and it hasn't been a lot of conversations about.
Ryan Merkel: Tariffs, specifically with my customer interactions and I think that's primarily because I think that's likely gets worked out some way, but nobody knows which way.
D.J. MacPherson: Okay.
D.J. MacPherson: And then second question is on tariffs. I just want to make sure I heard the message right. It sounds like on May 1st, you put through a price increase, but it was only for the direct imports that you're bringing in. And you're sort of waiting to see what the suppliers do. And you'll have an update on what that price increase might be, what, next quarter? Yeah, next quarter, we will. What I would say is mostly just our direct imports. There are a few suppliers that came with increases, and we put those through as well. But generally, it's, on the whole, it's very modest for some specific products.
Ryan Merkel: Yes.
Ryan Merkel: Okay.
Speaker Change: And then second question is on tariffs I just want to make sure I heard the message right. It sounds like on May 1st you put through a price increase but it was only for the direct imports that youre, bringing in and Youre sort of waiting to see what the suppliers do you have an update on what that price increase might be what next quarter, yes.
Speaker Change: Next quarter, we will have what I would say, it's mostly just our direct imports are a few suppliers that came with the increases that we put those through as well, but generally it's on the whole it's very modest.
Speaker Change: For some specific products.
D.J. MacPherson: Okay, thanks.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Thanks.
D.J. MacPherson: Thank you.
Thank you.
Christopher Snyder: Our next question comes from the line of Christopher Snyder with Morgan Stanley. Thank you. Just following up on tariffs, maybe no surprise. Did you guys have you guys, did you guys provide anything in the prepared remarks just around, you know, how much price is flowing through from what's, you know, been announced to date, including, you know, some of the early action on 232 in China, and then, you know, what we got here on the direct imports in May. And You guys did not change the gross margin guidance. Is that just an assumption that, you know, gross margin, you know, can be held through this period of higher cost inflation?
Speaker Change: Thank you. Our next question comes from the line of Christopher Snyder with Morgan Stanley. Please proceed with your question.
Speaker Change: Thank you just following up on tariffs maybe no surprise did.
Speaker Change: Did you guys have you did you guys provide anything in the prepared remarks, just around you know how much prices flowing through from whats.
Speaker Change: That's been announced to date, including some of the early action on $2 32 in China and then you know what we got here on the direct imports in May and <unk>.
Speaker Change: You guys did not change the gross margin guidance.
Speaker Change: Is that just an assumption that gross margin can be held through this period of higher cost inflation. Thank you.
Deane Merriweather: Thank you.
Deane Merriweather: Hey, Chris. So yeah, we didn't prepare in the prepared remarks didn't state a specific number. But we did note that we put through increases related to the tariffs on mainly on imported products. And DG just noted a few other national brand suppliers, we believe that impact will be about one to one and a half percent net impact for us. So, he noted, you know, fairly modest. And then when you look at the gross margin outlook for the year, you know, we did a little bit better in the first quarter. We've taken some price that we know of.
Chris: Hey, Chris.
Chris: So yeah, we didn't prepare in the prepared remarks didn't state a specific number but.
Chris: But we did note that we put through increases related to the tariffs on mainly on imported product and D. G. Just noted a few other national brand suppliers, we believe that impact will be about one to one 5% net impact for us.
Chris: So he he noted fairly modest and then when you look at the gross margin outlook for the year, you know, we did a little bit better and the.
Chris: The first quarter, we've taken some price that we know of we are going to continue to target price cost neutrality over time.
Deane Merriweather: We are going to continue to target price-cost neutrality over time. You know, within that price-cost neutrality, DeeDee just gave an example of where in some cases, you know, because and if, you know, some of these very significant tariffs sustain over a period of time, we're going to have to come back and revisit, you know, how we price our product generally. But the goal will be to achieve that price-cost neutrality over time and due to the noise and the scenarios we have run, we believe, based upon the range, in line with the guidance for the year, that is something that we should still be able to hit.
Speaker Change: Within that price cost neutrality did you just gave an example of where in some cases.
Chris: You know because.
And if you know some of these very significant tariffs sustained over a period of time, we're gonna have to come back and revisit how we price our products generally, but the goal will be to achieve that price cost neutrality travel the overtime and due to the noise and the scenarios. We have run we believe based upon the rate.
Chris: <unk> are in line with the guidance for the year that is something that we should still be able to hit but again more to come we feel like we're going to learn a lot in the second quarter more negotiations will be completed.
Deane Merriweather: But again, more to come. We feel like we're going to learn a lot in the second quarter. More negotiations will be completed. And we'll get a read on price elasticity as well. Thank you. I appreciate that.
Chris: And we'll get a read on price elasticity as well.
Deane Merriweather: And then maybe just following up on some of your commentary earlier around, you know, the benchmark, you know, maybe not being the right benchmark at this period of time. You know, I guess, why does the company think IP is the best way to benchmark volumes? You know, manufacturing is only, I think, about 30% of the mix.
Speaker Change: Thank you I appreciate that and then maybe just.
Speaker Change: Following up on your commentary earlier around the benchmark, maybe not being the right benchmark at this period of time.
Speaker Change: I guess why does the company think IP is the best way to benchmark volumes manufacturing is only I think about 30% of the mix. So I, just wonder could GDP or better.
Deane Merriweather: So I just wonder, you know, could GDP be a better benchmark to, you know, go volumes against? I mean, I wonder if some of the dislocation we're seeing between IP and GDP could be causing some of that performance. Thank you. Yeah, no, appreciate the question. So a couple of things.
