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DOW   37,798.97
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ASML’s Earnings Could Bring The Stock to New Highs
Stock market today: Asian benchmarks trade mixed amid expectations for US rates to stay high
Kinder Morgan Stock Bid Up In An Oil Breakout
Undervalued UnitedHealth Group Won’t Be For Long
DocuSign and The Case for 66% Upside 
3 Computer Vision Stocks for Long-Term Gains From AI
Silicon Motion Proves That AI in Motion Stays in Motion
S&P 500   5,051.41
DOW   37,798.97
QQQ   431.10
ASML’s Earnings Could Bring The Stock to New Highs
Stock market today: Asian benchmarks trade mixed amid expectations for US rates to stay high
Kinder Morgan Stock Bid Up In An Oil Breakout
Undervalued UnitedHealth Group Won’t Be For Long
DocuSign and The Case for 66% Upside 
3 Computer Vision Stocks for Long-Term Gains From AI
Silicon Motion Proves That AI in Motion Stays in Motion
S&P 500   5,051.41
DOW   37,798.97
QQQ   431.10
ASML’s Earnings Could Bring The Stock to New Highs
Stock market today: Asian benchmarks trade mixed amid expectations for US rates to stay high
Kinder Morgan Stock Bid Up In An Oil Breakout
Undervalued UnitedHealth Group Won’t Be For Long
DocuSign and The Case for 66% Upside 
3 Computer Vision Stocks for Long-Term Gains From AI
Silicon Motion Proves That AI in Motion Stays in Motion

W.W. Grainger Q4 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing

Participants

Corporate Executives

  • Kyle Bland
    Vice President of Investor Relations
  • D.G. Macpherson
    Chairman and Chief Executive Officer
  • Dee Merriwether
    Senior Vice President and Chief Financial Officer

Presentation

Operator

Greetings and welcome to the W.W. Grainger Fourth Quarter and Full Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the conference over to our host, Kyle Bland, Vice President of Investor Relations. Thank you. You may begin.

Kyle Bland
Vice President of Investor Relations at W.W. Grainger

Good morning. Welcome to Grainger's fourth-quarter and full-year 2022 earnings call. With me are D.G McPherson, Chairman and CEO; and Dee Merriwether, Senior Vice President and CFO. As a reminder, some of our comments today may include forward-looking statements, and actual results may differ materially as a result of various risks and uncertainties, including those detailed in our SEC filings. Reconciliations of any non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our Q4 earnings release, both of which are available on our Investor Relations website.

This morning's call will focus on fourth-quarter and full-year 2022 adjusted results, which excludes the gain related to the divestiture of Cromwell's enterprise software business, which was sold in the fourth quarter. We will also share results related to MonotaRO. Please remember that MonotaRO is a public company and follows Japanese GAAP, which differs from US GAAP and is reported in our results one month in arrears. As a result, the numbers disclosed will differ somewhat from MonotaRO's public statements.

Now. I will turn it over to D.G.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Thanks Kyle. Good morning, and thank you for joining us today. I'm going to discuss some of our key accomplishments from 2022 and then I'll pass it to Dee to walk through the specifics of our 4th-quarter performance and our outlook for 2023. Turning to Slide 4, the Grainger Edge framework has been instrumental in guiding our work in 2022. We know that when we live our principles are focused on the things that matter and serve our customers well we can achieve great things. Our customer base is very broad. I've been with customers that are seeing positive economic signs like aerospace and I've also been with other customers like some retailers that are seeing some concerning economic sites. But in general, our customers continue to be busy and Grainger has and will remain the trusted partner by providing value to their operations, every day.

As we look to 2023 and beyond we are excited to continue living out the Grainger Edge, starting with the customer and serving as a valued partner through any cycle. In 2022, the Grainger team stayed relentlessly focused on what matters most, providing our customers exceptional service supporting each other, and making a positive impact on our communities and the environment. In both models, we made strategic investments to support customers and build the business for the future. This included adding supply chain capacity, including a new bulk warehouse in the US and the startup of the Inagala distribution center in Japan, expanding our digital and data capabilities, including progress with our customer and product information systems and our high-touch business and improved account management tools and our endless assortment model. And executing against our merchandising and marketing initiatives, including tent search and recommendation functionality.

During the year, we also continued to strengthen our purpose-driven culture by ensuring Grainger is a place for our team members can be their true selves and have a fulfilling career. We continue to receive external recognition for our workplace culture, but what it means the most to me and the rest of the leadership team is the positive feedback from team members about why they choose to build their careers at Grainger. And finally, we continue to make progress with our environmental, social and governance objectives, both internally and in supporting our customers to help them achieve their own ESG goals. Result of this focus was an outstanding year of profitable growth and we are extremely proud of our results, which surpassed our own expectations throughout the year.

