Grainger Aktie

Greetings, and welcome to the W.W. Grainger First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Kyle Bland, Vice President of Investor Relations. Thank you. You may begin.

Good morning. Welcome to Grainger's First Quarter 2026 Earnings Call. With me are D.G. Macpherson, Chairman and CEO; and Dee Merriwether, Senior Vice President and CFO.

As a reminder, some of our comments today may include forward-looking statements that are subject to various risks and uncertainties. Additional information regarding factors that could cause actual results to differ materially is included in the company's most recent Form 8-K and other periodic reports filed with the SEC.

This morning's call includes non-GAAP financial measures, which reflect certain adjustments in previous periods as noted in the presentation. There were no adjusting items in the first quarter 2026 period. We have also included organic revenue adjustments in the presentation, which normalized sales growth to reflect our exit from the U.K. market, including the Cromwell divestiture and the closure of Zoro U.K., both of which are completed in the fourth quarter of 2025.

Definitions and full reconciliations of our non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our earnings release, both of which are available on our IR website.

We will also share results related to MonotaRO. Please remember that MonotaRO is a public company and follows Japanese GAAP, which differs from U.S. GAAP and is reported in our results 1 month in arrears. As a result, the numbers discussed will differ from MonotaRO's public statements.

Now I'll turn it over to D.G.

Thanks, Kyle. Good morning, everyone, and thank you for joining today. We're off to a strong start in 2026 with both our business segments performing well. Despite the ongoing tariff uncertainty and the broader geopolitical climate, we are encouraged by the positive signals we're seeing in the demand environment. By staying focused on what we can control, we continue to drive performance through solid execution and by consistently delivering value to our customers.

I had the opportunity to experience this firsthand on a recent visit with a major agricultural customer. While many of our large customers are complex, our approach is simple: Start with the customer, stay curious about how their operation works and then bring our full suite of capabilities to solve their MRO challenges end-to-end.

What differentiated Grainger with this customer and with other contract customers where we are seeing growth is our ability to deliver highly coordinated capabilities beyond the products themselves. That same coordinated approach is on display at our most recent Grainger sales meeting in March. This event showcased the breadth of our products, services and solutions. With more than 10,000 customer, supplier and team member attendees, the event demonstrated the power of listening, asking good questions and staying focused on the problem the customer is trying to solve. We invest in this meeting because it results in stronger teams, stronger partnerships and ultimately improved performance.

Earning trust and building strong relationships is also at the core of how we approach our workplace and culture. While awards aren't the goal, they serve as useful signals that we're executing the right way. In recent weeks, Grainger was once again recognized as a top workplace. This time being named one of the Fortune 100 Best Companies to Work For and the 2026 Platinum Employer on the Where You Work Matters List, which is powered by The American Opportunity Index. We don't take this recognition like this for granted, and we're proud that it reflects the experiences we create for team members and the outcomes we deliver to our stakeholders.

On the subject of team members, you may have seen that several of our senior leaders recently took on new roles within the organization. We are fortunate to have a broad and deep set of leaders at Grainger, a clear strategy and high-performing company. Having such a strong foundation allows us to provide leaders with new experiences to develop for the future.

Now moving to Q1 results. We delivered a strong quarter of profitable growth, meaningfully outpacing the expectations we communicated for the company back in February. Results benefited from healthy price realization, strong operational execution across both segments and improved market demand. The broader MRO market showed positive momentum as we move through the quarter and appears to have sustained that strength in April. At the same time, our High-Touch growth engines are gaining traction and the EA segment is continuing to power the flywheel.

Total company reported sales for the quarter were up 10.1% or 12.2% on a daily organic constant currency basis. Operating margin was strong at 16.7% and diluted EPS finished the quarter up over 18%. Operating cash flow came in at $739 million, which allowed us to return a total of $345 million to Grainger shareholders through dividends and share repurchases.

I also want to mention that we recently announced a 10% increase to our quarterly dividend, marking the 55th consecutive year of dividend increases. This reflects our continued commitment to returning cash to shareholders through a balanced and return-focused approach. Overall, the quarter finished ahead of expectations, and we are increasing our 2026 guidance to reflect the strong start and continued momentum we are seeing.

I will now turn it over to Dee.

Thanks, D.G. As mentioned, we had a great start to the year with total company sales up 10.1% or 12.2% on a daily organic constant currency basis, which included strong growth across High-Touch Solutions and Endless Assortment.