Speaker Change: Benchmark to the to go volumes against them and I Wonder if some of the dislocation we're seeing between IP and GDP could be causing some of that performance. Thank you.
D.J. MacPherson: What's not changing? We aren't changing our expectation of what market growth is going to be this year from a volume basis. We aren't changing our revenue projection. We aren't changing the fact that we think Outgrowth particularly on a volume basis is critical for us to be successful long-term and we aren't changing our target But what we're seeing right now, so historically IP manufacturing has been I would say close enough. We know it's not perfect. Our internal model takes into account things like government spending Trade flows those types of things. It's much more accurate, but it was close enough and easy for everybody to understand What's happened here is those two have really gotten to a different place this quarter And as we look at sort of how we're performing around the competitive set similarly We're seeing more positive things for us than than that that metric would suggest.
Speaker Change: Yes.
Speaker Change: The question so a couple of things what's not changing.
Speaker Change: We arent changing our expectation of what market growth is going to be this year from a volume basis, we are changing our revenue projections, we aren't changing the fact that we think.
Speaker Change: Outgrowth, particularly on a volume basis is critical for us to be successful long term and we aren't changing our target, but what we're seeing right now so historically.
Speaker Change: Manufacturing has been I would say close enough. We know it's not perfect. Our internal model takes into account things like government spending.
Speaker Change: Trade flows those types of things, it's much more accurate, but it was close enough and easy for everybody to understand here is is to have really gotten to a different place this quarter and as we look at sort of how we're performing around the competitive set similarly, we're seeing a more positive things for us and then that metric would suggest so.
D.J. MacPherson: So Given the noise, we're just gonna gonna focus on the annual number. We'll get back to you You're right. There's probably a there is a you know, there's a better one.
Speaker Change: Given the noise, we're just going to go to <unk>.
Speaker Change: Focus on the annual number we'll get back to you.
D.J. MacPherson: You know our mark our internal models more accurate We could explain it to you, but it's relatively complex And so we've tried to keep things simple in the past and that's that's been Thank you. I appreciate that teacher. Thank you.
Speaker Change: Youre right. There is probably up there is you know, there's a better way or mark or.
Speaker Change: Our internal models more accurate, we can explain it to you, but its relatively complicated and so we've tried to keep things simple in the past and Thats our goal.
Speaker Change: Thank you I appreciate that would be true.
Thomas Moll: Our next question comes from the line of Tommy Moll with Stephen Dink.
Speaker Change: Thank you. Our next question comes from the line of Tommy Moll with Stephens Inc. Please proceed with your question.
D.J. MacPherson: Good morning, and thank you for taking my questions. DG, I wanted to circle back to your comments around the private label portfolio. If you think holistically there, is it relatively more tied to China and and if we do end up with persistently elevated tariffs there? How much risk to profit dollars, if any, is there to the extent you see customers, as you indicated in the example, shift away from private label to a national brand? Yeah, so so I would say that certainly, private brand is more China centric than the national brands, but not as much difference as you might think, actually, there's a lot of national brands, same China exposure in the same category.
Tommy Moll: Good morning, and thank you for taking my questions.
Speaker Change: Thanks.
D. G.: D G I wanted to circle back to your comments around the private label portfolio.
Speaker Change: Do you think holistically there.
Speaker Change: Is it relatively more tied to China, and if we do end up with persistently elevated tariffs there how.
Speaker Change: How much risk to profit dollars. If any is there to the extent you see customers as you indicated in the example shift away from private label to a national brand.
Speaker Change: Yes, so I would say that certainly.
Speaker Change: That brand is more China centric than the national brands, but not as much difference as you might think actually there's a lot of national brands they've tried to exposure in the same categories. So we.
D.J. MacPherson: So, you know, we, the short answer is we think we can navigate around our private brand. Obviously, if this level of tariff were to persist, I think we'd get into supply challenges for big categories that are really important for our customers, and there may not be other sources. I think that's probably the biggest risk right now. If certain categories become un-cost competitive or non-cost competitive in China, we can move them to other locations in some cases, or just focus on the national brand. And I don't think it would be a huge deal overall. It would be a modest pressure.
Speaker Change: The short answer is we think we can navigate.
Speaker Change: Around our private brands.
Speaker Change: Obviously, if this level of tariff were to persist I think we get into supply challenges for big categories that are really important to our customers and there may not be other sources I think thats, probably the biggest risk right now.
Speaker Change: Certain categories become cost competitive or not cost competitive in China, we can move that to other locations in some cases or just focus on the national brand and I don't think it would be.
D.J. MacPherson: But the issue here is going to be do we actually continue to trade effectively with China? If we do, I think we can navigate things. If we don't, there's going to be some categories that are really Only other thing I would add is that we don't feel like we're We have a unique situation here. So this wouldn't be any different for us than anyone else we're competing with. Yeah, and the other thing on that is, you know, we've looked at where we have unique exposure and it's almost nothing, very, very low. And so everybody's in the same boat here for sure.
Speaker Change: A huge deal overall, it would be a modest pressure, but not yours, but the issue here is going to be do we actually continue to trade effectively with China. If we do I think we can navigate things if we don't there's going to be some categories that are really difficult to get our hands.
Speaker Change: Only other thing I'll add is that we don't feel like we're.
Speaker Change: We have a unique situation here. So this wouldn't be any different for us than anyone else, we're competing with.
Speaker Change: That's the only piece of it at their time, yes, and the other thing on that is we've looked at where we have unique exposure and it's almost nothing very very low.
