Global Industrial Co

NYSE:GIC

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Global Industrial's Third Quarter 2022 Earnings Call. At this time, I would like to turn the call over to Mike Smargiassi of The Plunkett Group. Please go ahead.

[Mike Smargiassi, The Plunkett Group]

Thank you, and welcome to the Global Industrial Third Quarter 2022 Earnings Call. Leading today's call will be Barry Litwin, Chief Executive Officer; and Tex Clark, Senior Vice President and Chief Financial Officer. Formal remarks will be followed by a question-and-answer session.

Today's discussion may include certain forward-looking statements. It should be understood that actual results could differ materially from those projected due to a number of factors, including those described under the forward-looking statements caption and under Risk Factors in the company's annual report on Form 10-K and quarterly reports on Form 10-Q.

The press release is available on the company's website and has been filed with the SEC on a Form 8-K. This call is the property of Global Industrial Company.

I will now turn the call over to Barry Litwin.

[Barry Litwin, CEO and Director]

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. Third quarter revenue reached nearly $300 million, growing 7.6% over the third quarter last year. Gross margin remained healthy and increased modestly on a sequential basis to 35.7%, but was down from a record third quarter performance last year, which included the initial benefits of strong price rationalization and lower cost FIFO inventory sell-through.

During the quarter, our one-to-one managed sales channel led our growth and we generated strong cash flow from operations. We further reduced our inventory position and continue to maintain a very strong balance sheet.

While the current outlook remains one of caution, we are investing in growth and productivity initiatives and are proactively managing the business to rapidly adapt to changing market conditions. Investment in sales, marketing, private brand, digital transformation, pricing analytics and distribution are strengthening our long-term competitive position and allowing us to better focus on the needs and experience of the customer.

One of our key growth initiatives is the expansion of customer relationships, both in terms of new customer acquisition and expanding share of wallet within existing accounts. For example, hospitality and health care are large markets with tremendous potential, the ones in which we have historically garnered low penetration. We are targeting these opportunities by staying true to who we are, meeting with our core offering of furniture and decor, storage and shelving and carts and trucks while augmenting these solutions with additional products. We have paired this offering with a very deliberate marketing and sales approach that highlights our understanding of the unique needs of these end markets.

Further, the same can be said of our large customer acquisition efforts, where the market is substantial, and we're being very focused in our approach as we build out our team and target-specific verticals. With both our new end market and large customer efforts remain in their early phases, we are pleased with the initial success and committed to building these efforts over time.

Our managed sales team continues to lead our performance and demonstrate the value we provide customers through direct one-to-one relationships. The sales organization is capturing share by driving greater penetration which in turn builds larger accounts and creates longer lasting relationships.

Pricing intelligence and analytics is another critical area of investment that is enhancing our ability to continue navigating the dynamic price/cost environment. By incorporating real-time market data, we are positioning to make timely decisions that allow us to maintain price competitiveness and preserve our margin profile.

In the quarter, we completed the launch of our new digital e-commerce site, it includes enhanced functionality aimed at driving personalization of sales, marketing and merchandising offerings, which is an important pillar of our customer-centric strategy. Finally, we recently commenced full operations at our new distribution center in Toronto, Canada. This facility will allow us to establish independent distribution pathways to our Canadian customer base. And consequently, significantly increase service levels, improve efficiencies and provide additional capacity to support long-term growth in the market.

In closing, I believe we are a stronger company today than any time in our history from the diversity of our customers and product offering to the talent of our associates and management team, to the data analytics and digital capabilities. We continue to differentiate ourselves as a leader in what remains a highly fragmented distribution industry. We are not immune to the macroeconomic environment, but the investments we have and continue to make in our strategy should position us well to capture opportunities for the long-term market share growth and emerge from the current cycle in a stronger position.