Turning to slide 6. We finished the year with over $15 to $15.2 billion in sales, up 16.5%, a daily basis or 19.3% in daily constant currency as demand across the business remains strong. In our high-touch business in North America, we focused on our growth engines and achieved approximately 775 basis points of US market outgrowth in 2022, far exceeding our update updated target of 400 basis to 500 basis. In the endless assortment model, both Zoro and MonotaRO made progress to achieve high-teens growth in local currency and local days.

During the year we drove 215 basis-points of gross margin improvement, which when coupled with 40 basis points of SG&A leverage resulted in 255 basis-points of operating margin expansion and a nearly 50% increase in adjusted EPS. We also generated over $1.3 billion in operating cash flow, an increase of 43% over 2021 and returned $949 million to Grainger shareholders to pivot hence and share repurchases. We accomplished this while also improving our ROIC by 870 basis points to 40.6%. The strong 2022 financials were the result of staying focused throughout the year on what truly matters to our customers, our suppliers, and our team members and we are well-positioned to continue this momentum in 2023.

With that I will turn it over to Dee to discuss the details of the fourth quarter and our outlook.

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

Thanks D.G. Turning to our fourth quarter 2022 Results for the total company. It was a solid quarter to finish out this year and while you notice some noise as we walk through the financials at the end of the day, we delivered great results. Sales growth in the quarter was 13.2% or 17.2% on a daily constant currency basis. Which normalizes for the impact of the depreciating yen. Our results this quarter included strong growth in both segments as we continue to execute well against our strategic priorities. This includes approximately 800 basis points of share gain in the US, high touch business, and high-teens growth in local currency across an endless assortment.

Total company gross profit margin in the quarter was 39.6%, expanding 230 basis points over the prior year fourth quarter, driven by increases in both segments and including a favorable Year-over-Year impact from year-end inventory adjustment, which I'll detail in a moment. The strong gross margin performance was partially offset by a decrease in SG&A leverage in the quarter. We continue to invest in our strategic initiatives and also incurred an aggregate $35 million in non-recurring items in the quarter. This included a one-time bonus to most hourly employees within high-touch to recognize their significant contributions towards our 2022 performance.

Excluding these one-time nonrecurring items, total company SG&A as a percentage of sales would have been roughly flat year-over-year. Despite these nonrecurring costs we still finished the quarter with an operating margin up 135 basis points over the prior year period. This profitable growth resulted in diluted EPS of $7.14 for the fourth quarter, representing a 31% increase versus the fourth quarter of 2021, another strong quarter of performance. In our High-Touch Solutions segment, we continue to see strong growth with daily sales, up 16.8% compared to the fourth quarter of 2021. We saw continued positive growth in all major customer end markets across the segment, including over 20% growth in natural resources, transportation, and heavy manufacturing.

The daily sales increased in the US of over 17% was fueled by mid-single-digit volume growth and continued strong price realization over 11% in the quarter. Canadian daily sales were also strong, up 7% or 17.2% in local days and local currency. For the segment, GP margins finished the quarter at 41.9%, achieving 225 basis points of margin expansion. During the quarter, the segment benefited from lower freight costs and continued improvement in product mix. Margin was also favorably impacted by year end inventory adjustment as we lap the unfavorable LIFO adjustment from the prior year period and also recorded a positive net inventory adjustment in the current year period.

The net impact of these inventory adjustments was around 130 basis points for the segment. Price cost spread in the quarter was also roughly neutral. Moving to SG&A. The segment delevered by about 35 basis points, which was driven by continued investments in marketing and headcount to support growth. In addition, this segment incurred $29 million in non-recurring items in the period, including the one-time bonus payment previously discussed and some accounting true-ups to close the year. While we did modestly delever SG&A, we still expanded operating margins by 190 basis points Year-over-Year, finishing with a 0.5% operating margin for the segment. This is a strong finish for our High-Touch team.

Looking at-market outgrowth on slide 10. We estimate that the US MRO market including volume and price inflation grew between nine and 10%, implying we outpaced the market by roughly 800 basis points in the quarter. This strong finish helped us deliver 775 basis points of market outgrowth for the full-year 2022. We continue to have great success in gaining share as we execute against our strategic growth engines in our high-touch model. We remain confident in our ability to deliver the 400 basis point to 500 basis points of annual outgrowth going forward and are excited to continue partnering with our customers and our suppliers to drive value for all parties each and every day.