D.J. MacPherson: Yeah.
Speaker Change: So everybody's in the same boat here for sure.
D.J. MacPherson: Thank you both.
D.J. MacPherson: DG In in recent periods, or I should say previous periods of Market Volatility. Grainger has been able to capture significant market share, and there's probably a whole host of reasons for that. But just as a simple example, I'm thinking about a few years ago, when the supply chain was disrupted, you were able to exploit your scale and buying power. to serve customers better than some of the smaller peers, for example.
Speaker Change: Yeah.
Speaker Change: Thank you both.
D G.
Speaker Change: And in recent periods or I should say previous periods of.
Speaker Change: Market volatility.
Speaker Change: Grainger has.
Speaker Change: <unk> been able to capture significant market share and Theres, probably a hole.
Speaker Change: The reasons for that but just as a simple example, I'm thinking about three years ago. When the supply chain was disrupted you were able to exploit your scale and buying power.
Speaker Change: To serve customers better than some of the smaller peers for example.
D.J. MacPherson: But if you think about the current environment, are there new lanes that you're identifying where you can lean in and once again, exploit some of the scale and sophistication that you've built? over your years as CEO.
Speaker Change: If you think about the current environment.
Speaker Change: Are there.
Speaker Change: New lanes that you're identifying where you can lean in and once again exploit some of the scale and sophistication that you've built.
D.J. MacPherson: Thank you. Yeah, I think I think we're like I said before, I think we're in a good place in terms of understanding the options, I would say, you know, similar to when we went into COVID, you know, our expectation was, we're not trying to win any dip, we're trying to win through the cycle. And I think with COVID and the supply shortages, it was pretty obvious what was going on. I'd say this is pretty uncertain. Still, we're probably going to let this play out for a few more months to understand really what the rules of the game are.
Speaker Change: Over your years as CEO I think I think we're like I said before I think we're in a good place in terms of understanding the options I would say.
Speaker Change: Similar to when we went into Covid.
Speaker Change: Our expectation was what I'm trying to win any dip we're trying to win through the cycle and I think that allowed us to to invest and gain share. We're talking about is similarly, now or are there ways for us to gain share coming through whatever happens here.
Speaker Change: Say it with.
Speaker Change: With Covid and the supply shortages it was pretty obvious what was going on I would say this is pretty uncertain still we're probably going to let this play out for a few more months to understand really what the rules of the game or but certainly I do feel like we will be in good position to.
D.J. MacPherson: But certainly I do feel like we will be in good position to drives some Cherokee.
Speaker Change: Drive some some share gain through this process.
D.J. MacPherson: Thank you.
D.J. MacPherson: I'll turn it back.
Speaker Change: Thank you I'll turn it back.
D.J. MacPherson: Thank you.
Ryan Cook: Our next question comes from the line of Ryan Cook with Wolf Research. Please proceed with your question. Morning, and thank you for taking my question today. Maybe we could just touch on some of the moving pieces in your guide.
Speaker Change: Thank you. Our next question comes from the line of Ryan Cook with Wolfe Research. Please proceed with your question.
Speaker Change: Okay.
Ryan Cook: Good morning, and thank you for taking my question today.
Ryan Cook: I understand that you left the high level framework unchanged, but I'm curious if there's been any push and pull between HTS and EA coming out of the quarter. And also if you could just help parse out price first volume expectations. I think you had said earlier in Q&A that market volume outlook remains unchanged, but presumably you'd be looking at no, you'd no longer be looking at minimal price for the year. Yeah, so you're correct in the fact that there are a lot of moving pieces, which is one of the reasons when we looked at scenarios, the pieces were moving so much, whether it was gross margin, you know, the revenue outlook is the price that we could actually feel certain about at this point in time.
Ryan Cook: Well, maybe we could just touch on some of the moving pieces in your guide I understand that you left the high level framework unchanged, but I'm curious if theres been any push and pull between HTS and coming out of the quarter and also if you could just help parse out price versus volume expectations. I think you had said earlier in Q&A that market volume outlook remains unchanged, but.
Ryan Cook: Typically you'd be looking at no longer would be looking at minimal price for the year. So maybe if you could just touch on that.
Ryan Cook: Yeah, So you're correct in the fact that there are a lot of moving pieces, which is one of the reasons. When we looked at scenarios that pieces. We're moving so much whether it was gross margin you know the revenue outlook is the price that we could actually feel certain about at this point in time.
Deane Merriweather: And then the leverage that we could probably drive for the rest of the year, we actually zoomed out and just said, okay, let's look at our seasonal trends. Let's base our outlook and guide, if we're going to look at it on what we actually know and can understand. And that got us back to really holding the guide that we had laid out, you know, earlier in the year. There are some pieces, as you know, you know, FX has moved a little bit differently. But, you know, we started off the year well, which, which helps us put, you know, a quarter of that in the bank.
Ryan Cook: And then the leverage that we could probably drive for the rest of the year, we actually zoomed out and just said, okay, let's look at our seasonal trends.
Ryan Cook: Based on our outlook and guide if we're going to look at it on what we actually know and can understand and that got us back to really holding the guide that we had laid out you know earlier in the year. There are some pieces as you know FX has moved a little bit differently, but you know we started off.
Ryan Cook: The year, well, which which helps us put you know a quarter of that in the bank.