Gross margin for the quarter was healthy at 40%, up 30 basis points versus the prior year period as we saw expansion in both segments. Operating margin was up 110 basis points year-over-year as gross margin flow-through and leverage in both segments helped drive results. Both gross margin and operating margin benefited from the exit of the U.K. market. Overall, we delivered diluted EPS for the quarter of $11.65, which was up 18.2% versus the first quarter of 2025.

Moving to segment level results. The High-Touch Solutions segment delivered sales growth of 10.5% on a reported basis or 10% on a daily constant currency basis. Sales growth included roughly equal contributions from price and volume.

From an end market perspective, we believe the MRO market demand gained momentum in the period. This view is supported by various market indicators as well as the activity we're seeing on the ground with customers. For Grainger specifically, we saw a broad-based acceleration across end markets with strong contributions from manufacturing, government and contractor customers.

On profitability, gross margin finished the quarter at 42.6%, up 20 basis points versus the prior year as positive mix and freight were partially offset by the impact of the annual Grainger sales meeting. We also continue to experience LIFO inventory valuation headwinds in the quarter.

Relative to our verbal guide, gross margin results exceeded expectations for the quarter as price/cost was roughly neutral, faring better than anticipated on stronger price realization. Further, we saw cost timing favorability compared to expectations on lower sell-through of certain SKUs within our private label inventory. We anticipate this cost pressure will now hit in the second quarter.

On SG&A, we gained nice leverage year-over-year as we benefited from strong sales, productivity and a tailwind from the Grainger sales meeting. This more than offset continued marketing investment and higher payroll and benefits expense, including higher incentive-based compensation given our strong start to the year. This helped drive operating margin for the segment to 18.3% or 60 basis points versus the prior year period. All told, it was a great start for the High-Touch segment, and we're excited about the momentum we have as we move towards the rest of the year.

Now focusing on Endless Assortment segment. Sales increased 19.6% on a reported basis or 21.9% on a daily organic constant currency basis, which normalizes for the closure of the Zoro U.K. business and the impact of foreign currency exchange. Zoro U.S. was up 18.7% on a daily basis, while MonotaRO achieved 24.3% in local days, local constant currency.

At a business level, Zoro saw strong growth from its core B2B customers, along with improving customer retention rates. The team continued to deliver on core foundational capabilities, improving the customer experience across pricing, fulfillment and website functionality.

At MonotaRO, sales were strong with continued growth from enterprise customers, coupled with solid acquisition and repeat purchase rates with small and midsized businesses. Additionally, MonotaRO continued to benefit from an increase in web traffic stemming from a competitor cyber outage, which provided a meaningful tailwind to sales in the period. As expected, this impact waned as we moved through the quarter.

On profitability, operating margins increased 190 basis points to 10.6% with favorability across the segment. MonotaRO margins remained strong at 12.9%, up 90 basis points and Zoro margin improved to 7.3%, up 210 basis points, with both businesses benefiting from healthy top line leverage. Overall, another strong quarter for the Endless Assortment team.

Before moving on, I wanted to share a brief update on the inflationary environment as we navigate tariffs and geopolitical cost pressures. We continue to manage the business with the goal of maintaining price/cost neutrality over time. With this, we passed further price increases in January in response to previously delayed tariff inflation and to offset annually negotiated cost increases with our suppliers, which were largely in effect as of February 1. These actions were net of a partial rollback on certain Chinese tariffs announced at the end of last year.

As it relates to the recent Supreme Court ruling on IEEPA tariffs, we are only anticipating a modest impact on the business since the tariff rate differential with prevailing Section 122 duties is minimal. With this, our May pricing actions were net neutral in total.

Where we have seen modest cost reductions, namely on products that Grainger is directly importing, we adjusted prices as part of our May update. For the remainder of our assortment, we're working with supplier partners to assess cost-reduction opportunities and we'll take subsequent pricing actions as warranted. Moving forward, the team is busy evaluating further inflationary pressures from recently announced tariff changes and the knock-on effects from the conflict in the Middle East.

On fuel, we are working with our supplier and transportation partners to minimize cost headwinds that have risen as diesel prices remain pressured. We ultimately strive to pass these costs through to customers, but there is some leakage since a number of our customers don't fully pay for parcel shipping. While currently only modest in total, these heightened costs are pressuring our margins, and this will likely continue until our next pricing window. We have included this fuel impact in our updated guidance.