We are a nimble organization that utilize the flexibility of our strategy and ability to adjust to market conditions to navigate the challenges of the past 2 years, and we continue to do so today. We are focused on operational excellence and putting the customer at the center of everything we do. We believe we have the right strategy in place to drive long-term performance and value for our stakeholders.

I will now turn the call over to Tex.

[Tex Clark]

Thank you, Barry. Third quarter revenue was $298.5 million, an increase of 7.6% over the third quarter of last year. U.S. revenue increased over 8%, while revenue in Canada improved approximately 4% in local currency. The private brand offering once again increased as a percentage of total sales, and we had a further reduction in open orders as we benefited from the normalization of the supply chain.

As we move through the quarter, the demand environment softened, a trend that has continued as customers have generally taken a more guarded approach to buying decisions, given the broader uncertainty in the market. Gross profit for the quarter was $106.6 million, up 4.5% from last year. Gross margin was 35.7%, an increase of 20 basis points on a sequential quarter basis but off 110 basis points from the prior year. Margin performance reflected the continued impact of promotional pricing on excess and seasonal stock as well as the flow-through of some higher cost inventory, which we noted on our second quarter call.

In addition, we had a very strong comp to the third quarter of 2021, which benefited from price rationalization and the benefit of lower cost FIFO inventory sell-through with increasing selling prices. We strive to provide exceptional value to our customers, which includes a competitive approach to pricing.

In the short term, this may impact our ability to attain the margin rates generated in the first half of this year. The benefit from price appreciation is waning as we begin to compare against initial increases applied in the third quarter of last year. In addition, while ocean freight costs have moderated, they remain elevated over historical levels and higher total landed costs remain a component of our current inventory value.

We continue to believe that long-term margin gains are achievable as we drive a higher balance of private brand sales, continue to invest in pricing analytics, optimize our fulfillment and freight profile and drive leverage across our fixed cost base.

Selling, distribution and administrative spending in the quarter was $79.1 million or 26.5% of net sales, an increase of 80 basis points from last year. SD&A primarily reflects investments in the expansion of our Canada DC network, including approximately $0.8 million in ramp-up costs incurred in the third quarter as well as investment in e-commerce and other technology enhancements and increased marketing efforts.

We continue to maintain strong cost controls but expect to see higher SD&A leverage ratios in the fourth quarter of 2022 as we transition to the new Canada DC and optimize operations, along with the impact of historically lower fourth quarter sales on our fixed cost base. Operating income from continuing operations was $27.5 million in the third quarter and operating margin was 9.2%.

Total depreciation and amortization expense in the quarter was $1 million, while capital expenditures were $2.8 million. We expect 2022 capital expenditures in the range of $6 million to $7 million, which includes the new Canada DC.

Let me now turn to our balance sheet. We have a strong and liquid balance sheet with a current ratio of 1.9:1. As of September 30, we had $20 million in cash, $10 million of debt and $61 million of availability under our $75 million credit facility. The improvement in our debt position over the second quarter of 2022 reflects decreased working capital needs as inventory levels normalized.

We currently expect inventory levels to further reduce in the fourth quarter. We maintain significant flexibility to fully execute on our strategic plan and to continue to fund our quarterly dividend. As a result, our Board of Directors declared a quarterly dividend of $0.18 per share of common stock, and we anticipate continuing a regular quarterly dividend in the future.

This concludes our prepared remarks today. Operator, please open the call for questions.

[Operator]

[Operator Instructions] Our first question will come from Anthony Lebiedzinski with Sidoti & Company.

[Anthony Lebiedzinski, Sidoti & Company]

So I know you guys talked about a softening environment from a macro perspective as the quarter progressed. Just wondering if you guys could provide any additional color on the monthly cadence. And maybe just also talk about like which product categories you saw some outperformance versus others. That would be great.

[Barry Litwin, CEO and Director]

Yes, Anthony, thanks for joining. This is Barry. Yes, as we kind of noted on the call, we definitely saw some demand environment kind of softened a bit through Q3. I think we saw a little bit of customers taking a little bit more of a guarded approach. And certainly, we saw a little bit of the price appreciation benefit waning through the period. But we did continue to see strong growth in our core lines and private brand assortment, which I think is very helpful for us. Certainly, category specific.