Deane Merriweather: Growth Margin was stable, and we're on our way to pass price and attempt to reach neutrality on the things that we actually knew, so that helps from a GP perspective. You call out that EA did really well, and it is growing faster than the high-touch business, which generally, at those margin rates, creates a headwind for us, but again, we were not necessarily incorporating, you know, potentially some of the upside that we may see from price over time, and so those things kind of canceled themselves out, so I guess the point I would like you to walk away with is, you know, we understand the dynamics of the business and what could happen.
Ryan Cook: Gross margin was stable.
Ryan Cook: And we're on our way to pass price and attempt to reach neutrality on the things that we actually knew so that that helps from a GP perspective, you call out that he did really well and it is growing faster than the high touch business, which generally at that at those margin rates creates a headwind for us.
Ryan Cook: But again, we were not necessarily incorporating you know potentially some of the upside that we may see from price over time, and so those things kind of cancel cancel themselves out. So I guess the point I would like you to walk away with is you know we understand the dynamics of the business and what could happen.
Deane Merriweather: We have modeled several scenarios, including EA continuing to move fast, you know, in this – grow well in this market, but also, I would point you back to some of our original assumptions related to the market. We knew that the administration was going to pass tariffs. We couldn't size them, but we did estimate that the market would most likely be down from a volume perspective or flat, and it looks like it is playing out that way, and so we've kept that assumption in mind as well. So again, we feel like we're in a good place.
Ryan Cook: We have modeled.
Ryan Cook: Oral scenarios.
Ryan Cook: Including E continuing to move fast.
Ryan Cook: And grow grow well in this market, but also I would point you back to some of our original assumptions are related to the market. We knew that the administration was going to past tariffs, we couldnt size them, but we did estimate that the market would most likely be down from a volume perspective or flat.
Ryan Cook: And it looks like it is playing out that way.
Ryan Cook: And so we've kept that assumption in mind as well.
Deane Merriweather: Any incremental price, we feel like we're going to be able to pass on as long as it's not too significant. But since we have been through several cycles of pretty high inflation, at some point, that's going to start to impact demand. And we're thinking about that and being conservative as we think about the rest That's very clear.
Ryan Cook: So again, we feel like we're in a good place any incremental price, we feel like we're going to be able to pass on as long as it's not too significant.
Ryan Cook: But since we have been through several cycles of pretty high inflation at some point, that's going to start to impact demand and we're thinking about that and being conservative as we think about the rest of the year.
Deane Merriweather: Thank you, D.
Deane Merriweather: And FX was actually going to be my next question. So it sounds like there could be a little upside there, given moves in the dollar. But okay.
Ryan Cook: That's very clear. Thank you D and FX was actually gonna be my next question. So it sounds like there could be a little upside there given moves in the dollar.
Deane Merriweather: So I guess for my second question, you know, we've covered a lot of ground on pricing and tariffs. Maybe if you could just touch on health of the customer groups and any notable trends that you'd highlight. I know government's a chunky exposure for you. So we still seen kind of no impact from Doge or stimulus rollback there. No, this is what I'd say is we're seeing all kinds of impacts at a subsegment level, you know, there were markets that were very, very strong in the quarter. Your comment on government, we think it was relatively weak to start the year.
Ryan Cook: Good Okay. So I guess for my second question you know we've covered a lot of ground on pricing and tariffs maybe if you could just touch on health of the customer groups and any notable trends that you'd highlight.
Ryan Cook: No government chunky exposure for you. So are you still seeing kind of no impact from dozer stimulus roll back there.
Ryan Cook: Hello. This is what I'd say is we're seeing all kinds of impacts at a subsegment level. There were markets that were very very strong in the quarter.
Ryan Cook: I'll comment on government, we think it was relatively weak.
Deane Merriweather: And, you know, we're not as exposed to DOJ, given we're mostly military and state, but the little bit of business that we have, it would be exposed. Certainly that was a little slower. So we did see that. But net, net, there's nothing, there's a lot of movements, but nothing dramatic to really describe at this point. I would say certain manufacturing segments were very, very strong. But but other than that, you know, not not much Appreciate the color.
Ryan Cook: To start the year.
Ryan Cook: And we're not as exposed to those given where mostly military and state, but a little bit of a business that we have that would be exposed certainly that was a little slower. So we didn't see that.
Ryan Cook: But net net there's nothing there's a lot of movements, but nothing dramatic to really describe at this point I would say certain manufacturing segments.
Ryan Cook: We're very very strong aerospace as an example, it was very strong in the quarter.
Ryan Cook: But but other than that you know not not much to really talk about.
Deane Merriweather: I'll turn it over.
Speaker Change: Okay I appreciate the color I'll turn it over.
Deane Dray: Thank you. Our next question comes from the line of Deane Dray with RBC Capital Markets. Thank you. Good morning, everyone. Good morning.
Speaker Change: Thank you. Our next question comes from the line of Deane Dray with RBC capital markets. Please proceed with your question.
Deane Merriweather: Hey, I'm going back to page 12. And the pie chart on the geographic mix, I would have thought China was much higher. And so has that changed meaningfully, let's say in the last five years? And then also, how does that mix look differently versus your channel partners versus private label? Maybe I was thinking the private label is much higher China sourced. The private label is much. Yeah, that's right. The private label is much higher. China sourced. This is sort of end production location as well. So what's the note about this? This is sort of the end production cogs by region.
Deane Dray: Thank you and good morning, everyone.
Speaker Change: Okay.
Speaker Change: Hey, I'm going back to page 12, and the Pie chart on the geographic mix.
Speaker Change: Would have thought China was much higher.