On the recently announced Section 232 modifications, given the significant complexity, we are still working to understand what the full impact might be across our assortment, but our initial analysis suggests it is likely minimal.

Separately, we're starting to see supply pressure from the conflict in the Middle East related to certain raw material inputs on some categories like nitrile-based gloves. As of now, this is minimal on the U.S. business, but we're starting to see more strain in the Japanese market given the region's reliance on energy inputs, which move through the Strait of Hormuz.

We will continue to assess the situation and are working with our suppliers and manufacturing partners to minimize supply impacts, including changing our sourcing strategy where needed. Despite these challenges, we're not anticipating a step change in cost inflation from these pressures at this time and thus have not included any impact in our updated guidance. However, if the conflict persists, these impacts could result in incremental cost for the business, and this will be felt more quickly in the U.S. based on LIFO accounting.

Lastly, we are also monitoring for the potential recovery of previously paid IEEPA tariffs where Grainger is the importer of record, but the timing and the magnitude of any recovery remains uncertain at this time. As you might imagine, the broader inflationary landscape remains highly fluid as it has been for the last several quarters. Importantly, our team is staying agile, and we continue to be confident in our ability to maintain supply for our customers while adhering to our core pricing tenets.

Now turning to our guide. As a result of our strong start and continued momentum, we are raising our full year 2026 guidance. On the top line, our new outlook includes expected daily organic constant currency sales growth between 9.5% and 12%, reflecting first quarter strength, continued strong execution and improved MRO market demand.

Our operating margin expectations for the full year have ticked up slightly at the midpoint to incorporate our first quarter outperformance. This is partially offset by headwinds from higher incentive-based compensation and leakage related to increased fuel costs.

While incremental margins remain healthy, you'll see that the added revenue dollars for the balance of the year are less profitable because of these transitory headwinds. Taking all this together, EPS is expected to be between $44.25 and $46.25, representing nearly 15% year-over-year growth at the midpoint. This represents $1.75 improvement at the midpoint versus the prior guidance range. We've also updated our supplemental guidance in the appendix, which includes an increase in total company operating cash flow compared to the prior guide.

We've continued our strong momentum into the second quarter with preliminary April sales up north of 13% on a daily organic constant currency basis. This start supports our expectations for the second quarter sales north of $4.9 billion or approaching 12% on a daily organic constant currency basis, which is 330 basis points lower on a reported basis when normalizing for the U.K. market exit and currency headwinds.

We expect operating margins will be down sequentially in the second quarter compared to the first quarter. Beyond normal seasonality, we expect this step down will be exacerbated by headwinds from fuel costs, along with increased costs on our private label inventory, the latter of which is in line with what we had expected to hit in the first quarter. All told, we anticipate second quarter operating margins will be in the low 15% range for the total company.

With that, I'll hand it back over to D.G. for his closing remarks.

Thanks, Dee. Overall, we feel good about how the business is operating and are confident in our strategy. I'm encouraged by our ability to continue to grow profitably in this ever-evolving environment while staying focused on creating value for the long term.

Looking ahead, we will continue to focus on what matters most for our customers and earn their trust through strong execution, differentiated capabilities and a consistent focus on doing the right thing. We recognize the significant uncertainty in the macro, but we'll stay nimble to serve customers and perform well in any environment.

With that, we'll open it up for Q&A.

[Operator Instructions] And your first question comes from David Manthey with Baird.

First off, I appreciate that you finally moved away from the myopic quarter-to-quarter share gain discussion, particularly in a quarter where you could have taken a major victory lap. So thanks for that. We'll draw our own conclusions. My first question is on price. Could you just tell us in simple terms just what was price contribution by each segment and overall?

So generally, we don't talk about the segment detail. Dave, thank you for the question, though. And so I would say when you look at North America, we're about 5% or 5 points of price.

Okay. All right. And then, Dee, maybe you could update us on the pacing of margins through the year. When I look back to last quarter, you said seasonally, gross margin would deviate from its normal pattern. You had LIFO price cost and the show impacting that. And you said that first half gross margins would be at or slightly below the annual guide and then rebounding in the back half and operating margins would follow a similar trajectory. I was just wondering if you could give us an update on your view there.