For us, we saw fairly good growth across those categories in the period. From a sales perspective, our one-to-one sales organization, which is a really strong group, definitely saw leading growth for us through the period. And I think that is our primary goal, obviously, to deliver kind of above-market growth over the long term and continue to leverage other resources we have to continue our growth base.

[Anthony Lebiedzinski, Sidoti & Company]

Got it. Yes. And in terms of the year-over-year gross margin decline, can you just go over some of the puts and takes as to what drove that decline? I know you had private label, you mentioned it went up, which is a higher-margin category, but then obviously some other things impacted. So if you could just go over, again, the puts and takes for the gross margin decline, that would be great.

[Barry Litwin, CEO and Director]

Yes, sure. I mean we were happy that we were able to gain sequential growth performance Q3 over Q2, which we were pleased with. I think the biggest differential, as we talked about in the call was really around some of the differential in FIFO inventory levels last year, which we benefited from, certainly, which I think helped us certainly on the margin side, which was one of the big drivers for us this year over last year.

[Anthony Lebiedzinski, Sidoti & Company]

Got you. And then lastly, so Barry, you talked about taking steps to adapt to changing market conditions. I know you mentioned pricing and analytics, investments, the marketing tools. So have those initiatives that you have in place, which ones do you think will be the most impactful in terms of just adapting to what's going on now in the external environment?

[Barry Litwin, CEO and Director]

Yes, good question. I mean I think you certainly hit on one, and we talked about that around price analytics and our ability to kind of dive deep to understand competitive pricing in this current market, coming off a high inflationary market last year and seeing continued evidence of that this year in certain pockets. So we've been spending quite a bit of time digging into that and trying to always maintain a competitive position for us in the market.

The other aspect is more of the sales effectiveness side. So I think with the one-to-one sales group, we're able to stay very close to our customers, hearing from them in terms of how they're seeing the demand environment and at the same time, trying to make sure that our pricing scenario is matched up with their expectations at this point. So I think the sales team is always a great tool for us to kind of hear what's happening on the ground.

And then currently, we also deploy some fairly significant voice of customer serving data that gives us some intelligence about how the broader customer market is feeling for us and where they're seeing trends in the future in terms of how they're looking at their spend, et cetera, going into next year. So those are some areas that we -- some tools we leverage right now to kind of help us.

[Anthony Lebiedzinski, Sidoti & Company]

Got you. So just to follow up on that in terms of the customer survey data. So what are your -- just curious as to what are some of the findings from that customer survey data that you've seen here.

[Barry Litwin, CEO and Director]

Well, as we kind of called out in our release and certainly in our call, I think the there's obviously -- there's a little bit of global caution around overall market conditions certainly heading into next year. And the way we play that is we're very much kind of looking at the near term, but we're also keeping our long-term growth prospects in mind relative to our investments that we called out. So we get different data coming through from our customers. And I think we've certainly seen some evidence of supply chain improving a bit. And I think that is helping customers relative to their overall view of satisfaction in terms of getting better data around when their products are going to arrive and things like that. So I think we we've definitely seen some improvement on the supply chain side that I think is helping in terms of their overall outlook. But certainly, on the buy side, we're looking at that constantly and helping to guide us going forward.

[Operator]

Our next question will come from Paul Dircks with William Blair.

[Paul Dircks, William Blair]

So first question for me. I can certainly appreciate, Barry, the softening of demand from customers throughout the quarter. But on the last quarterly call, if I recall correctly, there was good volume even through July. So I guess my first question is, was there a precipitous drop in August and September that came about? Or how would you characterize the change in those customer conversations later in the quarter? And to the extent you're comfortable, has there been any further change through October?