Speaker Change: And so has that changed meaningfully let's say in the last five years and then also how does that mix look differently versus your channel partners versus private label, maybe I was thinking the private label is much higher China source, but private label as much.
Speaker Change: Yeah, that's right. The private label is much higher China sourced this is sort of in production location as well so what what to note about this as sort of the end production Cogs by region, certainly there will be some componentry that we don't capture in our branded product that comes from China. So that number will be high.
Deane Merriweather: Certainly, there will be some componentry that we don't capture in our branded product that comes from China. So that number will be higher when we look at that. We know some of that. We don't know all. So this is just in production at this point. And it's actually China's gone down a little bit over the last several years. Not not fast, but it has gone down a little bit. There's been a shift to Vietnam as an example for some. Mexico picked up a little bit.
Speaker Change: Here when we look at that we know some of that we don't know all of that so this is just and production at this point.
Speaker Change: It's actually China has gone down a little bit over the last several years.
Speaker Change: Fast, but it has gone down a little bit there's been a shift to Vietnam as an example for some categories.
Deane Merriweather: All right, good. That's, that was really helpful.
Speaker Change: Mexico.
D.J. MacPherson: And DG, I know you were dismissive last quarter that there might be any pre positioning by I try to get out in front of any of this. Yeah, not not much. I mean, we placed we placed pretty strong orders for Chinese New Year to make sure we got service right and got out in front of service on private brand products. And then we're doing some things for things that were on the water, for example, to hold them so that we don't take them at a deflated cost, but we still have them accessible when we need them for customers.
Speaker Change: Yeah.
Deane Dray: Alright, good that's that was really helpful and D. G. I know you were dismiss of last quarter that there might be any pre positioning by customers ahead of tariffs and doesn't appear like that happened, but was interested if you wall have done anything differently in terms of sourcing.
Deane Dray: Volumes ahead of tariffs it doesn't look like it in your free cash flow, but just have you been tempted to try to get out in front of any of this but some.
Deane Dray: Some color there would be great, yes, not much I mean, we placed we placed a pretty strong orders for Chinese new year to make sure. We got service right and got out in front of service on.
Deane Dray: Private brand products.
Deane Dray: And then we're doing some things for things that were on the water for example to hold them.
Deane Dray: So that we don't take them at an inflated costs, but we still have them accessible when we need them for customers. So we are doing some things but.
D.J. MacPherson: So we are doing some things. But generally, we haven't we haven't done that much that would that Great.
D.J. MacPherson: And just last one is an observation. I appreciate all of your candor and the outgrowth, kind of the consternation between the two models. And as much as I would love to have real time outgrowth updates from you all, getting an annual number I think is fine and be great if you could revisit those differences at year end. Great. Thank you. Appreciate it. Thank you.
Deane Dray: But generally we haven't we haven't done that much that would that would show up.
Deane Dray: Great and just last one as an observation I appreciate all of your candor and the outgrowth.
Deane Dray: Kind of consternation between the two models and as much as I would love to have real time outgrowth updates from you all getting an annual number I think is fine and be great. If you could revisit those differences at year end, but I appreciate it great. Thank you appreciate it.
Sabrina Abrams: Our next question comes from line of Sabrina Abrams with Bank of America.
Deane Merriweather: Please proceed with your Hey, good morning. Hey, thank you. Thanks for the question. I'm going to go back to the price and tariffs. So I guess, I think, Dee, you mentioned that it was one to one and a half percent net impact in 2Q. And I guess I'm just curious. So if I, I understand, like, maybe not, it's not all not, you haven't raised prices on everything at this point, based on the tariffs. But just like, if I think about the China COGS and the percentage of China imports to the U.S., I think I get to, with the 145 percent tariff, I think I get to a very robust price increase, like something in, like, the mid-teens level.
Speaker Change: Thank you. Our next question comes from the line of Sabrina Abrams with Bank of America. Please proceed with your question.
Sabrina Abrams: Hey, good morning good.
Speaker Change: Good morning.
Speaker Change: Thank you. Thanks for the question I'm going to go back to the price and tariffs.
Speaker Change: So I guess I.
Speaker Change: I think the you mentioned that it was one to one 5% net impact in Q2, and I guess I'm just curious so if I understand like maybe not it's not Oh I'm not you haven't raised prices on everything at this point based on the cash, but just like if I think about the China Cogs and the percentage of China.
Speaker Change: Ana imports to the U S. I think I got the with the 145% tariff I think I got to a very robust price increase like something in like the mid teens level and I guess, just curious how to sort of bridge from the ones who wanted to have firsthand, what's implied just for like China alone and like the mid to high teens and I guess.
Deane Merriweather: And I guess just curious how to sort of bridge from the one to one and a half percent to what's implied just by, like, China alone and, like, the mid-to-high teens. And I guess, like, yeah, just thinking about, like, the different, I guess, like, getting from one to one and a half percent, maybe it goes higher in the second half, and how to think about, like, the price increases on China. And, like, if, you know, the tariffs do stay in place, like, do we see pricing reach, like, 16, 17, 20 percent plus in your business?
Speaker Change: Yeah, just thinking about like the different I guess like getting from one to one 5% maybe it goes higher in the second half and how to think about like the price increases in China and like if the tariffs do stay in place like do we see pricing reach like 16, 17, 20% plus in your business. Thank you.