Yes. I would say now we believe it's going to have more of a U-shape. And part of that is because Q1 performance we did very well from a price realization perspective as price continued to build based upon the changes that we made in 2025 and then, of course, the change we made in January. I believe you heard in prepared remarks that we had expected to sell through more of our private label inventory in Q1, which would have created a drag, not as much sold through. We're starting to see that sell-through already in Q2. So we expect that negative impact to then hit in the second quarter. And then we also have the normal seasonality decline that happens from Q1 to Q2 because we take a larger price increase in January and that bleeds off through the year.

As you also heard us talk about the impact that we have related to fuel, we believe that is going to build. That was not necessarily anticipated in the original guide. So that is new news here that we've added to the guide. And the challenge that we have with the majority of our very large customers have free parcel shipping. And as a result of that, it is more difficult for us to pass on accessorials and other fuel charges to them. And so that's going to take us some time. We noted that we're going to have some leakage and then we're going to have some timing implications. However, we are confident that we will find a way to work through that, i.e., the U-shape. And as the year goes on, we will have a means to pass some of that price on to those customers and some of our broader customers while still remaining competitive in the marketplace.

Your next question comes from Jacob Levinson with Melius Research.

It might be a little too early to really see any impact here. But if we look at Japan, I think that's probably a blind spot for a lot of us on this call. But is the team in MonotaRO seeing anything to be concerned about because I know they've certainly borne quite a bit of the energy shock here?

Yes. So you're right that certainly East Asia, in particular, bears more of the brunt here given most of their energy, most of their oil and natural gas, frankly, comes through the Strait of Hormuz. So what we've seen is some price pressure with some products there. And then we have seen a little bit of buying in the end of the first quarter, they talked about on their call today of those products that are potentially at risk. It hasn't been material yet, but certainly, it could become so depending how long it goes.

Okay. That makes sense. And just on the private label side, I assume no news is good news, but I know that, that was a potential concern last year. But have you been able to adapt that business to -- just given the tariff environment, it's kind of hard for us to know what all the moving pieces are there.

Yes. Yes, it's not a simple challenge either. So what I would say is there have been some private label products where the cost spread between it and the national branded products have compressed. And so we have seen some impact there and some more buying of national brand versus private brand. Some of that will probably work its way out over time, we think. And so we'll get back to having an appropriate gap and having very high-quality products at reasonable prices for customers in our private brand.

I would also note, we're having tremendous success with leveraging the Grainger brand for certain areas of our private brand as well. So we're pretty excited about the path there. Overall, we're still very confident in our private brand path, but there has been some impact for sure.

Your next question comes from Ryan Merkel with William Blair.

Nice job this quarter. First question is just on the demand environment. D.G., what was the surprise for you on revenue in the quarter? Was it just better end market demand? Or is the company-specific story also a part of it?

Yes. I think it's a bit of 3 things. One is the end market demand, we did flip. It's been negative for several years now, and we think the volume growth in the market, most signals would suggest it turned to slightly positive. So that's a benefit for sure. Our price realization has been higher than we had anticipated to start the year. So that's a benefit for sure. And then our share gain has been strong as well. So I think all of that has conspired to create a really strong demand environment for us.

Got it. That's great. Okay. And then second question is on gross margin, I guess, for Dee. So you did 40%. I think you thought it would be 39%. So is all of the beat sort of this mix timing? And I guess my question is, what drove the mix timing? And then can you unpack why in the second quarter, the cost increase in the private label is a negative?

Sure. So let me start with the first part of that, which is why we -- in my words, over May versus where we thought we would be in the first quarter. And D.G. talked about some of this, but we did achieve better price realization in the first quarter than what we had anticipated based upon some of the SKUs that customers were purchasing. And so that was very helpful to us.

The other part or the other side of that relates to the private label inventory. We had assumed that with some of this growth, we would be selling through much more of our lower-cost private label inventory and have that impact in Q1. We sold through a whole lot less of that than what we anticipated.

And so when we now move to the second part of your question related to Q2, that negative impact, we now -- we can start seeing it come through already in our April results will hit in the second quarter. So that's the difference between those 2 pieces of that. And in the second quarter, as you know, we have a normal seasonality with gross margin because of the price increase that we take, of course, in January that then normally subsides as we go through the year and into second quarter. So we're planning for that to continue to occur as well.