Moving to our endless assortment segment. Reported and daily sales increased 0.9% or 18.2% on a daily constant-currency basis after normalizing for the significant impact of the depreciating yen. In local currency and local days, MonotaRO achieved 19.4% growth and Canadian US was 19.5%. Revenue growth continues to be driven by strong new customer acquisition and repeats business for the segment as well as enterprise customer growth at MonotaRO. Gross margin for the segment expanded 170 basis points versus the fourth quarter of 2022 as we saw strong price realization, coupled with continued freight efficiencies as average order values have increased year-over-year.

We also benefited from favorable business unit mix as Zoro grew faster than MonotaRO in the quarter. Segment operating margin declined 180 basis-points as favorable gross margin was more than offset by heightened SG&A costs. While Zoro operating margins were roughly flat in the quarter, MonotaRO was impacted by startup costs at the new Inagala DC as well as nonrecurring asset retirement costs related to the upcoming closure of the Amagasa facility.

As we lap these DC transition costs and ramp the new facility to pitch peak efficiency, we expect profitability will begin trending towards more normal levels as we move through 2023. On slide 12, we continue to see positive results with our key endless assortment operating metrics. Total registered users are tracking nicely with Zoro and MonotaRO combined up 17% over the prior year. On the right, we show the continued growth of Zoro SKU portfolio now at over 11 million SKUs and then in 2022, the team successfully delivered on our stated goal to add 2 million SKUs per year over the next several years.

In summary, a great job of spinning the endless assortment of flywheels by both Zoro and MonotaRO and 2022. I also want to acknowledge the exciting news that our Zoro US business surpassed $1 billion in annual sales in 2022, the first time they exceeded that threshold in their history. It's been an amazing success story since we launched this business back in 2011 and we remain excited about what Messiah, Kevin and the rest of the Zoro team will accomplish going forward.

Moving to our outlook, despite the economic uncertainty heading into 2023, our high-level earnings algorithm remains intact. Within our Hi-Tech segment over the longer-term economic cycle, we target growing 400 basis points to 500 basis points faster than the US MRO market and remain confident in our ability to do so. In our endless assortment segment, we expect to continue our track record of strong growth both in the US and in Japan. At the total company level, we target generally stable gross margin performance over time while sticking to our core pricing tenant and as we strive to grow SG&A slower than sales to help expand operating margin.

Couple this with our balanced and consistent approach to capital allocation, and we can drive attractive returns over the long term as we've done especially well over the last few years. So what does this mean for 2023. At the total company, we expect revenue between $16.2 billion and $16.8 billion with daily sales growth between seven and 11% driven by strong top-line performance in both segments. Note that this range is 40 basis points lower on a reported basis when factoring in one less selling day in 2023.

Within our High-Touch Solutions segment, we expect daily sales growth between 5% and 9.5%. In the US, we're planning for MRO market growth between 1% and 5% comprised of the volume range of flat to down 3% coupled with price inflation between 4% and 5%, largely representing the RAP of 2022 price increases. On top of a 1% to 5% market, we expect to continue executing against our strategic growth engines to achieve 400 basis points to 500 basis points of US market outgrowth in 2023.

In the endless assortment segment, we anticipate daily sales to grow between 16% and 18%, or roughly 17% to 19% and daily constant-currency when factoring in 100 basis-points of foreign exchange headwind at the segment level from the Japanese yen. Zoro is anticipated to grow within this segment range reflecting further SKU expansion and the continued focus on acquiring and retaining high-value business customers. MonotaRO is also expected to grow within this segment range in local currency as they continue to grow small businesses and large enterprise customers.

Moving to our margin expectations. We expect strong performance in both segments with stable to expanding performance and high-tech solutions and improving profitability in endless assortment. In the High-Touch Solutions segment, we expect gross profit in the year to be flat to slightly down, as we anticipate some of the price-cost favorability experienced in 2022 to unwind as we trend back to neutrality over the long term. We expect this headwind will be partially offset by freight favorability, given the improvement in container costs and the current outlook for diesel prices.

On the SG&A side, we will continue to make incremental investments toward our strategic initiatives as we view our growth algorithm. We will also have the tailwind as we lap the nonrecurring items that hit in the fourth quarter and certain expenses like variable compensation reset in the New Year. Overall, in total we expect SG&A leverage to be favorable and therefore when combined with our top-line growth expectations, we anticipate an operating margin of 16.3% to 16.8% and high touch for 2023.

In the endless assortment segment, we expect MonotaRO's operating margins to improve Year-over-Year as they continue to benefit from favorable freight efficiencies and strong price realization. At Zoro, we expect operating margins to continue to ramp as they gain leverage on their cost base. Overall, this represents operating margin for the segment is between 8.6% and 9%, an improvement of 60 basis points to 100 basis points compared to 2022. Rolling this out for total company, we expect to gain SG&A leverage of 30 basis points to 60 basis points to offset a modest decline in gross margin resulting in an operating margin between 14.4 and 14.9% for the full year.

