Grainger (GWW) Has 'Amazon Bullseye on Its Back', Says RBC Capital

September 16, 2016 1:29 PM EDT
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(Updated - September 16, 2016 2:23 PM EDT)

Grainger (NYSE: GWW) was notably weaker Friday after RBC Capital analyst Deane Dray noted a significant competitive threat from online giant Amazon (NASDAQ: AMZN). Dray cited court testimony by a senior Amazon Business executive in the Staples-Office Depot antitrust litigation earlier this year. Based on this testimony, Grainger has the "Amazon bullseye on its back," and it is the most vulnerable industrial distributor given its exposure to profitable small and medium customers.

"We believe the long shadow of Amazon Business has been a growing threat to Grainger ever since Amazon entered industrial distribution in 2012. Since then, Amazon has been relatively tight-lipped about its master plan in industrial distribution. Now, for the first time, investors have some specifics directly from the head of Amazon Business that corroborate our view that Amazon/ecommerce represents a formidable threat to Grainger," said Dray.

The analyst continued, "Some of the key sound bites from the cross examination include: identifying Amazon Business as a 'top priority', referencing Grainger as a direct competitor (no other distributor named), a 'land grab' to grow in the competitive distribution sector over the next several years, and the surprisingly positive reception from larger customers, a segment that had not been an original focus."

Discussing the threat from Amazon, Dray added, "We see Grainger as the most vulnerable industrial distributor given its exposure to profitable small and medium customers (~25% of sales) and its retail/consumer-oriented bent with just a ~$250 average ticket. This is exactly where Amazon Business is focusing. We do not expect Amazon Business to venture meaningfully into adjacent distributor markets that are more capital-intensive, technically specified, or require value-add specialty sales/services. We expect ongoing margin pressure with the exodus of small and medium customers as Grainger is forced to transition to more price-competitive online sales and direct-ship economics."

RBC has an Underperform rating on Grainger with a price target of $211.

Shares of GWW were down roughly 5% intraday.

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