I think the other thing to just clarify is while we are mostly on LIFO, our private brand inventory is on FIFO. So it adds complexity here that to things. And so that has always been the case. It's just, obviously, in the last year, it's -- all that's become more clear and necessary to talk about. So that's what we're talking about on the private brand. We didn't sell through layers yet, and now we are that are higher cost.

Your next question comes from Chris Snyder with Morgan Stanley.

I appreciate the question. Could you just maybe talk about the impact that the leading on the price cost, I guess, primarily on the private brands? How much of an impact did that have to Q1 gross margin?

About 20 basis points in the first quarter.

I really appreciate that. And then if I could just maybe follow up on some of the price conversation just to make sure I'm understanding all of that right. So it sounds like you guys did the typical January start of the year price increase. And then it sounds like there was another round that came, I think, in May, you said, Dee, I guess, just in response to the -- all the inflation we're seeing now between metal, freight, tariffs, everything. So I just want to make sure I have that right. And if you could provide any relative sizing for either of those 2, just to help us calibrate the models.

Yes, Chris, just to be clear, so we -- January 1, May 1 and September 1 are our normal price cycles. So the May 1 wasn't in response to anything in particular. We just happened to ponder some of the things going on in that price cycle.

Yes, that's the timing at which we can take it. And so I'll point you to Slide 11, but I'll talk a little bit more about it. But again, as you noted, January incorporated any lag we had from being able to take tariff actions from 2025 plus what we were negotiating late in the year that would impact us in 2026. So that was the January price, and that was a slightly positive, I'm sorry, my voice, I'm losing it on this call, a slightly positive pricing action that we took because it was also net of certain Chinese tariff changes that were announced, basically rollbacks in November.

And then as D.G. was just noting, in May, which is a normal time where we can take pricing actions we did, and that was really a net neutral price for corrections or things like that, that we might need to take as it related to January, also incorporated Section 122 actions, and it was offset by IEEPA rollback for our private label products that we directly source because we know what those standard price changes should be, and that was net neutral.

Your next question comes from Christopher Glynn with Oppenheimer.

So you've talked about in the past few quarters kind of an elevated backdrop for a chunkier contract cycle. Just curious what pace you're seeing those kind of rolling into the outgrowth and the length of the tail of, I guess, what we're calling a more elevated cycle for chunkier wallet share pickup.

Yes. I'm not sure I would describe it necessarily as chunkier, a lot chunkier than the past. I think we have -- our contract business has been net positive to start the year. We've had a number of successes in implementations. I think we are seeing a lot of customer demand to serve them on-site in ways that are really important to them.

I think -- secondly, I think there's just less labor with many of our customers. And so getting asked to do more things, and we are doing more things on site with our customers and providing more services than we have historically. I don't think it's necessarily a significant departure from the past, but I do think that we've had some success in terms of growing our large customer volume in the last 6 months.

Okay. And just curious what now you're seeing in terms of most productive use cases for AI?

Yes. I mean I think there's many, many, many use cases. I would highlight a few. I think I would put them in a couple of categories. There are AI use cases that we have that are implemented in areas that drive productivity in the business. We have AI use cases and customer service that are working with our agents to our customer service reps to make sure we provide great service and do it faster and easier. There's a lot of work in finance in the back office that we put in AI solutions or putting AI solutions in our supply chain to drive more one piece flow in our warehouses, for example. So there's a lot of things going on with AI.

And then I think there's a number of use cases around the customer experience that are absolutely critical for us for long-term success. Investing in improving search, investing in improving merchandising capabilities are examples of that. So I would say it's pervasive in terms of where we are using it and will become more so. And I think pointing at the right things is really critical and making sure we create advantage through the efforts in addition to driving productivity is really important.

And if I could sneak in one more and might build up that prior answer. But from Zoro, you talked about website functionality as a driver. So just kind of curious what -- it sounds like maybe early days talking about that. But as that normalizes the implications for margin and outgrowth from Zoro with the website work and implementing the lessons learned?

Yes. I think that, that -- the website changes and improvements are in process. We probably haven't seen too much benefit yet from those. We've seen a lot of benefit from getting repeat business to customer with customers, improving the quality of our acquisitions and the business improved both margins and growth rate as a result of those things. But the website improvements will be fast off that and drive a lot of benefit, we think, too. So we're excited about what they're doing.

Your next question comes from Andrew Obin with Bank of America.