Turning now to capital allocation. We expect the business will continue to generate strong cash flow in the year with an expected range of $1.45 billion to $1.65 billion, an increase of over $215 million at the midpoint compared to 2022. We expect to use this cash to invest in the business and return capital to shareholders. As discussed at our Investor Day in September, we plan to invest in our DC network over the next few years to support strong growth and to maintain industry leading service levels. With this, we anticipate capital spending in the range of $450 million to $525 million in 2023. This includes DC capacity investments to expand our service advantage in the US as well as the start of a new DC project in Tokyo.

We are also continuing to invest in technology to further our customer and product information advantage and will continue to spend on accretive ESG investments across the portfolio. We expect to continue to return a significant amount of cash to shareholders in-line with our historical approach. This will include share repurchases to the tune of $550 million to $700 million and a strong cash dividends, which we've increased consistently for the past 51 years and expect to do so again here in 2023.

Summarizing the high-level points on slide 17. You can see these revenue, profitability, and capital allocation expectations translate to adjusted EPS of $32 to $34.50 per share, a 7.9 to 16.3 percentage increase over 2022 and nearly double our pre-pandemic 2019 adjusted EPS of $17.29. We are off to a really strong start in January with preliminary total company daily sales up 16% or around 19% in daily constant currency. We do expect growth rates will be stronger in the first half as a result will benefit from a more pronounced price wrap.

In the second half, we will face tougher comps and have modeled a slower economic cycle. On profitability, while every year is different, we do expect gross margins will generally follow our traditional seasonal pattern with a high watermark in the first quarter and sequential declines in the second and third quarters. We anticipate SG&A will be reasonably consistent over the course of the year.

With that, I will turn it back to D.G., for some closing remarks.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Thank you Dee. Before I open it up for questions, I want to first and foremost thank the Grainger team as well as our customers and supplier partners who have helped to drive such a successful year. We truly kept the world working in 2022 and in turn achieved outstanding results for the year, both financially and operationally. I am excited for what is to come in 2023 and remain confident in Grainger's ability to create tangible value, deliver a flawless experience and drive profitable growth over the long haul. With our team's continued commitment to focusing on the things that matter, we are well-poised to deliver in any macro environment.

With that, we will open up the line for questions.

Questions and Answers

Operator

[Operator Instructions] Our first question comes from Tommy Moll with Stephens. Please state your question.

Tommy Moll
at W.W. Grainger

Good morning and thanks for taking my questions.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Good morning.

Tommy Moll
at W.W. Grainger

I'll ask two both on High-Touch. Let's start on pricing there. It looks like for 2023 four points to five points of growth on price. I think you heard -- I think I heard you say that most, but maybe not all of that is a wrap, but if you could comment there on the route versus any new initiatives? And then also just related point, are there any areas of pricing pressure, that's something that's been picked up in the marketplace this quarter elsewhere and I just wonder if you've seen any of that in your business?

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

So I'll start with the first part and then maybe D.G. can add in a little bit on what he's hearing from -- what he's hearing from some customers on the visit. So, yes, when we look at the market outlook, it includes both price and volume. And so the sum of that, we believe will be somewhere in the range of 1% to 5% of the total market.

We believe that volume will be down 3% to flat. And as you know, at price up 4% to up 5%. We have more visibility into our pricing than anyone. And so when we look at price, we are also taking into account our wrap, which is basically the price increases that we took in 2022 and their full impact to 2023. So, we still see a little bit more price coming our way. So, it takes that 3-ish percent up to about 4% to 5% from for the price outlook.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Yes. Tommy, I would say most of the -- if there's deflationary pressure, it's mostly due to commodities. So there are -- we've taken prices up and down across the assortment and the ones that are down are almost always very commodity intensive. So they're very steel-intensive or very -- some specific commodity intensive. So we do see that broad market pressure. We don't see that much. It's more specific commodities that we're seeing right now.

Tommy Moll
at W.W. Grainger

Thank you. That's helpful. And then I wanted to follow up on the volume outlook for High-Touch flat to down three. And D.G., you mentioned at least one area of strength in aero and one area of relative weakness in retail, but I'm just curious, as you roll it all up into that full year outlook, are there other areas of weakness you're already seeing? Or is it more just potentially some conservatism around the back half? Anything you could provide there would be helpful.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Yes. We're really sticking to what the market projections are at this point. In terms of -- you heard the January results, we aren't seeing a lot of weakness to be fair at this point. We do expect in the back half, there to be more challenges from a volume perspective. What I would say is every customer we have has a COVID-fueled story about what's happened to their volume over the past few years and where they've been determines whether they're facing pressures now or whether they're seeing optimism. So obviously, with aerospace, they -- we shut down the airlines for a long time and they now have orders. So they're starting to build up. And that's going to take a couple more years to actually get the full speed, we think with aerospace.

