Q2 2025 WW Grainger Inc Earnings Call
Greetings and welcome to the W.W. Grainger second quarter 2025 earnings conference call.
At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation.
Conference. Please press star zero on your telephone keypad.
Please note that this conference is being recorded.
I will now turn the conference over to your host Kyle Bland vice president investor relations. Thank you. You may begin.
Good morning. Welcome to Grainger's second quarter 2025 earnings call. With me are DJ McPherson, Chairman and CEO, and Deidra Merriwether, Senior Vice President and CFO.
As a reminder, some of our comments today may include 4 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.
Results for the second quarter of 2025 are consistent on both the reported and adjusted basis, but will be compared to address the results from the prior year period, which were normalized for restructuring costs incurred in the second quarter of 2024.
Definitions and full. Reconciliations of our non-gaap financial measures with their corresponding Gap. Measures are found in the tables at the end of this presentation and in our earnings release, both of which are available on our IR website.
We will also share results related to monetarily, please, remember that? Monitor was a public company and files Japanese gap which differs from us gaap and is reported in our results 1 month in a Rears
as a result, the numbers discussed will differ from monetarily public statements.
Now, I'll turn it over to DJ.
Thanks, Kyle. Good morning, everyone, and thank you for joining today.
In the second quarter of the external environment, it continued to present a degree of uncertainty.
What we're observing in the field, though, is largely business as usual, with a sharp focus on execution.
Customers are seeking reliable partners who can help them manage the current complexity, and Grainger is proud to be that partner.
I recently spent some time with manufacturing and Industrial customers in Salt Lake City,
these conversations consistently focused on how Granger can help them Drive efficiencies.
Lowering their purchasing costs and improving Inventory management. In times of uncertainty, our role becomes even more important and we are uniquely positioned to help our customers, strengthen their purchasing processes and overall operations.
To that end, we continue to collaborate closely with our supplier Network, to uphold our standard of getting customers, the right products, when and where they need them.
We built a strong Foundation anchored by a world-class supply chain and enhanced by strategic investments in product information and digital capabilities. These efforts combined with our scale, deep supplier relationships and ability to provide alternative products Solutions, allow us to deliver unmatched value in any environment.
Beyond serving, our customers operations. We also recognize our broader responsibility to the communities, we serve in times of need, we remain steadfast in our commitment to supporting local communities, with emergency response and Recovery efforts. It's a part of who we are and how we show up every day.
I am proud of the resilience and dedication, demonstrated across our organization and remain confident, that our team will continue to deliver value for our customers, our communities, and our shareholders.
In the second quarter, we delivered solid results that, in total, were largely in line with our May verbal guide.
Total company reported sales for the quarter. Were nearly 4.6 billion up to 5.6% or 5.1% on a daily constant currency basis.
Property margins for the company were 14.9%, and diluted EPS finished the quarter up 21 cents to $9.97.
Operating Cash Flow came in at 377 million, which allowed us to return a total of 336 million, to Greater shareholders, through dividends and share repurchases.
Importantly, why the headline results for the second quarter played out largely as expected? They do reflect our estimate of tariff related lifo, inventory valuation headlines.
As D will discuss without this cycle impact, our operating margin would have been flat year-over-year in the period.
As we look ahead, we anticipate the continued life of headwinds along with further price cost timing pressures will impact our performance in the back half of the year. And as a result, we are updating our earnings outlook for 2025, which D will detail. In a moment, importantly, these accounting and timing effects are mostly transitory and our expectation is a gross margin will begin to recover over time as we work back toward our price cost neutrality Target. And with that, I'll turn it over to D to go through the details.
Thank you. DG
Turning to slide 7, you can see the high-level second quarter results for the total company, including $4.6 billion in sales, up 5.1% on a daily constant currency basis.
Within the period, we saw gross margin. Softness from segment, mix and from the aforementioned tariff, related impacts within the high-touch business, including noise, from lifo, inventory accounting.
In line with our communicated expectations.
Diluted EPS for the quarter of $9.97 was up 21 cents, or 2.2%, compared to the prior year period.
Moving to segment level results.
The high-tech solution, segment, delivered solid, solid growth in the quarter.
In total, sales were up 2.5% on the reported basis or up 2.8% on the daily constant currency basis, with growth across all geographies and local days in local constant currency.
