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Rating Action:

Moody's changes Grainger outlook to negative; Affirms A2 long-term and Prime-1 short-term ratings.

Global Credit Research - 09 May 2017

New York, May 09, 2017 -- Moody's Investors Service ("Moody's") changed the rating outlook of W.W. Grainger, Inc. to negative from stable, and affirmed the A2 long-term and Prime-1 short-term ratings.

RATINGS RATIONALE

The negative outlook reflects an increasingly competitive operating environment that has highlighted Grainger's vulnerability to pricing pressures and led to a weakening of profitability metrics. Moody's expects these pressures to continue going forward, primarily as a result of greater pricing transparency in the Maintenance, Repair and Operating (MRO) supplies industry. The increased competition in Grainger's markets is against a backdrop of pronounced weakness in its Canadian operations and a higher than expected level of Debt-to-EBITDA.

Moody's expects Grainger's profitability metrics to continue to decline for at least the balance of 2017 with gross margins expected to drop to the high-30s range by the end of the year, as compared to margins in the mid-40s as recently as 2013. The company is currently undertaking an aggressive pricing strategy involving significant price reductions in an effort to regain market share and improve mix. Preliminary results from this initiative appear to bode well for greater volume growth although the initiative is still very much in its early stages and it remains to be seen whether Grainger can ultimately recapture market share with its traditional high margin customers. In the meantime, the aggressive pricing actions are expected to weigh on near-term profitability metrics. The pricing initiative also raises the prospect of competitors taking similar measures which could result in additional pricing pressures going forward.

Grainger's previously announced share repurchase program is expected to be completed during 2017, and Moody's expects the company will curtail its debt-financed buybacks in the face of weaker operating performance ($600 million of anticipated buybacks during 2017 versus the previously announced $800 million). Pro forma for the pending debt financed buybacks, Moody's anticipates Debt-to-EBITDA (after Moody's standard adjustments) of around 1.8x. This level of Debt-to-EBITDA is higher than the range of leverage that was contemplated when Grainger initially announced its 3-year share repurchase plan in 2015.

Grainger benefits from a superior competitive position resulting from deep penetration within the fragmented MRO industry and substantial scale as the leading MRO distributor in North America. Grainger's strong market position and reputation for superior order fulfilment in its sector is underpinned by a product offering that well exceeds its peers (at 1.6 million SKUs), a multichannel operating model, and ongoing and substantial investments in its distribution and supply chain infrastructure. Grainger has a track record of strong cash flow generation and we expect this to continue over the next few years with free cash flow likely to range from $350 million to $400 million in 2017.

Grainger's good liquidity profile is supported by an undrawn $900 million revolving credit facility, cash balances of about $250 million, and strong free cash flow generating capabilities.

A ratings upgrade is unlikely over the near term in light of operating performance that is trailing expectations along with Grainger's recent adoption of a more aggressive pricing strategy which is expected to weigh on profitability metrics through the balance of 2017. Over time, upward rating action would be driven by Debt-to-EBITDA sustained below 0.75x, operating margins in excess of 15%, and FCF/Debt above 25%, along with particularly strong liquidity and return on investment measures.

Expectations of operating margins sustained in the low double digits would likely result in a downgrade, as would any indication that the pricing strategy is unable to stem market share losses or that even more aggressive price cuts could be needed. A rating downgrade could also occur if Moody's expects Debt-to-EBITDA to remain in the high-1x range. An absence of demonstrated growth in sales volumes, an inability to gain market share, particularly with the mid-sized customers, or expectations of FCF/Debt remaining below the mid-teens would also create downward rating pressure.

The following summarizes today's rating actions:

.Issuer: Grainger (W W) Inc.

Affirmations:

.Senior Unsecured Regular Bond/Debenture, affirmed A2

.Commercial Paper (Local Currency), affirmed P-1

.Senior Unsecured Shelf, affirmed (P) A2

Outlook Actions:

.Outlook, changed to Negative from Stable

The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

W.W. Grainger, Inc. is a leading distributor of maintenance, repair and operating (MRO) supplies and other related products and services. Products offered include safety and security supplies, cleaning and maintenance equipment, material handling equipment, and lighting and electrical supplies. The company generates about 90% of revenues in North America and operates across multiple end markets, including heavy and light manufacturing, commercial, retail, government, and natural resources. Revenues for the twelve months ended December 2016 were approximately $10 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Eoin Roche
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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