With some, they may have forward loaded some of their volume because they were selling things that were very important during the pandemic, and now they're faced with situations where things are slowing down. So I would say every customer has their own story, net-net, that we're not seeing any real softness as of yet, and that's showing in the numbers.

Operator

Thank you. Our next question comes from Ryan Merkel of William Blair. Please state your question.

Ryan Merkel
at W.W. Grainger

Thanks and nice quarter. I wanted to start with a couple of questions on price cost. Just wanted to dig in a little bit more. So last quarter, I think price cost held by 60 basis points and then in the fourth quarter, it was flat. I'm just curious, why does it move around so much. And then I think you're managing the price cost being neutral, but typically in the past, when there's a lot of inflation, your gross margins would expand. I'm curious how you're sort of managing to that price cost neutral.

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

Well, if you're specifically focused on GP in the U.S., our gross margins have expanded, if you look over a longer period of time here. And as it relates to price cost, just want to reiterate, when we talk about neutrality, we do talk about that over time and we have continued to speak about the fact that price cost just like GP is lumpy. We have a cost cycle, which we have traditionally had for years that really didn't hold last year because of how fast cost inflation was coming in to suppliers. So that makes the cost piece of that a little bit lumpier.

And then if you recall, we have the opportunity based upon our percentage of revenue, highly contracted. We have the right to introduce price at different periods during the time. We also have web price, which is also a good portion of our business, and we can pass price on web at any particular time. So that is the lumpiness. It's the timing of when we can actually price plus the timing of when cost actually comes through and that's why our focus is doing that over a period of time and when it makes sense, both for our supply base as well as for our customer base.

Ryan Merkel
at W.W. Grainger

Okay. That makes sense. And then my follow-up, I think you had 9% price mix in '22. And my question is, is that 9% also included in your definition of the MRO market? And really what I'm getting at is, did Grainger have more price in '22 than the market and if so, why?

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Yes. Maybe I'll cover that. First of all, I think that the way you measure price inflation is probably not common across everybody. So you dive into the details that we don't really know how others are talking about price inflation, so we wouldn't comment on that. I think the thing I would point to is, to Dee's point, we generally think of price as pricing to the market, and we are very confident that what we have now is market competitive, and we look at that very, very, very closely, given our history. You might understand why we would do that and so we are more wired on how we price competitive. As you said, there's really a lot of lumpiness. We may have taken price later than others or some may have taken earlier who knows. But the reality is that we are very competitive now and feel like we're in a good position on pricing.

Operator

Thank you. Our next question comes from Deane Dray with RBC Capital Markets. Please state your question.

Deane Dray
at W.W. Grainger

Thank you and good morning, everyone.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Good morning.

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

Good morning.

Deane Dray
at W.W. Grainger

Could we touch on freight for a second? It looked like that rate efficiencies helped you on price cost, if I read that correctly, but it still sounds like there's freight inflation. So where does that stand today?

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Yes. So our price cost does not include freight the way we define it for you. So freight is a separate issue. Obviously, we consider freight in everything we do. Like everybody, we saw huge freight increases during 2021 and 2022. That has certainly moderated. It's still above 2019 levels fairly substantially and we have seen that come down quite a bit. So -- and we talked about for this year, we expect it to be a benefit in terms of some of the moderating prices. And some of that is sort of obvious places the containers from overseas or a lot cheaper than they were six months ago, quite a bit, but they're still relatively higher than 2019, but getting closer. Other parts of the market are still tight. So net-net, we still feel like it will be a small benefit this year for sure.

Deane Dray
at W.W. Grainger

That's helpful. And then follow-up on the supply chain, just where does it stand today with inefficiencies. What kind of lead times you're seeing and what expectations about returning to normal?

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Yes. It's a great question. So what I would say is that, from our perspective, once we have the product to when customers get it, that part of the supply chain is all good. We were basically clean every night, barring a storm in Dallas or something that we've seen in the last couple of days where people won't pick up, but in general, the supply chain on the outbound side, both in our buildings and then our freight partners is very, very good.

On the inbound side, we still have some elongated supply chains. It's gotten much better in the past four or five months, and we expect to continue to get better. At normal, I think I'd probably say in quotes now. I do expect it to get closer to 2019 lead times, but maybe not quite all the way there as the year progresses, but we do expect it to continue to get better.

Operator

Thank you. And our next question comes from Chris Snyder with UBS. Please go ahead.

