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Text: Actual results may differ materially due to various risks and uncertainties, including those detailed in our SEC filings.
We will also share results related to MonotaRO.
Please remember that MonotaRO is a public company and follows Japanese GAAP, which just differs from U.S. GAAP and is reported in our results one month in arrears.
As a result, the numbers disclosed today will differ somewhat from MonotaRO's public statements.
The Grainger Edge is our framework that defines who we are, why we exist and where we're going while establishing a set of operating principles.
I'm proud of the ways that we use the principles to guide decisions and deliver results.
Things are very challenging on many fronts.
Given the ongoing pandemic and labor and material shortages, nothing in the world seems to be working exactly the way it should.
Our manufacturing partners, transportation partners, Grainger team members, and certainly our customers, are all finding harder than ever to keep the world working.
Grainger is proud to support the hospital staff, government agencies, teachers and many others who continue to do great work in a very challenging environment.
I might say that in spite of these challenges, we performed very well, but in reality, it's partly because of how we are wired that Grainger is doing so well.
We've seen strong demand this quarter, especially in the U.S.
We have product available in our network and have been able to ship it to customers quickly.
Our service to customers has been exceptional given the circumstances.
We are leveraging our scale, demonstrating our agility and gaining share.
Our goal is to always be in an advantaged position to help our customers solve their problems.
As I've been out with customers this past quarter time and again, I hear that Grainger is executing well.
Customers tell me that they are pleased with our performance, and you can see this in our revenue growth.
While the current supply chain environment is volatile and uncertain, we are confident in our current plans and our readiness to respond to any evolving dynamics.
In the face of labor and material shortages throughout the supply chain, we are providing strong relative service and helping our customers avoid disruptions.
We continue to actively leverage our network even if sometimes we have to the orders from less optimal locations at a higher cost.
We are investing in inventory while actively monitoring the freight market and the West Coast ports.
And as it relates to labor, we have made great progress in closing staffing gaps and training team members, which has resulted in improvements, especially in our DC operations.
Our customer research shows that this is driving customer satisfaction.
Turning to our financial highlights.
Demand in the quarter was robust, resulting in strong revenue and gross margin performance and well-managed SG&A.
We achieved organic daily sales growth of 11.9% for the total company on a constant currency basis.
When compared to Q3 2019, the quarter was up 17.3% on a daily organic basis, driven primarily by core non-pandemic product sales, which is a positive indicator of our underlying run rate performance.
Our High-Touch Solutions in North America segment grew 11.6% on a daily constant currency basis.
In the U.S., we drove approximately 100 basis points of share outgrowth versus the prior year and 475 basis points on a two year average.
We remain confident in our ability to grow 300 to 400 basis points faster than the market on an ongoing basis.
Our service to customers, especially the last two years, has contributed to meaningful share gain.
Our Endless Assortment segment finished the quarter with 14.9% daily sales growth on a constant currency basis.
I'd like to note two things that temporarily moderated growth in this segment.
First, Zoro lapped a very strong third quarter in 2020.
For context, we opened up pandemic product supply to Zoro customers in Q3 2020 that was previously reserved mostly for government and healthcare customers.
In the third quarter 2021, Zoro managed to drive 11.9% revenue growth.
And when we compare that to Q3 2019, we are up 30.6%, which is really strong.
Also MonotaRO was impacted by several external factors, including a slow start to vaccinations and a generally slower Japanese economy.
In local days and local currency, sales were up about 17.5% compared to Q3 2020.
And MonotaRO continues to take share, especially as COVID restrictions lift and we grow with our targeted enterprise customers.
And as we look at results versus Q3 2019, MonotaRO sales are up over 37%.
We feel that the comparison to 2019 for both businesses is more indicative of our underlying business strength.
We still expect the segment to close the year with growth at about 20% above prior year.
We saw strong gross margin expansion across all segments, even above our expectations that we discussed last quarter.
High-Touch Solutions North America was up 140 basis points over Q3 of the prior year, and Endless Assortment was up 115 basis points.
Dee will cover the drivers for both segments.
Lastly, we returned $327 million to shareholders through dividends and share repurchases in the third quarter, and we maintained strong return on invested capital of 31.4%.
Turning to our quarterly results for the company.
I've discussed most of what's on this slide but wanted to point out a few additional items.
First, our SG&A was $812 million, right where we thought it would be.
We continue to invest in marketing and labor, primarily through increased variable compensation and gripped wage rates in the DCs.
And like many companies, we're also starting to see increased healthcare costs as team members return to routine medical visits and undergo deferred elective procedures.
And while overall spending is up versus the prior year, we are still gaining significant leverage when compared to 2019.
Our operating earnings were $438 million, up 17.4%.
And our resulting earnings per share is $5.65 for the quarter, which is growth of 25%.
Overall, it was a really strong quarter.
We continue to see a robust recovery with daily sales up 12% compared to the third quarter of 2020 and up 14.5% compared to the third quarter of 2019.
In the U.S., we saw strong growth, especially in our core non-pandemic product categories.
Both large and midsized customers saw significant growth at 10% and 19%, respectively.
Canada continues to be slow as recurring shutdowns in many of the larger provinces kept businesses closed or operating at minimal capacity.
As vaccination rates improve and businesses reopen, we expect more typical purchasing behavior to resume and sales to follow.
Canadian daily sales were up 11.7% or 5.7% in local days and local currency compared to the third quarter of 2020.
For the High-Touch Solutions segment, GP margin finished the quarter at 39.4%, up 140 basis points versus the prior year third quarter.
Our focus and diligence on managing price/cost spread contributed to our GP improvement.
In the quarter, we saw strong price realization to customers both on contract and web pricing.
Our realization was better than anticipated, and as a result, price/cost spread was above neutral.