Results were driven by continued volume growth and modest price inflation in the segment.
From an in-market perspective, our indicators suggest the mro market remained muted but was softer than expected.
We saw strong performance with contractor and healthcare customers, which helped to offset slower growth in other areas of the business.
For the segment growth profit, margin finished the quarter at 41% down 70 basis points versus prior year.
In the quarter, we saw a negative price-cost spread as we progressed negotiations with suppliers and elected not to pass any off-cycle price increases onto our customers.
This cost timing related lumpiness in the period; however, as pricing catches up starting with our regular September cycle, we expect price cost will begin to recover.
Further, because we are on LIFO, we had to pull through the current estimated impact of all effective cost increases known to date.
Putting further pressure on margins in the quarter.
These two tariff-related impacts were only partially offset by a favorable mix and freight in the period. I would note that if we were not on LIFO, our gross margin rate would have been flat compared to the prior year's quarter.
On sgna. WE slightly de-lever in the quarter as we continue to invest in marketing.
These costs along with our annual Merit increases that went live to start the quarter.
Were only partially offset by productivity, gains and sales Leverage.
taking all of this together, operating margin for the segment finished at 16.6% down, 90 basis points, versus the prior year quarter
Now focusing on endless assortment segments.
Sales increased 19.7% or 16.3% on the daily constant currency basis, which normalizes for the FX Tailwind realized in the period.
The Euro US was up 20%.
We achieved a 16.4% growth in local constant currency.
At a business level, zero continues its strong momentum, driven by growth from its core B2B customers, along with improving customer retention rates.
At Monitorul, sales growth remains strong, with continued growth from enterprise customers coupled with solid acquisition and repeat purchase rates from small and mid-size businesses.
From profitability, operating margins for the segment increased by 200 basis points to 9.9% with both businesses, contributing to the favorability.
Monitor's margins remain strong at 13.2%, as they continue to gain operating leverage.
At Zoro operating. Margins accelerated sequentially and were up 380 basis points year-over-year to 5.8% aided by gross margin flow through and strong Topline Leverage
At sales comps become more pronounced for Zoro, in the back half of the year. We do anticipate, this margin outperformance will moderate slightly as the year continues.
beyond the results, you will see in the appendix that the team took steps in the period to optimize Zero's assortment
specifically, net skews decline by 1.1 million in the quarter driven by, the elimination of some low volume, low service items.
This near-term reduction is part of an ongoing effort to further improve the customer experience at Zoro and has no impact on our go forth strategy or expected financial performance.
Looking forward, our optimization efforts will continue over the next several quarters, but we expect net assortment growth for the business over time.
Overall.
We had an exceptional first half across endless, assortment and we remain confident in the team's ability to continue delivering strong results. Going forward.
Where we are with tariffs.
As we shared during our first-quarter earnings call.
We took initial pricing actions in May primarily related to section 232.
and the first wave of announced tariffs on China.
These initial pricing actions, only apply to a small portion of our products largely. Those were Granger is important. The product directly.
As part of this initial wave, we did not take any pricing action on the reciprocal escalation.
Frequently, we expect our initial pricing actions to hold as they relate to tariff levels that remain in place today.
At this point is a bit early to get an accurate elasticity read. But as the full competitive set, takes price through the cycle. We still expect. These May price actions will approach the previously discussed 1 to 1.5%. Net annualized, price inflation, run rate for the high-touch business.
On the vast majority of our remaining products, we were grinders. We are not the direct importer. We continue to work with our supplier partners regarding tariff-related cost increases.
We finalizing the negotiations on a number of impacted skus but expect conversations to be iterative throughout the balance of the year. As a tariff environment remains highly fluid
Looking ahead to the third quarter, we expect to adhere to our regular cycle, with our next pricing action slated to go live in early September.
This round will include some further increases on products directly imported by Granger to reflect current tariff rates.
Which are higher than what we passed in May.
The September cycle will also include initial pricing actions on supplier. Imported products where we have finalized negotiations,
The past price from this round is expected to result in net annualized incremental, price of 2, to 2 and a half percent on the raw rate basis for the high-touch business.
Note that these run rate, price figures are annualized.
And on a cumulative basis, we'll lay across the full year 2025 to deliver close to 1% price increase in total for the high-touch business.
As we wait on pricing actions until September, we do anticipate continued headwinds from price cost and further LIFO inventory valuation impacts in the third quarter.