Chris Snyder
at W.W. Grainger

Thank you and congrats on a really great year. Market outgrowth for the U.S. High-Touch business has continued to improve despite presumably better product availability across your smaller competitors. So it seems like the strategic initiatives are certainly taking hold. So I guess my question with that, does this change the way you think about the 400 to 500 basis points of outgrowth? And should we think about price as part of that outgrowth? It sounds like a lot of the questioning seems to suggest that you guys are overpricing the market. But it just feels like with the digital divide we're seeing and the increased importance that brings to customers, I would suspect you guys should be able to outprice the smaller regional competitors who do not offer that.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Yes. I guess I would say just from a core sort of principle for us, we think of outgrowth in terms of volume, we expect price to be relatively neutral. You're right, we make it modest benefits over time that can happen. But certainly, what we're talking about is volume outgrowth. The position from last year, certainly, we got some benefit from supply chain fairly modest. And what we do is we sort of decouple that analytically and look at what our initiatives are doing, and that's how we came up with the 400 to 500 basis point target at the Analyst Day. We're still sticking with that. Obviously, we've done a little better than that. But for now, we're not changing that. That's our expectation going forward.

Chris Snyder
at W.W. Grainger

Thank you. And then for my follow-up, I wanted to talk about the High-Touch favorable mix during the quarter, typically mixed screens as transitory, but on the last call, the Company talked about the mix benefit coming from an increased focus on technical products. And just given the strategic nature of that, it sounds more structural, so just hoping for more color on how to think about mix going forward. Thank you.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Yes. So we have a favorable mix. Mix for us generally means product mix here. And so you can imagine during 2020 and 2021, in particular, we had a very negative mix because we had -- we were selling any mask in the world we could find, we're selling it, and that is a lower margin product. I would say we are more back to normal now in terms of the industrial products that we have typically sold, and that's been a favorable mix for us. And certainly, we are working hard to make sure that we can compete with technical products or industrial products, and that will be a focus for us going forward. But most of the mix benefit has been getting -- really getting back to normal is the way I describe it.

Operator

Thank you. And our next question comes from Jacob Levinson with Melius Research. Please go ahead.

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

Good morning,

Jacob Levinson
at W.W. Grainger

D.G., are you guys still experiencing any kind of labor issues either at the factory level or otherwise? Just thinking about kind of the mix signals we're seeing in the labor market. You still got wage inflation at the lower end and seemingly a lot of competition and warehouses and factories and whatnot, but just curious what -- how that translates for you guys.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Yes. Well, so a couple of things. One is we certainly, we had wage labor challenges 18 months ago, a year ago. We have made adjustments in wages for our team members. I would say we are in a much, much better position. Our churn rates are back to normal basically in most parts of the business. And we are in a much more stable staffing pattern than we've been. And I mentioned some of the outbound, our DCs are performing well, our call centers are performing well. We don't have as much churn -- near as much churn as we did at the peak and we're really close to back to normal at this point.

Jacob Levinson
at W.W. Grainger

Alright. That's helpful. And just switching gears, I guess as a consumer when you get a lot of inflation, you see people switching from the premium product to the private label brand. Are you seeing that kind of trend in your business where customers that might want to prefer your Grainger brand over some of the marquee brands, if you will.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Not. We aren't seeing a big shift there. I would say that most customers, when they're buying industrial products, they need the product for the application they're using it for. And so if our private brand works that we use it and they always have, but generally, we aren't seeing certainly a down shift to lower cost products. That's not what we're seeing right now.

Operator

Thank you. And our next question comes from Christopher Glynn with Oppenheimer. Please state your question.

Christopher Glynn
at W.W. Grainger

Thanks. Good morning guys. So I think last quarter, another topic that came into the improved mix discussion for HTS was the result of the merchandising initiatives. So drilling into that, is that trend kind of in the input there full throttle now or still ramping up? And is that kind of expected to be a good guide driver for an indefinite number of years?

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Yes, it's the latter Chris. So we've -- we started this initiative three or four years ago. We've worked through sort of some initial category reviews. We keep getting better at them and what we've discovered is that we've learned a ton as we've gone, and we're just getting better and better at it and there's still a lot of improvement to be made. It will be a consistent benefit for us, we believe going forward for the foreseeable future, sort of that midterm three year to five year time frame. We still see a lot of benefit from improving the way we merge. And it's core to what we do. I mean helping customers have confidence that they found the right product, it's kind of what we do. So getting better at that seems to have a good result, and we're going to continue to really push hard on that.

Christopher Glynn
at W.W. Grainger

And to be clear, that's just highlighting higher-value add products within categories for the most part.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

No. We are -- I would say we are agnostic to what the -- not agnostic to the economics, but agnostic to sort of identifying higher-value products. We're trying to make it super easy for customers to find what they need. And so it's really all about, do we have the right assortment, can we present it in a way that makes it really easy for customers to find so they can have a lot of confidence that they're getting the product that they need to use for the right application.

