As the August 1st deadline for tariffs approaches, it is time to look at how tariffs have impacted companies and what to expect. In a few recent articles, I have looked at commentary from companies that provided insights into the housing market and general consumer behavior. The concept here is that the commentary from companies provides a heads-up even before the facts show up in the macro data. Continuing along those lines, what better company to evaluate than W. W. Grainger (GWW) when examining the impact of tariffs?

Why GWW?

GWW is a broad-line distributor of maintenance, repair, and operating (MRO) products and services with operations primarily in North America, Japan, and the United Kingdom. GWW’s product offering is grouped under several broad categories, including safety and security, material handling and storage, pumps and plumbing equipment, cleaning and maintenance, metalworking, and hand tools.

GWW has more than 5,000 primary suppliers that provide it with over 1.4 million products that are sold to more than 4.5 million business customers. Hence, GWW has great insight into the evolving tariff situation and how suppliers and customers are behaving and planning for the upcoming tariffs.

Tariffs Impact

People have been wondering, with all the tariffs, where the inflation is. Well, apart from some China tariffs, no other tariffs are in place yet. Also, companies stocked up on inventory before April 2nd, and that is still working through the system.

Now, as things have evolved since May 1st, in most cases, price increases are not expected to show up anytime soon. The timing of it all would depend on how much inventory people build up before August 1st. For instance, GWW’s inventory turns every 80 days, or about three months, so GWW wouldn’t have to take dramatic price increases well into Q4, and that, too, would depend on the extent of the tariffs.

The question then becomes, where is the risk? GWW clearly defines it.

GWW has its own private branded products, which it sources directly from suppliers in China. The products compete with other national brands and have higher gross margins. Now, if the National Brand is sourcing from, say, Indonesia at a 20% tariff and GWW has to source it from China at a higher tariff, the advantages would be gone, thus making GWW’s private branded products uncompetitive.

Essentially, this is the main variable companies are having to deal with. What can we move to another country and how fast? The issue is with ever-changing numbers for countries; everybody has gone into a wait-and-see mode.

GWW imports about 30% of its goods from China. For GWW, an extremely high number for China could have a material impact. For now, they are sticking to their guns and maintaining their guidance for the year. GWW doesn’t expect more than a 100 bps to 150 bps impact on gross margins based on the information available.

MRO Market

GWW uses an internal model to help triangulate around MRO volume growth and enables them to formulate a comprehensive view of the MRO landscape outside of manufacturing (makes up 30% of GWW’s revenues). GWW’s internal view is that the overall MRO market volume declined by low single digits in Q1, implying it outperformed by several hundred basis points of growth.

Uncertainty for you. Even one of the best, if not the best, companies in the MRO space is uncertain, then think about what the others are going through.

Financials

GWW’s balance sheet is pristine. However, one thing does stand out: the drop in cash in Q1 2025 to $666 million from $1,036 million in Q4 2024. Repayment of $502 million of long-term debt caused that drop.

Cash from Operations was $646 million in Q1 2025, compared to $661 million in Q1 2024.

The issue shows up in the income statement when one looks at the sequential QoQ revenue growth. It is flat for the last four quarters, and guess what? GWW has missed expectations in all four of them. Other than that, Gross Margins and Operating Margins are steady.

Yes, for a change, I will dispense with my customary marking up of financial statements in the article.

Valuations and Verdict

I will just do a back-of-the-envelope “value of equity” calculation for GWW here. Feel free to do a DCF if you wish to have more fun.

See, it is all in the assumptions of the growth rate. Just my opinion, this year will be tough even for a great company like GWW.

We can look at it differently. We can compare earnings yield plus dividend yield (3.8% + 0.9% = 4.7%) to the 10-Year Treasury Yield (4.37%). When one looks at it that way, GWW doesn’t look that bad.

Do take the management’s take on GWW’s long-term prospects into account:

Verdict: If you hold it, keep holding and buy the dips. If you are the swashbuckler kind, you may think about shorting it for a short-term six-month trade. Do note that the August 1st earnings call will reveal a lot, and then there is that TACO thingy.

Until next time. Have fun!!!