But as we pass price, we expect gross margin to recover to more normal levels over time.
The team continues to stay nimble as the cost environment evolves.
And we take and and we take actions as needed over the remainder of the year and into 2026.
Despite the anticipated lumpiness, we remain focused on adhering to our two core pricing tenants: to remain priced competitively and to achieve price cost neutrality over time.
Now, moving to the updated outlook for the remainder of 2025.
First, we're adjusting our sales outlook to reflect both the latest FX rates and the aforementioned pricing actions, the latter of which we expect will contribute around 1% in total for the high-touch business in 2025.
These Tailwinds are partially offset by the softer than expected mro market. We've seen to date, which we don't expect will recover in the back, half of the year.
More notably, as DJ mentioned, at the beginning of the call, we're updating our Outlook to reflect the Tariff related price cost timing headwinds and our current full year estimate for the lifo, valuation impact.
Consequently, we're, we've lowered, our gross margin guide with the total company. Now expected to be be between
38.6% and 38.9% or down. 80 to 50 basis, points year-over-year.
Is largely unchanged and therefore this gross margin pressure will flow through to operating margins where we now expect the total company will finish between 14.7% and 15.1%.
This all translates to earnings per share between 38.50 and 40.25 roughly 1% year-over-year at the midpoint.
Updates were also made to our supplemental guidance, which included a $100 million increase in expected capital expenditures due to the timing of DC network investments.
And the related offset to our share repurchase outlook.
The third quarter is off to a solid start with preliminary. Total company July sales up Slightly North of 6% on a daily constant currency basis.
Added by softer comps and the prior year period.
We expect growth will moderate as the quarter goes on and anticipate total company sales for the third quarter to be up north of 5% on a daily constant currency basis.
As discussed gross margin will see further pressure in the quarter driving. A sequential decline in total company operating margin to around 14.5%.
With that, I'll turn it back to DG.
Thanks d.
Overall, I'm encouraged by how the team continues to manage through this uncertainty and evolving environment.
Although we did slightly lower our 2025 Outlook, it is primarily the result of a softer than expected market and transitory impacts on gross margin. Neither of which change our view of how the business is operating overall.
We remain confident in our strategy and our ability to drive long-term value for all stakeholders. And with that, we'll open it up for Q&A.
Thank you. And ladies and gentlemen, at this time, we will conduct our question and answer session.
If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.
You may press ? 2 if you would 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. Once again, I ask a question, press star 1.
and your first question comes from David mansy with beard, please State your question,
Thank you. Good morning everyone. Um,
First question on LIFO accounting and the operating income impact. Looks like it was about, I don't know, 50 basis points or something.
And I guess the question that's that's out here is if if you were on um average cost for accounting here. Um in in book we would your second out. The second half Outlook has changed at all, or is this just the timing factor of the lifo and and price increases Etc?
so,
our performance as we were on 54 would have been different, um, as you noted
However, as it relates to the Outlook, um, you know, our outlook would not have included.
Um, the negative impacts of LIFO.
But our underlying operations, I will say, are still very similar when you look at our ability to.
Estimate the price increases outside of the LIFO impact and the timing of our cost changes. Those things, I believe, will have remained the same. So the only real difference is that we would not have had this LIFO accounting impact.
flow through cogs, uh, and through the p&l and the way um, it is flowing through
Today.
So when you look at, you know, a specifically, you know, our eps
Year over year, just comparing ourselves to ourselves, instead of being up $2, EPS would have been up north of $6.
That makes sense.
And then, um, as we're looking forward, do you, you gave us some insight into third quarter. I think you said gross margin would would step down again in the third quarter. And operating income would come in at 14.5% of, I heard you correctly. Could could we think about the the progression from there? So I know, uh,
Operating income usually takes a step down seasonally in the fourth quarter, but not necessarily gross margin. So anything directionally you can talk to us about how the P&L is going to move from the third quarter to the fourth quarter, just so we incorporate that correctly.
yeah, I I do believe, you know, seasonally stepping from Q3 to Q4 we, we would still see the revenue, um, trend
Uh, through normal seasonality, but the point you make related to pricing, pricing will continue to build with our September pricing change heading into uh, the fourth quarter. And so we will start to see Improvement in Gross margins and expect to exit the year uh, with improved price cost.