Christopher Glynn
at W.W. Grainger

Thank you.

Operator

Thank you. Our next question comes from David Manthey with Baird. Please state your question.

David Manthey
at W.W. Grainger

Thank you. Good morning. First off, I'm interested in understanding how you capture a LIFO benefit when both inventories and the LIFO reserve are up quarter-to-quarter and year-to-year. I just if you could go through the mechanics of that, I'd appreciate it.

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

Sure, Dave. So I'll go back to last year, you just start with that because there was two things. We're lapping last year's -- it was unfavorable last year, favorably this year just net. And if you recall last year, we had a sharp increase in cost and then we had an outsized amount of inventory kind of get delivered in the fourth quarter. And that combination of those two factors happening at the same time, resulted in us recording a meaningful LIFO adjustment to our fourth quarter adjustments in 2021.

Now looking at that and understanding that we were still in an inflationary period as it relates to cost and we saw costs still coming in. From our suppliers, we worked on improving our processes, tightening our processes, making sure that we were booking entries and looking at the process, not just from the financials, but with the chain leaders to ensure inventory valuation was staying up to par as we move through the year. So I feel like we did a much better job there.

However, when you look at the inventory that was sold through in the last quarter of the year, it required us to take a favorable LIFO adjustment to correct for that because if something has an increase for those that don't know, something has an increase in the quarter, it haven't sold it or the price change in that quarter from when it changed early in the year, the LIFO adjustment causes you to refactor all of those sales to the latest cost. So that adjustment was favorable for us. The combination of those two year-over-year in Q4 resulted in about 130 basis points, a net 130 basis point year-over-year impact to GP for the High-Touch business.

David Manthey
at W.W. Grainger

Okay. And the second, the share gains that you've been seeing has clearly been terrific. Could you discuss the balance that you're seeing between new customer adds and selling more to existing customers? I would imagine there's a difference between High-Touch and Endless Assortment. But could you just give us some color on that.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Yes. In High-Touch, so I would just say that in High-Touch that the vast majority of our share gain is the existing customers. The reality is that the Grainger brand sells something to most large and midsized customers' business customers in a year. And so a vast majority of those are -- the share gains we're seeing are actually share of wallet as opposed to new customer acquisitions.

In the Endless Assortment, it's more balanced. We're seeing in Japan, we're seeing a mix of new customers, but also significant growth with existing customers. And at Zoro, we're seeing nice retention rates. So we are seeing more balance between new customer acquisition and volume and existing customer volume in the Endless assortment model.

Operator

Thank you. And our next question comes from Ken Newman with KeyBanc Capital Markets. Please state your question.

Ken Newman
at W.W. Grainger

Hey, good morning guys.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Good morning.

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

Good morning.

Ken Newman
at W.W. Grainger

Dee, I think the midpoint of guide implies SG&A leverage of, call it, high teens for 2023 at the midpoint. Just remind me how much of the SG&A spend is fixed versus variable at this point? And should we think about high teens as kind of the right way for SG&A leverage to progress if sales stay at this at or above mid-single-digit growth going forward?

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

So the -- if you're looking at our guide, the guide is implying 30 basis points to 60 basis points of SG&A leverage for next year. And as I think about that, let's remember a couple of things. We're continuing to invest in demand generation, and we had some one-time costs this year that we don't expect to impact us next year. And I will say the -- one of the last things to consider is going into a new year, we get to reset our variable cost like variable costs such as variable compensation back to a 100% of our plan.

And then we have some modest productivity that we built into the plan because we focus our organization on looking at driving standard work automation and productivity every day. So we don't have to have huge events. We do that in times when things are going really well and we can scale and also when things are tightening up. So, those are the numbers that I had related to the type of SG&A leverage we're looking to gain. And remember, that's in the midst of us continuing to invest.

Ken Newman
at W.W. Grainger

That's helpful. For my follow-up here, it does look like inventories took a decent step up from the third quarter to fourth quarter, which makes sense given the sales guide increase. Can you just provide some color on what's embedded in the operating cash guide for how inventories and working capital trend throughout the year?

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

Can you repeat the question again?

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

What can happen to have inventory levels next year and working capital next year?

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

Oh. So would that investment, it also includes some investments in DC capacity, so we expect to continue to build inventory as we stand up some of those new buildings. We do expect to see some slight improvement in working capital as far as it is not diminishing as much as it has in the last couple of years because we were investing much more significantly in inventory, say, last year and we're starting to see some improvement and our accounts receivable execution as well.

Operator

Thank you. Our next question comes from Chris Dankert with Loop Capital Markets. Please state your question.