[Barry Litwin, CEO and Director]

Yes. No, I think that's a good question, Paul. And as you know, we generally don't provide kind of specific month-to-month guidance. As we kind of noticed, we definitely saw some softness as we move through Q3, which is where we really saw it. And I think the feedback we got was really that customers have taken a little bit more guarded approach relative to spend. I think they're kind of looking a little bit more focused on spending certainly through the year. And certainly with kind of an overall cautious tone into '23. I just think they're taking a more guarded approach. So I think that is what we're seeing.

I think -- and I think the other aspect that we've certainly seen and we kind of expected, you're seeing a little bit of price appreciation benefit kind of wane a little bit through the period. And I think customers are getting a little bit more focused on what they're paying for items.

[Paul Dircks, William Blair]

Very good. Digging into the sales aspect, can you quantify by chance the difference in growth rates between your private label sales and other products?

[Barry Litwin, CEO and Director]

Yes. I mean we typically don't call that out directly, but what I will tell you, Paul, is that the private brand for us is a very strong growth driver in the business. And as we've talked in previous calls, we -- that's been an area for us to be able to engineer more margin and create better value proposition for our customer. So we definitely like to see our private brand growing generally at the fastest rate relative to the category. And obviously, it's an important part for us, and it's a big focus of the business.

[Tex Clark]

And if I can just jump in there as well, Paul. So as we pointed out, the private brand was our fastest-growing segment in our sourcing channel in the quarter as compared to the national brand, which really did help maintain that margin as there was some other price pressure on, as we're talking about the FIFO inventory layer still continue to work that high cost of freight of acquired products as well as some of those promotional pricing that we need to work through to get through some of that seasonal inventory that we had acquired. A little bit of a continuation of some of that from Q2. But again, as Barry mentioned, we had been able to maintain, actually, modestly improve our gross margin rate sequentially, albeit coming off of last year, a pretty significant rate in Q3 of last year.

[Paul Dircks, William Blair]

Got it. No, I appreciate that extra color. Switching gears to the new e-commerce site. Could you maybe quickly elaborate on what your expectations are for the site now that's rolled out? How are the early returns? How is the feedback and the customer response been? And how do you anticipate this new e-commerce site helping you over the medium term here as we go through what may be a down economic period?

[Barry Litwin, CEO and Director]

Yes. That's a great question. And from an e-commerce perspective, it's kind of a business where there's always continual updates and enhancements to the overall experience based on what our customers tell us and the analytics we get. So the big changes we made relative to the UX and navigation experience is operating, certainly, as we had expected. We feel the site experience itself and the look and feel of it is really, really strong. And we continue -- it's not just the big launches we do. We're continuing to make adjustments to the navigational flow of the site to ensure that we get customers finding the right products that they're looking for on the site.

Our internal search certainly has improved significantly with the latest enhancements that we made, and we continue to groom the experience each day based on data we see based on product selection and flow through in terms of conversion rate. So we've been pretty pleased with the performance so far, and we're going to continue to make enhancements along the way. But it's a daily activity in the organization to groom it and to continue to fine-tune it based on what our customers are telling us.

[Paul Dircks, William Blair]

Very good. And then lastly for me, given the fact that we've seen the macro economy step down, have some of the discussions you guys have had with potential acquisition targets, have those discussions heated up at all? Are valuations coming in? How would you characterize your pursuit of inorganic growth here?

[Barry Litwin, CEO and Director]

That's a great question, too. I think, like I said, we've said before, we're constantly scanning the market for opportunities. I think it's hard for us to comment relative to valuations at this point. I think each situation that we've looked at is very different, what's driving the valuation at the types of size that we're looking for in terms of an acquisition? So it's hard to comment on the valuations right now, but all I can tell you is that we continue to look at opportunities on a regular basis. And when we do identify that company that creates the right synergies with our business, we'll pursue that.

[Operator]

This concludes our question-and-answer session, which also concludes today's conference. Thank you for attending today's presentation. You may now disconnect.