And that's what helps, um,
With, uh, Boeing operating earnings, um,
At the end of the year.
Mhm.
Your next question comes from Tommy Mole with Stevens. Please state your question.
Good morning, and thank you for taking my questions.
Hi Tommy. Hey Tommy.
It sounds like there was a judgment call made on the timing of when you're going to push through the second batch of.
Um, inflationary factors here. And I think you referenced that you're just going to take it on the normal cycle. And in September, I'm just curious what, um, what went into that decision-making process. Did you consider pushing in a more real-time fashion? Have you seen others do that in the marketplace? What were some, what were some of the gives and takes their on arriving at the decision? You did.
Yeah. So, you know we we considered all kinds of different options here. Um, we decided to keep our price increase on a normal schedule. We think it's the best thing for our customer stability, Point standpoint and we're hearing very good things from our customers, about that decision. Um, you know, we we will be a little bit upside down in price costs, but there are other factors that are actually moving sort of positively as well. Uh, and as the discussed really, the lifo impact is the biggest impact on our GP right now. And so, you know, we we felt like X that we could we could manage this by by going to 91 and Awakening
Following up on Zorro. Um, good update this quarter, it sounds like you, you did.
Some pricing optimization and then also reduced, uh, the SKU count if you can bring us into that, decision-making process. How long are those initiatives been under consideration?
And what’s the lay of the land there as we go forward? Thank you.
Yeah. And I think, I think the pricing decisions been in the works, for the better part of a year. Uh, we've been considering that and made some changes and and have learned learned our way into what we actually did. Uh, it's a bit different tilt on pricing, which provides a better experience for customers. The the the SKU count 1.
Um, you know, when you have millions and millions and millions of products, 12 million 13 million products. Uh, it's healthy to go through and say, which products are actually noise and, and not creating a great customer experience. So, we basically identified a set of products that fairly large set of products that we got rid of, we, we will continue to expand the assortment, but want to make sure we do it in ways that actually improve the customer experience. That's really what that was all about.
Thank you for the insight. I'll turn it back.
Your next question comes from Chris Snyder with Morgan Stanley, please State your question.
Thank you. Um, you know, DC in your opening remarks, you talked about how how in times of uncertainty customers lean more heavily on Granger, um, and we certainly saw that through through coid and and all the supply chain disruption that followed. Um, but it doesn't seem like we're seeing that same impact here. Um, you know, in in this current period of disruption, uh, you know, outgrowth remains sluggish, um, you know, there seems maybe a little bit of less conviction and pushing price, um, to get, you know, value for that, you know.
Supply chain partner, uh, status. So, I guess, I mean, maybe you would disagree with that. Um, but but but why do you think? Um, you know, maybe we're not seeing that that, that, that those Tailwinds that we saw in other times of of disruption.
Well, I think I think the pandemic disruption was very much a supply disruption, Which is less the case this time. I think there hasn't been many as many channels just getting supplies, so we may have seen some Tailwinds there. Um, you know, I I would say a couple of things 1 is I don't think we have any um, lack of confidence in passing price. I think we're just trying to time it correctly for customers and, and marry it up. So, it actually makes sense. And so we still feel like we're going to be able to pass price through this period. Um, we may not see as much cost as others as well. Uh so you know our price deadline prices might not be as big but there's mixed issues and all kinds of things that drive that
Uh, and in terms of share gain, actually the second quarter looked better from a high touch, share gain and and we continue to see significant disruption between our internal metric and the and the 1 1 uh uh 1 1, 1 unit metric. The the external 1 and the internal 1 would suggest. We gain quite a bit of share in the second quarter and there's been uh surveys from your peers that have just suggested the market was down to or 3, even in the quarter. Uh, so I think actually sharing, we feel pretty good about again. Uh, so I I don't I don't know that. We feel like we're not getting here. We do. We do feel like we're getting here.
Thank you uh appreciate that. And then I guess just on the gross margin, the the 50 basis points guide down. Um
Escalation versus how much of that pressure is just some price cost timing, um, into the back half. Thank you.
Oh, I just want to step back a little bit, so thanks for that question. Um, I think it ties back to the last question too. A little bit, which is
You know.
you know, back in q1, when we were looking at the guide
Um, you know, there was information in the market related to tariffs.
1 piece of information was like, trying to tear up was like, at 135%, which it is nowhere near today.