Can you hear me?

Yes, we can.

Okay. Excellent. So just a question in terms of guidance range. It seems that a lot of debate on the stock has been about your ability to push pricing, and I think gross margin this quarter reflects quite a bit of success in doing that. So -- but at the same time, most of the raise reflects the beat in the quarter and maybe I appreciate some of the headwinds in the second half. So how should we think about sort of sustainability of this pricing momentum into the second half?

So the way I describe it is that debate has not been happening internally, it's been happening with others. And -- so the reality is we always said as we went through the tariffs that it would -- we would lag in terms of getting to price/cost neutrality. We did it. You see that in the first quarter. And now there's some things that may cause us to, as these go through U-shape and do it again. But generally, the fundamental -- and that's partly because we're on LIFO, the fundamental of price/cost is perfectly strong with the business and very stable. It has been for some time.

And what about not flowing through for the second half of the year? Is it just being conservative?

No, it's the things we talked about. So it's potential fuel cost. It's the PL, the private brand cost coming through. It's just the basics basically and some seasonality. So really, there's nothing there that isn't very explainable. You could argue whether we're being conservative or not on increased fuel costs. There's just so much uncertainty with that one, right, who knows. Obviously, if the conflict ended today and the Strait opened up next week, which is unlikely to happen, that would be great. We'd love for that to happen. But what we're forecasting now is some challenge with fuel, and that's just the reality.

And just a question, could you just size the LIFO impact this quarter relative to other quarters just directionally?

Yes. So LIFO, as we kind of talked about, never goes down, right? It kind of normalizes and subsides. And so when we went from Q4 to here at the total company level in Q1, we think it's about 70 bps on the total company.

Your next question comes from Stephen Volkmann with Jefferies.

Great. And I'll ask a couple of growth questions and maybe save Dee's voice a little as well. I'm curious, your Slide 19, where you kind of show the various end markets, pretty nice inflection in a lot of these. Would you say, D.G., that any of these were sort of specifically benefiting from share gains or more than the others? Or is it sort of a more broad-based approach?

I think that it's more broad-based in terms of share gains. Share gain for us typically are providing great service, helping customers make sure they can find the right product, providing on-site support for inventory management. It's a set of core things that we do. And generally, those things impact most segments at the same time if we're performing well. And I think that's really what's reflected here.

Okay. And then any potential that you saw some customers kind of buying a little extra inventory given all the uncertainty around price and availability and so forth?

Not in the U.S. We have not seen that in the U.S. We've also not seen customers stop projects given the uncertainty really. I think we've seen things just kind of in normal status here in the U.S. We mentioned before that in Japan, at the end of the first quarter, we saw a little bit of maybe buying ahead just to make sure that, that customers could secure products that are petroleum-based, but not in North America, we haven't seen that.

Great. I appreciate that. And then finally, just competitively, we hear pockets of sort of availability issues. I'm just wondering, are you seeing any of your competitors do sort of more or less pricing or be able to pass through diesel maybe or not or having issues getting anything?

I think it's too early for us to really know that. We -- in North America, we don't anticipate having challenges, the fuel impact. If there were challenges, it would be things going on in Southeast Asia that we're all procuring and we all be procuring the same things. Generally, that was what we've seen in the past. But so far, we haven't seen trouble getting product in the U.S., and we haven't seen any unusual competitor behavior.

Your next question comes from Deane Dray with RBC Capital Markets.

I'm not sure you gave this data point yet, but what was the benefit to margin in the quarter from the 2 European exits? And what would be the benefit for the year?

Yes. So I'll start with the last part of it, which is about the same as the total. But year-over-year, it's about 45 basis points, equally split between gross margin and SG&A. And then as it relates to top line, of course, Cromwell sales, that's about a 210 basis point impact on total company and 110 basis point impact on EA for Zoro U.K. exit.

Got it. All right. And then for D.G., just is this free shipping on the parcel shipments, is that a nonnegotiable? Is that just part of the service that you need to offer free shipping on that? And what is that impact? Is that on your total fuel cost? Is this a small sliver? Or is it meaningful?

It's a meaningful portion of the total. It's very common to build free parcel shipping into contracts with large customers in our space. It's not an unusual thing to do, and we would face similar things. We have the ability to do certain things to mitigate this and will over time depending on how long this goes. So we're not concerned about it. It's just that in the short term, it creates a headwind. Part of the issue with large customers is their average order value is significantly higher. And so the parcel cost are as a portion of the overall is pretty small relative to smaller customers.

