Release Date: August 04, 2026
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Strong sales growth of 10.3% reported and 13.7% daily organic constant currency, with broad-based acceleration across most end markets.
- Operating margin expanded 120 basis points year-over-year to 16.1%, driven by gross margin flow-through and leverage in Endless Assortment.
- Diluted EPS grew over 20% to $12.01, benefiting from IEEPA tariff refunds and strong operational execution.
- Endless Assortment segment delivered robust growth, with Zoro U.S. up 18.4% and MonotaRO up 24% in local currency, supported by improved customer retention and enterprise growth.
- Company raised full-year guidance for sales, operating margin, and EPS, reflecting strong momentum and confidence in the back half.
- New Northwest distribution center in Oregon began operations, enhancing capacity and service capabilities.
- Canada business showed significant improvement, with sales growth and operating margins reaching near-decade highs.
- July sales trended up over 13% daily organic constant currency, indicating continued strong demand into Q3.
Negative Points
- Gross margin in High-Touch was impacted by higher volume of lower-margin products and project-based spend, leading to less favorable mix than expected.
- SG&A deleveraged slightly in High-Touch due to increased marketing investment and higher incentive-based compensation from strong top-line results.
- Ongoing inflationary pressures from rising freight and product costs due to the Middle East conflict, requiring additional pricing actions in September.
- MonotaRO experienced customer pre-buying of petroleum-related products ahead of anticipated shortages, which has subsided and is expected to moderate growth in the back half.
- Private label cost headwinds and unfavorable freight costs partially offset gross margin benefits in the quarter.
- CFO Dee Merriweather announced her departure, creating leadership transition uncertainty despite interim appointment.
- Third-quarter operating margins are expected to decline sequentially due to the lap of tariff refunds, with margins in the mid-15% range.
Q & A Highlights
Q: Can you provide more color on the impact of large projects on the business, and does this provide more visibility on top-line for the second half and into next year? Are these projects dilutive to operating margin?
A: D.G. Macpherson (Chairman and CEO) explained that large projects, particularly around data centers, have been a tailwind on revenue but a headwind on gross margin. He clarified that while these projects are dilutive to gross margin, they are not dilutive to operating margin. The project spend has increased the High-Touch segment's growth rate by about 90 basis points this year. He expects this to remain a tailwind for revenue for the remainder of the year and potentially beyond, given the cycle of building out data centers and electrical infrastructure.
Q: Regarding the IEEPA tariff refunds, can you estimate the potential refund benefits for the third and fourth quarters? Also, could you decompose the guidance and explain the offsetting factors that caused you to raise the full-year gross margin by less than the benefit from the second-quarter refunds alone?
A: Dee Merriweather (CFO) stated that the vast majority of refunds were accrued for and received in the second quarter, with the back-half impact expected to be immaterial. On the guidance, she noted that tariff refunds account for about 23 basis points on the full year, which is offset by higher volume on lower gross margin products or project-based sales, netting to about 15 basis points. Continued headwinds from fuel and freight costs related to the Middle East crisis and less mix benefit in the second half further offset the benefit. D.G. Macpherson added that big projects tend to have strong contribution margins, so while they drag on gross margin, they don't hurt overall profitability.
Q: Can you help us understand where pricing will shake out in the third quarter and into the first quarter, given the various pricing actions and surcharges?
A: D.G. Macpherson explained that the May pricing actions were net neutral overall. The September pricing actions will add about one point annually, or roughly 40 basis points for the balance of the year. For the full year, pricing is expected to be around 4%, at the high end of the original 3% to 4% guidance. He noted that the company was patient with customers on tariff-related price increases last year, and the same pattern will play out in September to recover headwinds from freight and Middle East product costs.
Q: Can you size the pre-buy impact for Zoro and MonotaRO, and did you see any pre-buy elsewhere, such as in the U.S.?
A: D.G. Macpherson confirmed there was no pre-buy in the U.S. or at Zoro. At MonotaRO, given its reliance on the Middle East, there was a run on TPU, nitrile gloves, and related products, totaling roughly $45 million. He noted that it's difficult to know how much of the pre-buy actually plays out going forward, as customers may continue to buy even after pre-buying.
Q: On gross margin for the quarter, excluding the tariff refund, it came in a bit below expectations. Was the surprise fuel and freight, and can you quantify the impact? Also, should we expect better SG&A leverage in the second half?
A: D.G. Macpherson stated that the miss was more mix-related than freight, though both were drivers. The company purposely held back on aggressive price increases despite knowing tariff refunds were coming, for competitive reasons. On SG&A, he noted that higher-than-expected performance led to headwinds in management bonuses, commissions, and marketing spend. He expects moderation in these outsized costs in the back half of the year, leading to more in-line leverage.
Q: Can you provide color on the sequential bridge from first quarter to second quarter gross margin, and what are the expectations for the back half?
A: Dee Merriweather explained that gross margin saw normal seasonality from price running off, but was also impacted by fuel cost leakage and additional private label inventory costs. The tariff refunds were a benefit but were offset by mix, resulting in a decline of about 50 basis points from Q1 to Q2. She expects the U-shape pattern to continue, with no tariff impact in Q3 and stronger supplier rebates as the year ends.
Q: How is the private label headwind in cost of goods phasing, and can you expand on the Grainger brand launch? Is this more of a margin play or an incremental growth play?
A: D.G. Macpherson said private label will continue to be a headwind, similar to the first half of the year, due to tariffs and compressed costs. He noted the launch of the Grainger brand has shown good growth, with many products converting to Grainger branded items. He described it as more of an incremental growth play, consolidating from 14 legacy brands down to four or five, with brands like Dayton remaining while others shift to the Grainger brand.
Q: On the September pricing actions around freight and fuel, should we think of this as part of the regular cadence of negotiations with customers, or are these surcharges that may require force majeure discussions?
A: D.G. Macpherson clarified that these will be normal course price increase discussions with customers, not force majeure events. He also noted that supplier price increase announcements have been stable over the last couple of months, with some significant increases in categories that are Middle East-centric in terms of raw materials.
Q: Can you provide any color on how you think your share is trending and how the competitive marketplace has been, particularly on the High-Touch side?
A: D.G. Macpherson stated that the company has benefited from pricing, market demand, and share gains, all of which have been reasonably strong. He noted the MRO market has turned from negative for several years to clearly positive, possibly in the low single-digits or higher. He expects this to continue through the balance of the year.
Q: You mentioned the IEEPA tariff was a small impact on total tariff costs. Do you expect more refunds from IEEPA going forward? Also, can you size the contribution of data center projects to volumes?
A: D.G. Macpherson clarified that the comment was to emphasize that overall tariff increases were much larger than the refunds received, and he does not expect a lot more refunds. On data centers, he noted direct exposure is less than 1%, but the project spend has
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
This stock alert was generated using automated technology and GuruFocus financial data to provide readers with timely and accurate market reporting. This content was reviewed by GuruFocus editorial team prior to publication. Please send any questions or comments about this story to [email protected].