And so when DJ talks about being really prudent about the timing of when we're going to take price, this is what we mean. Like if we would have taken that assumption which was very high level, very hard to measure at that point in time and then roll that through our estimates.
You know, we would have had some jarring changes to guide guidance, then, and then now having.
Had a whole quarter of better information.
You know.
a little bit more certainty around tariffs and then being able to actually estimate their near-term impacts, I think has put us in a better position and then that is also allowed our pricing team, to take that information and then make better pricing decisions with our customers at this time,
um, back to your question related to how much
Is lifo versus how much is price cost?
the vast majority, um, of
You know, the impact to us or like as an example to high touch, you know, in this quarter is the lifo impact. It's like 80 basis points.
Um, and so, um, there is an impact of price cost.
But much smaller than the impact of LIFO. And, uh, we believe that will continue to be the case as we move through the year.
Because as we've noted, we will in September. Be then updating, you know, for the incremental increase that had been announced, you know, on aluminum and steel plus, some of the other changes, uh, that have occurred. And so, that will also continue to F flow through as subsequent life, or adjustments. Um, but
As it relates to gross margin, none of that reverts.
Unless we have deflation, which we don't see any coming.
But gross margin will improve since we're on LIFO because pricing will start to take hold.
And so, if there's one thing to walk away with, those of us that are on LIFO, you know, have a hotter impact or more negative impact to gross margin at the beginning of these cycles because we restate our entire inventory.
for the latest price.
Uh, latest price or cost of goods.
And that flows through the P&L immediately.
Over time, as pricing takes hold and the LIFO impacts normalize, this will be more evident.
Our gross margin starts to recover and improve.
Different than those on fifo.
Who have the opportunity to flow through their lower cost inventory. While they're taking price leading to higher gross margins.
That then starts to mitigate through the cycle.
So, over time, our growth margins will become much more comparable to others.
Uh, based upon the differences in our accounting treatment.
So we expect our gross margin, and specifically our price cost, which is not the biggest impact here; it is a timing difference.
Um, to moderate as we go through the end of 2025 and into early 2026 as we continue to take price.
Thank you, I appreciate that.
Your next question comes from Jacob, levenson. With malas research, please see your question.
Hi, good morning, everyone.
Good morning. Good morning.
I realized these tariffs are are moving Target, uh, but if you've got, you know, if you have a 30% tariff on on China today and obviously different different rights and some of the other measure manufacturing centers does.
Is the economics of private label really changing versus the branded side? Because I assume...
Or Vietnam. But I'm just trying to get a sense of of
You know, whether there's been a real shift in terms of the economics of private label.
Yeah, so I guess. Um, you know, first of all, I would I would say that, you know, we we do have a lot of us, private label production so that isn't is not affected. Uh, certainly the China comp component of private brand is
Is could be impacted. It really depends. I it, you know, without sort of giving you a direct answer here, it really depends on the SKU level analysis. So there are some skis for which a 30% tariff, might make them much less competitive to the to the National brand, uh, and there's many where it doesn't matter. You're still more competitive coming from China. So, really? It's happening at a few level. We're watching it very closely. I suspect once we get through the next quarter, we'll have a lot more to say about what we're seeing. It's still really, really early. Um, you know, in terms of, in terms of what we're seeing from the, the cost increases on a private brand, but it's going to vary dramatically by SKU and we'll have, we'll have a better perspective over time.
Okay, that makes sense and just on a on a, a brighter note is Zora seems to be heading in stride there. I know I know Tommy asks about it as well, but can you can you just help us understand like what's what's really changed in that business? I know there's been a lot of cross-pollination with monitor, but it seems like they're finally kind of getting the uh the flywheel going there.
Yeah, yeah, I think, um, you know, I point to a few things. One is...
I think they've done a nice job of improving uh, who they who they target to acquire and then getting to repeat business with those customers. Uh, and that includes how they think about what products, they, they promote, uh, how they think about evaluating customers initially and then how they think about, um, you know, basically marketing to those customers that are attractive. And so, a lot of what monitor has done to be successful. They built and, and ported over the logic, it's a little bit different in this context, but to basically get to that, repeat business, and that repeat rates really, really important. And that's that's up about 200 basis points over a year, which is a big deal to that business. The other thing I'd say is, as they grow, they had already built out a lot of the capabilities. They they, they get good, really good leverage when they grow at at this point because they don't need to add nearly as much cost. So, those 2 things are really working in their favor.