Deane Merriweather: Thank you. Yeah, yeah. So Just as a reminder, the tariffs that we took were on direct imports, meaning our own private brands. Mostly, we took a few increases on national brand product, but mostly it was our, our own product. And that's a relatively smaller portion of the product. And and certainly some of those products did increase into the into the mid teams that that is that is true. But as a percent of the whole that's very, that's pretty small. And so that's where you get the one to one. If, and this does not contemplate any of the 145%, obviously, that is a different thing altogether.
Speaker Change: Yeah, Yeah. So.
Speaker Change: Just as a reminder, the tariffs that we took were on direct imports meeting our own private brands, mostly we took a few increases on national brand product, but mostly it was or our own product and that's a relatively smaller portion of the product and certainly some of those products did increase into the.
Speaker Change: The teams that as that is true.
Speaker Change: But as a percent of the hole, that's that's pretty small and so that's where you get the one to one and a half now.
Deane Merriweather: And if, if we had to price that in, if our suppliers had to price it in, it would be quite a change. And so right now, the behavior we're seeing for our suppliers, they know that if they take the prices up that much, we're not going to sell anything. And so we're working through everybody sort of working through what's going to happen and how we're going to handle that.
Speaker Change: And this does not contemplate any of the 145% obviously that is a different thing altogether.
Speaker Change: And if if we had to price that and suppliers have to price it and it would be.
Speaker Change: Quite a change and so right now the behavior, we're seeing for our suppliers. They know that if they take the prices up that much product to sell anything in some cases.
Deane Merriweather: But so far, it's Thank you. That makes sense.
Speaker Change: So we're working through it because we're working through what's going to happen and how we're going to handle that but so far it's been relatively modest.
Deane Merriweather: And then could you just provide a little more color on the price-cost dynamics through the year? I think there's a comment on the slide about being lumpy, but just want to understand expectations around price-cost and QQ and sort of how that cadence trends through the year. Yeah, thanks for the question. And so, you know, just I will say I continue what DG started with. At the highest level, you know, there's a lot of noise in the news about inflation. However, on the ground, things are moving a whole lot slower. And so the reason why we took the step to take the increases that we did is because those are more known, they've been negotiated.
Speaker Change: Thank you that makes sense.
Speaker Change: And then could you just provide a little more color on the price cost dynamics through the year I think theres a comment on our side about it being lumpy.
Speaker Change: But just wanted to understand.
Speaker Change: Expectations around price cost and QQ and sort of how that cadence trends through the year.
Speaker Change: Yes, thanks for the question and.
Speaker Change: So.
Speaker Change: Just I will say I continue what did you started with.
Speaker Change: At the highest level you know, there's a lot of noise in the news about inflation.
Speaker Change: However on the ground things are moving a whole lot floor.
Speaker Change: And so the reason why we took the step to take.
Speaker Change: The increases that we did is because those are more known they've been negotiated.
Deane Merriweather: And, you know, some of those standard costs in our system are being changed and thus the prices being And so we did layer in this first pass of price inflation. You know, and that will have an impact, a slight impact as it is modest on the second quarter. But there's a lot of puts and takes related to, I would say, price, gross margin and profitability as we go from Q1 to Q2. As you know, from Q1 to Q2, structurally gross margin uses usually trends downward in the second quarter. We layered on the tariff from that perspective, and then SG&A, there's also quite a bit of We expect to gain some leverage as we move sequentially from Q1 to Q2, and in the prepared remarks, I noted that some of the favorability from Q1 SG&A.
Speaker Change: And you know some of those standard costs in our system are being changed and thus the prices being changed and so we did layer in this first passive price inflation.
Speaker Change: You know and that will have an impact a slight impact because it is modest.
Speaker Change: On the second quarter.
Speaker Change: But there's a lot of puts and takes related to them.
Speaker Change: Well, let's say price gross margin and profitability as we go from Q1 to Q2.
Speaker Change: As you know from Q1 to Q2 structurally gross margin users usually.
Speaker Change: Turns downward in the second quarter.
Speaker Change: We layered on the tariff.
Speaker Change: From that perspective, and then SG&A, there's also quite a bit of noise, we expect to gain some leverage as we move sequentially from Q1 to Q2.
Speaker Change: And in the prepared remarks, I noted that.
Deane Merriweather: flows into Q2. So that'll be a headwind. And then we have this noise with Grainger sales meeting that also impacts us both on gross margin and operating margin.
Speaker Change: Some of the favorability from Q1 SG&A.
Speaker Change: Flows into Q2, so that'll be a headwind.
Speaker Change: And then we have this noise with Grainger sales meeting.
Deane Merriweather: So I wanted to point everyone to the fact that we expected for the second quarter operating margin to be about 15, because it is so noisy it's kind of hard to follow all the noise and some of the things straight through. But as you think about the rest of the year, if you know, tariffs remain modest as we continue to work through negotiations, we feel like we'll be able to manage that from a price cost perspective. There may be some timing differences, but you know, we will provide you that insight as we do on a quarter basis on how things are trending.
Speaker Change: That also impacts us both on gross margin and operating margin. So I wanted to point, everyone to the fact that we expected.
Speaker Change: For the second quarter operating margins will be about 15, because it is so noisy it's kind of hard to follow all the noise and some of the things straight through that as you think about the rest of the year.
Speaker Change: If tariffs remain modest as we continue to work through negotiations, we feel like we will be able to manage that from a price cost perspective, there may be some timing differences, but you know.
Speaker Change: We will provide you that inside as we do on a quarter basis on how things are trending and we feel like the overall guidance still holds intact.
Deane Merriweather: And we feel like the overall guide still holds intact from an operating margin range, including operating cash flow, and some of our other expenditures, like CapEx, share repurchase, and the announced dividend that we just had. Thank you.