Chris Dankert
at W.W. Grainger

Hey, good morning. Thanks for taking the question. I guess looking at the margin guide for analyst assortment, pretty impressive expansion in '23 expected here. How do we think about kind of the long-term path towards that 11% margin guide? Does the DC investment in Tokyo, what else should we be thinking about in terms of cost and investments in '24 and beyond maybe as we think about Endless Assortment profitability over time here?

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Yes. So the two biggest portions of the Endless Assortment are on our Zoro U.S. and MonotaRO. MonotaRO, their profitability in the last year was deflated by operating two buildings at once in the in the Osaka area. That goes away. So they'll see some improvement next year. They will be investing in a building in the Tokyo region in the next several years.

But generally, I think the pattern for them will be getting closer back to where they were prior to the dual DC Osaka situation. So, we would expect them to improve over time. And then we talked a lot about Zoro U.S. We expect that to get a kind of high single-digit operating margins over the next several years. And so that combination gets you to sort of that long-term guidance.

Chris Dankert
at W.W. Grainger

Okay, and just to put a finer point on that last piece about Tokyo. Will that have a similar impact as the standard of stock? I did in terms of operating two facilities that once whenever that that investment comes through.

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

So we expect the Inagala DC that went up and got out a margin in 2023, there they have first-half, they will still be incurring some costs as well as ramping up to their full efficiency in the midst of that they they are also launching Phase-II of the Inagala DC, which has additional costs. So our expectation is that they will end the year in 2023 or exit that year with at margin rate similar to what you saw, prior to both.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

I think Chris was asking a different question, which you were asking about Tokyo and whether it's going to be a similar issue with Tokyo when that comes on board. The answer is, who knows, it depends on the pattern of the timing and when it when things open it may or may not be as impactful that will go, comment on that as we get closer to.

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

Okay.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

That's like that's three or four years out so.

Operator

Thank you. And our next question comes from Pat Baumann with JPMorgan. Please go-ahead state your question.

Pat Baumann
at W.W. Grainger

Hi, good morning. Thanks for taking my questions. A quick one. I think you're expecting on gross margin for the fourth quarter, like 30% to 34%. Can you just walk from what you were expecting to, that 39.6% that you reported, kind of like what surprised you? You called out the LIFO benefit but that's like a year-over-Year impact. So I'm not sure if that's like. The entire bridge to that 39 6%. I know it's 130 year-over-Year, but I'm not sure that that's like the difference in, kind of, where you came in versus what you expected sameer can color on that. Thanks.

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

This year, so admittedly, we didn't in stronger than we expect, as we continue to execute well, and a number of things as you kind of note when our way. So we talked about one of them earlier, we got some tailwind from freight efficiencies with both fuel and container cost coming down over the last couple of months. In addition to that, we did get some price-cost timing benefits. As we look to implement web prices we implement isn't what prices in the quarter, Head of R&D price increases, so that helped us a bit. And then if you break away inventory valuation adjustment this year from what we saw last year that was more of something that wasn't anticipated so that inventory valuation adjustment that we booked in the quarter that was favorable. That was the third piece.

Pat Baumann
at W.W. Grainger

Okay, is it kind of like in that order? In terms of like the magnitude of difference.

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

I would say if you take all three with about a third from a value perspective.

Pat Baumann
at W.W. Grainger

Great. And then my follow-up is just on, it's also on gross margin, just the guide for '23. Just wondering what the assumptions are kind of behind that modest contraction for some of these moving parts, like is it is price-cost? Negative, which is offset by freight kind of wash out, and then kind of the decline is like just kind of segment mix-related or is there anything in there for kind of the inventory adjustment dynamics to think about? Just wondering that the year-over-Year guide on how to think about the moving parts for that.

Dee Merriwether
Senior Vice President and Chief Financial Officer at W.W. Grainger

So. I think you said it exactly right. I you repeat what you said that you know we have some price-cost benefit timing some of that may fall away. We may have some freight efficiencies both may or may not cover that completely up and then you've got the business unit mix. Between endless assortment and high-touch and the fact that illicit assortment is going to grow faster. So it has a negative impact.

Operator

Thank you. And we have reached the end of our question-and-answer session today. I will now turn the call over to D.G McPherson for closing remarks.

D.G. Macpherson
Chairman and Chief Executive Officer at W.W. Grainger

Yes. Thanks for joining us today. I really appreciate you jumping on the call. Hopefully, you get a sense that we feel pretty good about the path we're on. We've had at a really good year, but we're more excited about the future and driving things to help our customers operate better and help them succeed. So with that, I'll just say thanks for joining again and hope you stay safe. If you're going to get cold, I think in the Northeast. So hopefully, you don't ice up too much. That does affect us too. But have a great rest of the week.

Operator

[Operator Closing Remarks]

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