All right, good caller. Thank you, DJ. I'll pass it on.
Thanks.
Your next question comes from Ryan Merkel with William Blair. Please state your question.
Uh thanks. Hey all um so it sounds like a key message here on gross margin is that the the update is more about lifo than it is price cost. So my question is the new 50 basis point. Uh headwind to gross margin for the year. How much is of that is lifo? And how much of that is price cost timing?
um,
I will say the majority of that.
is um,
lifo.
and um,
Again, I think we'll really start to see the price cost portions of that unwind into 2026. There there is, there is a component there, but as I know that I kind of noted, the impact of high touch in this quarter is significant, you know, it is, it is
The main event when you look at the year-over-year decline to high-touch gross margin. Yeah, I would just say, I would just say, you know,
We we've said this a few times rgp would have been flat year over year, which is actually better than we expected to start going into the year if we didn't have lifo.
So um while we have some price cost headwinds, we have other things that have been positive as well. And so um, lifo on the math basis is an entirety of what we're seeing right now.
Okay.
That's helpful. Um, and then my follow-up, this might be kind of a hard question, but, you know, there's new tariffs being announced today and 1 of the questions I'm getting from clients is is they're going to be more price cost risk. Now, in the second half, if you have more tariff driven inflation,
Hard hard to tell. So I I mean, clearly China is the most significant.
Trade partner, we have uh at this point. So some of the countries that are being announced have much smaller impacts than than China does. Um and Mexico hasn't changed, they are significant trade Partners as well. So it just depends which countries have that happen to them and right now there's there's obviously risk
Depending on what happens um or opportunity as well depending on what happens going forward. Um but you know China is the the the biggest 1 we have to have to watch and and so so far I don't think the things that have been announced today would have a huge impact on US based on what I know.
Pass it on.
Your next question comes from, Christopher Glenn with Oppenheimer and Company. Please State your question,
Hey, uh, good morning, DGT. Um, hey, so you mentioned a good, great description of the decision-making process with, uh, in deferring on price a bit. And you talked about the customer benefits and the good feedback there. I wanted to talk about maybe what long-term strategic goals you might have had in mind there along the way, as well as this sort of a nice, uh, arrow in the quiver as you, you know, go through next rounds of contract negotiations. And does this play into the wallet share strategy?
You know, I think, I think um, our long pair of share strategy is based much more on providing exceptional service, helping customers. Take out costs helping them with their purchasing process, helping them manage inventory.
Um, you know, we but we do recognize that, you know, you don't want to winning the Tariff. Transition is not really a thing for us for us. It's are we doing the right thing for the customers and and making sure we we continue to build loyalty and trust. And so that's that's a big part of what we do and we think that does help us in the long term. Um, this wasn't really a, a specific
Point. We were trying to make around share game, but we do think it does help. We do think it helps us over time.
Okay, great. And um, just to follow up on Zorro. It's had tremendous sequential momentum in the last few quarters. I think the high end of your guidance has kind of flattish through the back half. Is that just conservatism
You know, relative to Q2 on it.
Yeah, you know, last year their cycling, uh, some tough comps, so it's just a modest deceleration. But, you know, nothing to worry about. We're still very bullish on their outlook.
Okay, thank you.
And your next question comes from Deane Dray with RBC Capital Markets. Please state your question.
thank you. Good morning everyone.
Good morning, how are you?
Hey, I'd like to Circle back on the Zorro SKU pruning. Um, you know, consider this to be a very healthy process but I'd love to hear just a bit more detail on the algorithm, uh, the, the, the approach here is it simplification. Um, you look at returns by SKU, the volume that's being done and, uh, you know, the frequency of ordering. It's probably all the above. But, uh, it is, what's the net impact?
The net impact is basically nothing. These are these are SKU that basically weren't moving. And frankly, we're we're um, probably not helping searchability on the website. And so uh this there, there these are very low risk like no risk financial decisions that were made uh, in the core.