Speaker Change: From an operating margin range, including operating cash flow and some of our other expenditures like capex share repurchase and the announced dividend that we can do that.
Speaker Change: Thank you.
Christopher Glynn: Our next question comes from the line of Christopher Glynn with Oppenheimer and Company. Yeah, thanks. Good morning and afternoon. Um, so going back to the Zorro strength, uh, you know, I know it's in a different growth zip code from HTS, but the spread of growth is pretty unique historically. So, I'm just curious if we were in, like, a 3 to 4% HTS environment, would you be expecting Zorro to be putting up 25 to 30%? Is there a multiplier on end market increments to the upside?
Speaker Change: Thank you. Our next question comes from the line of Christopher Glynn with Oppenheimer <unk> Company. Please proceed with your question.
Christopher Glynn: Yes, thanks, good morning and afternoon.
Speaker Change: So going back to the zoro strength.
Speaker Change: I know, it's been a different groups Zip code from HCS, but the spread of growth is pretty unique historically, so I'm. Just curious if we were in like a 3% to 4% HTS environment.
Speaker Change: Would you be expecting zero to be putting up 25% to 30% is there a multiplier on end market increments to the upside.
D.J. MacPherson: No, I, what I would say is I generally focus on different end markets. And so, um, Zorro's growth is typically its ability to acquire high quality customers that are more midsize and smaller, uh, and then to get them to repeat. And most of their growth, frankly, is in their hands. And so it really isn't linked to Hightouch given Hightouch is focused on more industrial, larger customers. with all kinds of added services. Zorro is a business, it's very much a marketing focused business.
Speaker Change: No what I would say is they generally focus on different end markets and so.
Speaker Change: Zero is growth is typically its ability to acquire high quality customers that are more midsize and smaller.
Speaker Change: And then to get them to repeat and most of their growth frankly is in their hands and so it really isn't linked to high touch given high touch is focused on more industrial larger customers with all kinds of added services zoro as a.
D.J. MacPherson: I'm trying to gain share with those those mid-sized and smaller Okay, great.
Speaker Change: Business, it's very much a marketing focused business I'm trying to gauge here with us those midsized and smaller companies.
D.J. MacPherson: And then just within the US, DG, any, you know, interesting divergences geographically regions within the US? Now, not that we've seen we haven't seen anything really. Okay, thank you. My other questions have been asked. Thank you.
Speaker Change: Okay, Great and then just within the U S D G any.
Speaker Change: Interesting divergences geographically regions within the U S.
Speaker Change: No not that we've seen we haven't seen anything really interesting there.
Speaker Change: Okay. Thank you my other questions have been asked appreciate it thanks.
Katie Fleischer: Our next question comes from the line of Katie Fleischer with KeyBank Capital Markets. Please proceed with your question. Hey, thanks for squeezing me in. I just have one question here.
Speaker Change: Thank you. Our next question comes from the line of Katy flanker with Keybanc capital markets. Please proceed with your question.
Deane Merriweather: Is there any way to quantify the amount of price increase requests that you have gotten from your suppliers and how long that will take to flow through to the P&L? So we probably won't talk about the the amount of increased requests. They've been all over the map. I will say that. So we've had some very high and some some modest. Flowing through the P&L, though, I think is an interesting question, you know, we typically have. say three months worth of inventory already. And so it does take a while for this to flow through and we have to place the orders and then we actually have to receive the orders for the cost to change.
Katy Flanker: Hey, Thanks for squeezing me in I just have one question here.
Katy Flanker: Is there any way to quantify the amount of price increase requests that you have gotten from your suppliers and how long that will take to flow through to the P&L.
Katy Flanker: So we probably won't talk about the amount of increase request they've been all over the map I will say that so we've had some very high in some some modest ones are flowing through the P&L, though I think is an interesting question. We typically have.
Katy Flanker: I'd say three months worth of inventory already and so it does take a while for this to flow through and we have to place. The orders and then we actually have to receive the orders for it for the cost to change it. So it will take some time.
Deane Merriweather: And so it will take some time. We will see a little bit of that in the second quarter. But I'd say more of it in the third quarter. Okay, helpful. Thank you.
Katy Flanker: We will see a little bit of that in the second quarter.
Katy Flanker: But I'd say more of it in the third quarter and beyond we'll start to see that flow through.
Speaker Change: Okay helpful. Thank you. Thank you.
Patrick Baumann: Our final question this morning comes from the line of Patrick Baumann with JPMorgan. Please proceed with your question. Hi, good morning.
Speaker Change: Thank you. Our final question. This morning comes from the line of Patrick Baumann with Jpmorgan. Please proceed with your question.
Patrick Baumann: On the comparison of branded versus private label product, is there a rule of thumb or an average, you know, where your private label competes with a branded product? Like what percent discount in price the private label brand is to the branded product? And then what the difference is in gross margin between them?
Patrick Baumann: Alright, good morning.
Patrick Baumann: On the comparison of branded versus private label product is there a rule of thumb or an average.
Patrick Baumann: [noise], where your private label competes with a branded product like what what percent discount in price the private label brand as to the branded product.
Deane Merriweather: And then in terms of, I know you've probably looked at this very detailed, is there a percentage risk that you're thinking about as a percentage of your private label portfolio that's sourced from China that would, you know, be non-competitive if the tariffs held that at, you know, the 145 percent number? Yeah, so, so, you know, what I would say is that you have to do this on an individual product basis, and in some cases, our private brand have a modest cost advantage. And if the tariffs are big, they will be underwater immediately. And in that case, the So the GP between the private brand and the national brand isn't actually that big of a difference.
