I'm an eternal optimist, willing to give any company the benefit of the doubt. With W.W. Grainger Inc. (GWW) though, there's something gnawing at me. By extension, the stock may be a risky proposition
despite today's 9% rally.
Here's the deal - Grainger's Q1 earnings were down 16%. Revenue for the quarter fell from $1.66 billion to $1.47 billion, and income fell from $114.2 million to $96.4 million. No big deal, as that was to be expected - most other companies are going through the same thing. I don't want to punish the company for being in the same economy we're all mired in.
What I can't get past are the comments we got from President/CEO James Ryan regarding the quarter's numbers coupled with some related decisions. This is what he said....
"Businesses and institutions have responded to the recession by buying
less and looking for ways to improve productivity....We do not believe that
we've seen the bottom to the sales decline and expect increased pricing
pressure throughout the remainder of the year."
OK. Fair enough - demand is down, as we'd all expect it to be.
However, the company is also going to expand its sales force in Q2, and offer more customer incentives. That's going to cost the company somewhere between $25 million and $50 million over the course of 2009....or roughly up to 12% of its total income for the typical year.
I understand the concept. I really do. More sales people means more sales....
usually. In this case though, I have to wonder if (ok, I'm pretty certain)
the problem isn't a lack of sales people, but rather a lack of true demand JUST LIKE JAMES RYAN SAID!If the company made a piece of breakthrough medical equipment, maybe an expanded sales force would help. Grainger makes building/facilities maintenance supplies though, which are basically commoditized. And, if a company only needs one or two ballasts or a few feet of plumbing a year, more
sales people can't magically create demand (particularly if it's something that can be bought at a local hardware store if the Grainger sales force isn't around at the time the need arises).
Yes, the price concessions could help sales, but at the expense of already-paper-thin margins. Is that really a win for anybody besides their customers though?
The bitter irony is that Grainger has already cut 200 jobs this year, and is going to cut 300 to 400 more. It's not clear if those are production or support jobs on the chopping block. Maybe both. Yet,
the company is adding sales people? That's a short-sighted "quick fix" that may not even actually fix the problem. Tom Peters would be beside himself, despite the fact that he puts sales folks on a pedestal. (Peters also prefers quality over quantity when it comes to sales.)
I'm wondering just how crowded the sales force will become before they start cannibalizing one another's sales rather than enhancing the company's total revenue. I don't think it'll take much to get to that point.
So how'd the market respond? Grainger shares are up nicely of course. Figures. The market loves job cuts and quick fixes. No need to get bogged down by the reality of the decision.
For investors, I'd use today's surge as an exit opportunity. The problems Grainger posed are real, but their proposed solutions are hollow. That's likely to become evident in three to six months.