Great. Is there any would you be following a similar practice with the core Granger offerings has that if you done any meaningful, calling of the skus and maybe just kind of size that process for us to. Yeah, we do. We we, we, we do that on an ongoing basis that is not new for us. We, we probably have 80,000 views followed every year roughly or something like that. And then we add a little bit more than that to, to get to the net. Assortment number. But that is a very well, um, well trod path. And the analytics to, to make those decisions are very clear to have been in place for a long time. I think with Zorro the difference is you've added so many so fast. We've added things that we didn't know what they're going to sell or not. And so, if they didn't, then we made the decision.
That's real helpful. Thank you.
Thank you.
Your next question comes from Chris danker with loop capital markets, please State your question.
Hey morning, thanks for uh taking the question uh I guess just I'm sorry to come back to pricing here again but just on high touch pricing specifically you'd flag you know 1 to 1 and a half points of of kind of targeted price. For the quarter. We came in basically flat was that fully offset by negative mix or was it a measure of weak realization on the price front there?
So um you know, when we laid out, what we thought we would realize the 1 and 1/2 that was on an annualized run rate basis.
And so, you're right in the quarter. Um,
Larger than the 1 we took this year, so that explains a portion of it. The rest of it, though, we believe has to do with the fact that.
Our sales and others are taking price on different skus at different times. And it's really hard to read elasticity based upon what we continue to see, even including in this month that is improving. And so we have conviction that on a run rate basis. We will get on an annualized basis to the 1, to the 1 and a half percent.
And as it relates to September with that, you know, continued conviction, and then the new um, an additional pricing of tariffs and other negotiated costs.
Uh, we plan to pass.
Um, enough to realize an additional 2% to 2.5% on an annualized run rate basis to cover those increases. And then, as we stated in our prepared remarks, when you look at that across all of 2025,
We expect to realize about 1%, you know, the combination of those 2 with the timing because we do, we are starting to see, um, you know, competitors take more price and so we feel like we'll be in a more normalized environment. Uh, and realization will get back to what uh we have esteemed has seen
Historically.
Got it. Thank thank you so much for that D. Um I guess just to as a follow up here um notice you moved about 100 million from the buyback towards you know, capex investment uh in the guide here just maybe some color on what we're spending on. What what kind of projects are moving forward here? That that look more attractive today.
Yeah, and it's, um, what what I would say is a vast majority of that is, is in the supply chain investment and it was, there was an opportunity to, to make an investment for the future. It's not going to be near-term, but it's a longer term. And so we're thinking about the longer term Network Evolution and there was just an opportunity to
to, to make to make a to add some money to the the budget.
Got it. Thanks so much.
Thank you and just a reminder to the audience to ask a question, press star 1 on your phone to remove yourself from the queue press star 2.
Our next question comes from Sabrina Abrams with Bank of America. Please state your question.
Hey, good morning, everyone.
Good morning. Good morning.
Um,
Apologies, I'm also going to go back to pricing, but if um, I look at like the government pricing data for non durable, wholesalers. Um, like the smaller, Machinery equipment, and, uh, supplies wholesalers. Um, the industry data is closer to like, mid single digits up year-over-year, um, and I just want to understand. Maybe it's something in the definition of how you report pricing.
But just want to understand like maybe the difference between what the government data, suggesting inflation is running at uh versus uh, reported pricing for you guys. Thank you.
Yeah, I mean I think it's that's that's an interesting view, you know? Obviously we we look at first of all we think we've got better scale and opportunity to not have have the cost increases. Maybe that others might take and so we tend to match try to match our cost with our pricing and that's what you'll see us do over the next few years. What page, what what D did talk about though is we will be running right through to 4% at the end of the year for this year. So you will see us increased prices. But uh we're not having to take them maybe as soon as others do that's not unusual for us. When there's a a inflationary environment that's been the history.
Thank you. Um,
And then, then just on the uh, High touch vault.
They were I I better I guess than what I had in my model in the quarter. Um, I think they're, you know, we have like the monthly sales. I think July, you said, came in a little bit better on the easier, call anything to call it on like Cadence of demands in the quarter. Like I understand you guys don't have a ton of you guys. Don't really have like big Capital project exposure but I think what we're hearing from some of the other manufacturers is you did feel a little bit better about the macro in July. So just any color there,
Yeah, I mean it's it's hard to talk about the macro. I think the macro has been 1 of the days. I do think we've, we've like I said before we are doing better on share gain and volume share, gain was pretty solid in in in the quarter. And and again, we'd expect that in July, so I it doesn't feel like a huge change. Frankly, it feels like the demand environment is still relatively muted. Um, but, but we do feel like we're, we're doing reasonably well in that environment.