Patrick Baumann: And then what are the differences in gross margin between them.
Patrick Baumann: And and then in terms of I know you've looked at this very detailed but is there a percentage risk that youre thinking about.
Patrick Baumann: As a percentage of your private label portfolio, that's sourced from China that would.
Patrick Baumann: Be noncompetitive.
If the tariffs tell that.
Patrick Baumann: 145% number.
Patrick Baumann: Yeah. So so you know what I would say is that you have to do this on an individual product basis and in some cases, our private brands has a modest cost advantage and if the tariffs are big they will be under water immediately and in that case.
Patrick Baumann: So the the GP between the private brand in the natural light isn't actually that big of a difference so that'll be an impact but not a huge.
Deane Merriweather: So that'll be an impact, but not a huge one. smaller on those those those products in that. So far, the the cost increases that we price increases we put through on those cost increases we've been to pass those through and then that'll make sense. Like I said before, it's 145% we're going to sustain and that's where you're some issues where we probably affect gross margin.
Patrick Baumann: It could be smaller on those those those products are in that case so far.
Patrick Baumann: The cost increases that we price increases we put through on those cost increases we've been able to pass those through.
Patrick Baumann: I think that it makes sense like I said before it's 145% were to sustain and that's where you're going to have some issues, where we probably affect gross margin in the short term potentially.
Deane Merriweather: Okay, and then in looking at your comment on slide 12, again, back to that slide where you mentioned that total cogs isn't subject to the full tariff increase, resulting in net inflation being lower for Grainger. Can you help us understand how much of your COGS is product and input costs versus some of those other buckets like freight supplier markup, other costs that maybe won't be subject to the tariffs? We don't give all of those details, but, you know, some of the things that we have talked about in the past that I think are fair to reiterate is that freight as a percent of COGS is, you know, generally in the, you know, mid to high single digits for us.
Speaker Change: Okay and then in looking at your comment on Slide 12, again back to that slide where you mentioned that total Cogs.
Patrick Baumann: Isn't subject to the full tariff increase.
Patrick Baumann: Resulting in net inflation being lower for.
Speaker Change: Grandeur can you help us understand how much of your Cogs this product and input cost versus.
Speaker Change: Some of those other buckets like freight supplier mark up at other costs that maybe won't be subject to the tariffs.
Speaker Change: Well, we don't give all of those details, but you know some of the things that we have talked about in the past that I think our fairness to reiterate is that freight as a percent of Cogs as you know generally in the you know mid to high single digits for us.
Deane Merriweather: But this is the detailed work that we've done to be able to understand that, and by and large, you could assume that the product piece is the majority of the impact, but as DG noted, you really have to go through product by product cost and then composition of the product to really get to the tariff amount, and I know it's hard, you know, for you all to attempt to model this, but it's also difficult for us as well as our supplier partners to get to the right answer here, and that's why we're really, our teams are really taking a very measured approach, and I really appreciate that our supplier partners are doing that as well with us, and then we're also trying to partner on the other end with customers to help them understand that, you know, we have much more knowledge.
Speaker Change: But this is the detailed work that we've done to be able to understand that and by and large you could assume that the product piece of the the majority of the majority of.
Speaker Change: The impact, but as D. G node. It you really have to go through product by product costs.
Speaker Change: And then composition of the product to really get to the tariff amount and I know it's hard you know for you all to attempt to model. This but it's also difficult for us as well as our supplier partners to get to the right answer here and that's why we're really our teams are really taking a very measured approach and I really appreciate that our supplier partners are doing.
Speaker Change: That as well with US and then we're also trying to partner on the other hand with customers to help them understand that.
Speaker Change: We have much more knowledge.
Deane Merriweather: Thank you.
Operator: Ladies and gentlemen, that concludes our question and answer session.
Speaker Change: Thank you.
D.J. MacPherson: I turn the floor back to Mr. Macpherson for any final comments. So thanks for joining us today. You know, we spent a lot of time talking about tariffs and, and while we don't know where those are going to shake out, I just would reiterate that our business is focused on making sure we can serve our customers well, protect service, and work with our partners effectively to get the right outcome. We will be thoughtful. We will not react too quickly and we'll get to the best answer. We feel like we've got a good position given our product information, our understanding of sources, and some of the things we've evaluated in the past help.
Speaker Change: Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Macpherson for any final comments.
Speaker Change: So thanks for joining us today.
Speaker Change: We spent a lot of time talking about tariffs and while we don't know where those are going to shake out I just would reiterate that our business is focused on making sure. We can serve our customers well protect service.
Speaker Change: And work with our partners effectively to get to the right outcome here.
Speaker Change: We will be thoughtful we will not react too quickly and we'll get to the best answer we feel like we've got a good position given our product information and understanding of sources and some of the things we've evaluated in the past help us have a good position heading into this.
D.J. MacPherson: have a good position heading into this. But this is all about making sure we can serve our customers effectively and protect service. do that in a financially prudent way. So I want to thank everybody on our team and our suppliers for helping us with this. And thanks for joining today and take care.
Speaker Change: But this is all about making sure we can serve our customers effectively and protect service in and do that in a financially prudent way. So I want to thank everybody on our team and our suppliers for helping us with this and thanks for joining us today and take care have a great weekend.
Operator: Have a great Thank you.
Operator: This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.