In addition, consistent with the second quarter, our U.S. pandemic product mix was about 22%, an improvement versus 28% in the third quarter of 2020.
We are confident that our run rate GP remains strong and will finish in line with the expectations we set forth for the fourth quarter.
On slide 20, you'll find a chart with details on the U.S. and Canadian businesses.
This information has been provided to help bridge our prior reportable segments to our new High-Touch Solutions North American segment.
I'd like to give you some advanced notice that we will continue to show daily sales and gross margin by business.
However, as our operating expenses across the segment have become more intertwined, our operating margin by geography will no longer be provided in our 2022 reporting.
On slide 9, taking a deeper dive into High-Touch Solutions for the U.S. The Delta variant and the renewed mask mandates in July reversed the declining trend we were seeing in the second quarter for pandemic products.
As the virus surged, we saw pandemic product demand pick back up, especially for masks.
However, of particular note, our core non-pandemic sales growth was at or above 20% every month in the third quarter.
We are encouraged to see this growth as a sign of more regular business and economic activity.
When comparing core non-pandemic sales to Q3 2019, sales were up 12%, which is quite strong.
In total, our U.S. High-Touch Solutions business is up 12% for the third quarter 2021 and up 16% as compared to 2019.
Looking at market outgrowth on slide 10.
In the third quarter, as expected, we saw our share gain grow as we lap more reasonable yet still inflated Q3 2020 comparisons.
In the quarter, we estimate that the U.S. market grew between 10.5% and 11.5%, resulting in our estimated outgrowth of approximately 100 basis points versus Q3 2020.
To normalize for volatility, we are continuing to show the two year average share gain, which was about 475 basis points over the market for the third quarter of 2021, a really exceptional result.
Given the noise and fluctuations in the market number across industrials, the two year average is a better estimate of our true market outgrowth.
We remain focused on our key initiatives, which give us confidence in our ability to achieve our U.S. share gain goal of growing 300 to 400 basis points faster than the market.
Now let's cover our U.S. GP rate.
We saw a significant lift in the High-Touch U.S. GP performance in the quarter.
Sequentially, we wanted to comment on two of the biggest factors that make up the difference between the second quarter and the third quarter.
First, the biggest contributor, the inventory adjustments are behind us as anticipated.
In addition, we are seeing greater price realization than expected.
I'll note that while we sold some of the pandemic inventory that was previously written down, the impact to GP was immaterial.
We're encouraged by these results and are confident in our ability to achieve our expected 40.1% GP rate in Q4 based on continued pandemic mix improvements, our expected price realization in the fourth quarter and our ability to navigate supply chain challenges.
Moving to our Endless Assortment segment.
Daily sales increased 12.7% or 14.9% on a constant currency basis, driven by continued strength in our new customer acquisition at both Zoro and MonotaRO as well as growth of larger enterprise customers at MonotaRO.
GP expanded 115 basis points year-over-year driven primarily by Zoro U.S.
We took a number of pricing actions based on evolving market conditions, and we deemphasized lower-margin channels.
In addition, we experienced improved freight efficiencies at Zoro, primarily as a result of fewer B2C customers who typically place smaller orders that are more expensive to ship.
Operating margin for the segment finished up 80 basis points over the prior year third quarter due primarily to improved gross profit margin.
I'll go into more detail on the next slide as we provide further transparency on the results for both businesses.
Moving to slide 13.
In local currency and using Japan's local selling days, which occasionally differ from U.S. selling days, MonotaRO daily sales grew 17.5% compared to the third quarter of 2020.
GP margin finished the quarter at 25.8%, 30 basis points below the prior year third quarter, as we continue to grow with enterprise customers.
As a result, operating margin decreased 65 basis points to 12%.
Switching to Zoro U.S. Daily sales grew 11.9% as compared to the strongest sales quarter of 2020.
Zoro GP grew 375 basis points to 33.9% and achieved 325 basis points of operating margin expansion.
In addition to the strong financial performance in the segment, we also continue to execute well on our key initiatives.
First, when it comes to our registered users, we saw continued growth across both businesses, which is an important driver of top line performance.
And on the right, Zoro continues to actively add SKUs to the portfolio.
At the end of the third quarter of 2021, we had a total of eight million SKUs available online, achieving our goal for the year a quarter early, adding nearly two million SKUs in the last nine months.
We remain encouraged by our progress with SKU additions.
Once again, I would like to provide some color commentary as it relates to the fourth quarter and the full year.
For the fourth quarter for revenues, we expect total company daily sales to be between 11.5% and 12.5%.
We anticipate company gross margin will fall between 37.2% and 37.4%.
As discussed before, we expect the U.S. GP rate to exit the year at or above pre-pandemic levels.
And for SG&A, we expect a similar level of spending in the fourth quarter as we saw in the third quarter, between $810 million and $815 million with increased variable compensation, wages and healthcare expenses.
And while it's unclear at this point, we may have some additional risk as it relates to vaccine mandate costs.
Given the strong performance in the quarter, we remain confident in our guidance range.
For the full year, we expect revenue to be at or above the midpoint and all other metrics to be stronger than the low end of the range we discussed at the end of the second quarter, but likely still below the midpoint given the pandemic inventory adjustments taken in the first half.
First, I'm immensely proud of the Grainger team and their commitment.
It's been very challenging, but we continue to demonstrate the strength and resilience of our team and our supply chain.
Second, it was a very good quarter across the board.
The results were above our expectations.
And finally, despite the current market and supply chain uncertainties, we are confident in our ability to deliver solid performance in the fourth quarter and into 2022.

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q3 adjusted earnings per share $5.65.
q3 sales rose 11.7 percent to $3.4 billion.
reaffirming guidance ranges previously provided for 2021.

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