Thank you. I'll pass it on.
Your next question comes from Ken Neumann with KeyBanc Capital Markets. Please state your question.
Hey, good morning guys. Uh thanks for squeezing me in.
Um, maybe the payback hey morning, uh, maybe the piggyback on that last question. Um, you know, look it does sound like you feel confident uh, Around the Net price, realization into the back half, uh, on on the negotiations that are already finalized. I I guess.
Is the confidence that volumes don't have another or don't have a negative response as you introduce these price increases really just driven by net. Customer adds or is it that you think there's also a stickiness to your current customers as it relates to volumes today? Well, I mean, I I guess what we would say is we think that price increases in general and inflation in general, is going to have an impact on market demand. So we do have some, we we have the market demand, not doing as well on the back end as we had in the first half. Um, so that's where you see that impact. Uh, we don't think we are uniquely exposed. Uh, we think everybody's doing the same thing and and so we feel confident in our ability to realize prices with that lower market demand.
Got it, okay. And then, uh, just for my follow-up, switching gears to endless assortments. I think the total revenue guide kind of implies endless assortment grows.
Similar on a total sales, maybe like in that high tea to low 20% in the back half, but maybe the incremental are slightly lower than what we saw in 2q, you know, V is that right? And if so just any comments on what's driving that you Leverage
Yeah, you do have that, right? And again, we talked a little bit earlier about the fact that
some of it is the comp that Zoro um is um, cycling through because they had um,
You know, a stronger back half last year.
Uh, after some of the actions, they took the prior year. And so when you look at it on a to your basis, we we feel like the numbers are, you know, in the in in the in the right realm, so it's really a comping issue.
For EA.
Okay, understood. Thanks for the clarification.
And your next question comes from Patrick Bowman with JP Morgan. Please state your question.
Oh hi, good morning. Um, one quick, one on gross margin. So it looks like the exit rate on gross margin in the fourth quarter is maybe in the high 38% range. Um, given the timing of the price increases coming through, which I think you said were going to annualize at 3 to 4%, um, maybe that hits at some point in 2026, but starting in late 2025, I guess.
Um, and then also the life went back to 25. Do you think 2026 will be a year of gross margin expansion back to that 39% level, um, just based on all those things and this life for Dynamics?
That um, sounds like it's timing related.
I would say that would be reasonable.
All things.
No, there are things like that now. So today, we would say that would be very likely to happen. You know, obviously, things are changing, but yeah, that is a way to shoot flow.
I mean, I'll take that as a as as, as an encouraging sign because I actually wasn't really expecting a response from you on that. Um, the, the next question was on, um, uh, government customer Dynamics. Um,
It looks like things were relatively stable um in the quarter after slowing a bit in the first quarter. Can you talk about, you know,
Have you seen, you know, contract cancellations at all? Impact your business there. And whether you've been able to backfill that with...
With other activities. Just any any Dynamics within government, customer Federal versus State local versus military. However, you want to talk to it. Yeah, yeah. I mean, so so certainly, the the place we've seen, we don't have contracts canceled. We don't, we typically are transacting in small, small orders with our customers basically. But uh, the non-military Federal Business certainly has has been struggling and is down fed.
The military business has been good. State and local have been okay; some states are doing well while others are not. It really varies. Other than that, the small portion—about 70% state and local and 30% federal—most of our federal and military sectors aren't that impacted by this. It's a very small portion that has some impact.
Thank you. And there are no further questions at this time, so I'll hand the floor back to management for a closing remarks.
And our underlying performance would have been pretty good and quite good actually had had it not been for lifo, but we are on lifo. So the reality is we have altered our guide based on largely on that as we discussed. Uh, and that will cycle through and it's going to be several quarters until that cycle through and that that goes away as an issue. And also we do believe that market demand is going to be relatively muted. And and we've taken that down as well. Um, and that's just a reflection of what we think pair of price increases are likely to do to the market. Uh, we also think that that's temporary. None of those neither of those things changes the way we think about the business, or run the business. And and and like I mentioned, we run it for long term health and success. So we feel pretty confident about what we're doing and and how we're doing it. Uh, and appreciate you joining today. Thank you.
This concludes today's conference. All parties. May disconnect have a good day.