W.W. Grainger's Earnings Call Contradicts on Tariff Refund Benefits, Project Margin Impact

Date of Call: Aug 4, 2026

Financials Results

• Revenue: Reported sales up 10.3% (13.7% daily organic constant currency), with High-Touch up 11.9% and Endless Assortment up 13.5%.
• EPS: Diluted EPS finished at $12.01, up over 20% year-over-year.
• Gross Margin: 39.5%, up 100 basis points year-over-year.
• Operating Margin: 16.1%, up 120 basis points year-over-year.

Guidance:

• Full-year daily organic constant currency sales growth expected between 11.5% and 13%.
• Full-year operating margin range increased to 15.8% to 16.2%.
• Full-year EPS expected between $45.50 and $47.25, up over 17% year-over-year at midpoint.
• Q3 sales expected north of $5B, up over 12% daily organic constant currency.
• Q3 operating margin expected in the mid-15% range.

Business Commentary:

Strong Revenue Growth:

• WW Grainger reported sales growth of 10.3% on a reported basis and 13.7% on a daily organic constant currency basis for Q2 2026.
• The growth was driven by robust performance in both high-touch and endless assortment segments, with a notable acceleration in most end markets.

Operational Profitability:

• The company's operating margin was 16.1%, up 120 basis points year-over-year, supported by improvements in gross margin and leveraging in the endless assortment segment.
• This profitability was further benefited from the exit of the UK market and tariff refunds.

Endless Assortment Segment Performance:

• The endless assortment segment experienced 13.5% reported sales growth and 20.6% on a daily organic constant currency basis, with Zorro US up 18.4% and Monotaro achieving 24% growth.
• Growth was fueled by strong B2B customer engagement, higher customer retention rates, and enterprise customer growth, particularly in the US and Japan.

Pricing and Tariff Adjustments:

• WW Grainger adjusted prices to reflect the changing tariff landscape, including the rollback of IEPA tariff pricing and offsetting Section 122 tariff impacts, maintaining price-cost neutrality.
• These adjustments were necessitated by ongoing shifts in tariffs and inflationary pressures from rising freight and product costs.

Sentiment Analysis:

Overall Tone: Positive

• Management stated, 'We delivered strong performance,' 'we are encouraged by the progress,' and 'we are increasing our outlook for the year.' They noted 'continued strength in demand,' 'strong sales momentum,' and being 'confident in our strategy.'

Q&A:

• Question from David Manthe (Baird): Can you estimate the potential refund benefits for Q3 and Q4?
  Response: The vast majority of refunds were received in Q2; benefits in the back half are expected to be immaterial.

• Question from David Manthe (Baird): What caused the full-year gross margin guidance raise to be less than the Q2 tariff refund benefit?
  Response: Offsetting factors included higher volume of lower-margin project products, new large customer sales, and continued net headwinds from fuel and freight costs, plus less mix benefit in H2.

• Question from Jacob Levinson (Milius Research): What is the pricing action cadence into Q4?
  Response: September pricing adds ~1% annually, with full-year increases at the high end of 3-4% (around 4%).

• Question from Jacob Levinson (Milius Research): What is the materiality of the data center market?
  Response: Direct exposure is less than 1%, but the broader ecosystem impact is larger, supporting overall growth.

• Question from Ryan Merkel (William Blair): What drove the below-expected tariff refund impact on gross margin?
  Response: Mix (big projects/lower-margin products) and fuel were primary drivers, with freight held back competitively to be recovered later.

• Question from Ryan Merkel (William Blair): Why did SG&A in High-Touch not lever, and will it improve?
  Response: Higher incentive comp, management bonuses, and marketing spend drove the headwind; moderation is expected in H2.

• Question from Chris Schneider (Morgan Stanley): What were Q1 to Q2 gross margin moving parts?
  Response: Normal seasonality, fuel cost leakage, private label inventory costs, and tariff refunds (partially offset by NICs) drove the ~140 bps sequential decline.

• Question from Chris Schneider (Morgan Stanley): Expectations for Q3 vs. Q4 gross margin?
  Response: Expect a U-shape with Q3 lower (no tariff refund benefit) and Q4 stronger due to supplier rebates.

• Question from Christopher Glynn (Oppenheimer and Company): How are private label headwinds phasing?
  Response: Headwinds steady in H1, with a shift to more Granger-branded items for incremental growth; some margin compression but volume benefit.

• Question from Christopher Glynn (Oppenheimer and Company): Are supplier price increases stabilizing?
  Response: Price requests are consistent and stable, with more visibility expected in February; some Middle East-centric categories see increases.

• Question from Dean Dre (RBC Capital Markets): Can you size the pre-buy impact for Monotauro?
  Response: The pre-buy was ~$45M US for Monotauro; no pre-buy seen in the U.S. or for Zoro.

• Question from Dean Dre (RBC Capital Markets): How do projects differ from MRO, and what's the strategy?
  Response: Projects are customer-initiated, dilute gross margin but add volume; not a strategic shift but opportunistic support in a strong market.

