Grainger misses Q4 EPS but issues solid 2026 guidance
Operating margin declines 70 basis points to 14.3% amid tariff inflation and healthcare costs, yet distributor forecasts 7-26% EPS growth
W.W. Grainger reported fourth-quarter earnings that fell short of analyst expectations on margin pressure, yet the industrial distributor offered shareholders reassurance with robust 2026 guidance and a substantial share repurchase program.
The Lake Forest, Illinois-based company posted diluted earnings per share of $9.44 for the quarter ended December 31, 2025, missing the analyst consensus of $9.47. Revenue reached $4.43 billion, slightly topping estimates of $4.4 billion. The shares were trading at $1,079.94 in pre-market activity on Tuesday, down 0.2% from the prior session's close.
The earnings decline reflected a 70-basis point compression in operating margin to 14.3%, as the company navigated a challenging macro environment. Sales increased 4.5% year-over-year, or 4.6% on a daily, organic constant currency basis, according to the company's earnings release. However, diluted EPS decreased 2.8% compared with the prior-year quarter.
Margin pressure stemmed from multiple factors, including unforeseen healthcare costs and slower sales growth in the High-Touch Solutions – North America segment. For the full year 2025, gross profit margins were affected by tariff-related inflation, which created unfavorable price/cost timing and LIFO inventory valuation headwinds in the High-Touch Solutions business.
Despite these headwinds, Grainger offered an optimistic outlook for 2026. The company projected diluted EPS between $42.25 and $44.75, compared to an analyst consensus of $43.84. The guidance range represents 7% to 26% growth from the midpoint, depending on the comparison baseline. Management forecast operating margin expansion to 15.4% to 15.9%, up from the 14.3% reported in the fourth quarter.
"Despite a challenging macro environment, we drove profitable share gain, made strong progress with our strategic initiatives, and operated with resiliency," said D.G. Macpherson, chairman and chief executive officer, in the earnings announcement.
Grainger also signaled confidence in returning capital to shareholders, announcing plans for share repurchases between $950 million and $1.05 billion in 2026. The company projected daily, organic constant currency sales growth of 6.5% to 9.0% for the year, with total revenue expected in the range of $18.7 billion to $19.1 billion against consensus estimates of $18.83 billion.
The earnings miss comes at a time when industrial distributors face intense competition and shifting customer behaviors. Grainger rival Fastenal reported double-digit sales growth in its most recent quarter but experienced a 50-basis point slip in gross margin, attributed to a shift towards lower-margin contract customers. MSC Industrial, another direct competitor, reported 4% year-on-year revenue growth in its recent quarter, meeting market expectations.
Analyst sentiment ahead of the release was mixed. Oppenheimer upgraded Grainger to "Outperform" from "Perform" on January 27, setting a price target of $1,250. However, a broader consensus from 21 analysts tracked by Investing.com showed a more cautious stance, with five recommending "buy," 13 "hold," and three "sell," with a mean price target of $1,082.
MarketBeat reported a "Reduce" rating with a $1,016.57 price target in late January, reflecting concerns about valuation. Grainger's stock has traded at a premium, with a trailing price-to-earnings ratio of 30.3 compared to a forward P/E of 24.8, suggesting investors expect the margin compression to be temporary.
The stock has gained nearly 15% over the past three months and 5.1% over the last 12 months, closing at $1,096.18 on February 2. The shares remain below their 52-week high of $1,098.54 but well above the 52-week low of $887.81.
Looking ahead, investors will focus on Grainger's ability to execute on its margin improvement initiatives and achieve the price realization that analysts believe is possible in 2026. The company's guidance suggests confidence in navigating tariff pressures while leveraging its extensive distribution network and e-commerce capabilities to drive profitable growth in the $175 billion U.S. maintenance, repair, and operations market.