• Question from Guy Hardwick (Barclays): Are large projects a tailwind for future visibility?
  Response: Project spend is a revenue tailwind for H2 and potentially beyond, but dilutive to gross margin; not dilutive to operating margin.

• Question from Guy Hardwick (Barclays): What are SG&A risks in H2?
  Response: Risks are mitigated by an easy comparison to prior year government shutdown impacts and expected moderation in incentive costs.

• Question from Chris Dankert (D.A. Davidson): How was July preliminary sales vs. Q3 guide?
  Response: July up ~13%, supporting Q3 expectation of up ~12% daily organic constant currency.

• Question from Chris Dankert (D.A. Davidson): Is Zoro SKU count growth sustainable?
  Response: SKU growth is slowing after pruning non-core items; modest growth expected to continue for next couple years.

• Question from Tommy Mull (Stevens): Are September freight/fuel price changes via force majeure or regular course?
  Response: Normal course price discussions with customers, not force majeure.

• Question from Tommy Mull (Stevens): How is share trending given strong top line?
  Response: Top line benefits from pricing, market demand, and share gains; expects continued strength through the year in a positive market.

• Question from Connor Cerniglia (Bernstein): Could there be more IEPA tariff refunds?
  Response: The refund was small relative to total tariffs paid; no expectation for significant future refunds.

• Question from Connor Cerniglia (Bernstein): Can you size project contribution to volume?
  Response: Project spend has added ~90 bps to High-Touch growth rate this year; profitability is maintained on a net margin basis.

Contradiction Point 1

Full-Year Gross Margin Guidance Impact

Contradiction on the net impact of tariff refunds on full-year gross margin guidance.

David Manthe (Baird) - David Manthe (Baird)

2026Q2: The gross margin benefit from tariff refunds on a full-year basis is about 23 basis points, but this is partially offset by... The net effect on gross margin guidance is a reduction to the full-year benefit. - Dean Merriweather(CFO) & D.G. McPherson(CFO)

Why was the full-year gross margin guidance increase less than the second-quarter tariff refund benefit? - David Manthey (Baird)

2026Q2: The tariff refund benefit in Q2 was 90 bps, but on a full-year basis, it accounts for ~23 bps. This was offset by higher volume of lower-margin products and project-based sales... Additional net headwinds from fuel and freight costs... and less favorable mix in H2 further reduced the net gross margin benefit. - Deirdre Merriwether(CFO) and D.G. Macpherson(CFO)

Contradiction Point 2

Nature of Project Business Impact on Gross Margin

Contradiction on whether projects are a headwind or dilutive to gross margin.

Dean Dre (RBC Capital Markets) - Dean Dre (RBC Capital Markets)

2026Q2: Projects are a tailwind for revenue but a headwind for gross margin. - D.G. McPherson(CFO)

How does Grainger differentiate between projects and MRO, and what is its approach to project opportunities? - Deane Dray (RBC Capital Markets)

2026Q2: Projects are a tailwind for revenue and a headwind for gross margin. - D.G. Macpherson(CFO)

Contradiction Point 3

Gross Margin Trajectory

Q1 margin beat and Q2 pressure drivers conflict with the U-shaped trend guidance.

Ryan Merkel (William Blair) - Ryan Merkel (William Blair)

2026Q2: The primary driver [of Q2 gross margin surprise] was mix (higher volume of lower-margin products and project-based spend), with fuel costs also contributing. - D.G. McPherson(CFO)

What factors caused the Q2 gross margin decline, specifically fuel/freight costs or product mix? - Ryan Merkel (William Blair)

2026Q1: The Q1 beat was due to better-than-expected price realization... and less sell-through of lower-cost private label inventory than anticipated. - Dee Merriwether(CFO)

Contradiction Point 4

Full-Year Price Contribution Guidance

Q2 guidance for full-year pricing is raised, contradicting Q1's expectation of moderation.

Jacob Levinson (Milius Research) - Jacob Levinson (Milius Research)

2026Q2: Full-year pricing is now expected to be at the high end of the 3%–4% range, so approximately 4%. - D.G. McPherson(CFO)

Can you provide details on the pricing actions and their schedule for the remainder of the year? - Patrick Baumann (JPMorgan)

2026Q1: Price contribution is expected to moderate from ~5% in Q1 to ~4% for the full year. - D.G. Macpherson(CFO)

Contradiction Point 5

Supplier Cost Visibility and Pricing Action Cadence

Contradiction on the level of certainty and timing regarding future supplier price increases.

Christopher Glynn (Oppenheimer and Company) - Christopher Glynn (Oppenheimer and Company)

2026Q2: Supplier price increase requests have been consistent and stable recently... More visibility on next year’s increases will be available in February. - D.G. McPherson(CEO)

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2025Q4: Future unknown tariffs or rollbacks are not included in the outlook... It is unclear if further price actions are necessary from suppliers. - Deidra Merriwether(CFO) & Donald Macpherson(CEO)