Your next question comes from Guy Hardwick with Barclays.

Excellent results, congratulations. Just one for D.G. and then just kind of a quick aside for Dee. So you probably had like 6 months now, if you include April of better good trading, maybe better than expected and you're guiding to double-digit organic growth this year. D.G., does that give you a little bit of room for maybe investing more for organic growth in terms of market share gains? Or do the inflationary pressures that you guys have alluded to kind of preclude that, that you set your marketing budget or your investment for this year and it's probably not going to move upwards? Or is that subject to change?

So I would say if we have the ability to invest profitably for growth, we will do it. We don't have a cash problem. I don't expect our budgets this year to change all that much given we set our budgets based on what we've seen from a cause and effect basis in areas like marketing and sales force coverage and things like that. So in general, I don't think that our added growth means we will invest more. And in difficult times, you often won't see us investing much less either because if something is worth doing for the long term, we will go ahead and do it to be successful through any cycle.

And just for Dee, on the SG&A growth of 6%, is that a sensible number to use for the rest of the year, that sort of growth rate?

Yes, 5.5%, I think, is kind of what we kind of look at, 5.5% to 6%. So I think for the rest of the year, that's a fair number.

[Operator Instructions] Your next question comes from Patrick Baumann with JPMorgan.

Sorry, Dee, this is one for you probably. But when you're looking at the sequential move in margin into the, I guess, 15% range for the second quarter, is that -- is all of that decline coming from the gross margin sequentially? And if you could piece for us like or bridge for us kind of the drivers there between seasonal versus all the things you've talked about, private label costs or fuel costs or Grainger meeting timing, et cetera, I don't know. Any pieces you could help bridge that 150 basis point decline sequentially would be helpful.

Sure. I'll talk about some of the numbers we've talked about already. And so there's about 1 point difference on gross margin. And we talked about the 60 basis points, which is what we believe is normal seasonality. And we've also talked about the increased costs related to the private label inventory moving from Q1 to Q2 being about 20 basis points.

And then you just have a little bit left from that, which is really the leakage that we expect that we're going to experience on this increased fuel cost. Really that -- some of that is timing because fuel is going to hit, and we're not in a pricing cycle right now to go after that. So it may be the next pricing cycle that we start to recoup some of that back. And that gets you to about 1 point of the difference between the 40% gross margin and about the 39%. Then when you move that down to operating margin, we have normal seasonality there as well as it relates to merit and stock comp where we delever as we move from Q1 to Q2, and that gets you about there.

And so that would imply that your SG&A growth goes from kind of 6% to kind of high single digits. And I think you just said you expect it to stay kind of 5.5% to 6%. So what's the difference there?

Balance of the year, as we continue to grow, we still have investments that we're making through the year. So that's why the last call, when they said -- I think he said 6% or 5.5%. I said 5.5% to 6% in that range on average.

Got it. Okay. And then what's embedded now for the guide for the year for -- in terms of market outlook and for price? And that's all I have.

Yes. Market outlook is 0 to 1-ish, somewhere in there. We think it's going to be positive for the year for volume growth and price probably moderates and goes down from maybe 5% in the first quarter to 4% for the year.

And your next question comes from Tommy Moll with Stephens.

D.G., you made some comments at the Annual Shareholder Meeting last week I wanted to follow up on. First was just on the sales force adds. I think you added 110 last year across 2 geographies. Two-part question, is that a gross or a net add number? And what do you have baked in for this year?

Yes, that's a net number. So we've been adding fairly consistently over the last several years, probably between 60 and 120 every year, and we expect this year to be in the same general area. We've been -- some of the value we've had from having better data, better customer data, in particular, has allowed us to identify places where we can fill in coverage. And so we've been doing it region by region. Really, by next year, we should be done with those changes is the expectation, '27, we should be done, by the end of '27 mostly. So we're well into that. But yes, those are net adds, and we've been adding probably 3%, 4% to the sales force every year.

And a related point on your distribution network. Last week, you just commented on the progress in Houston and the Northwest facility. Looking ahead, are there other big geographies where you're contemplating a greenfield opportunity or a substantial increase in an existing footprint?

Yes. So Portland is going live this year. It's ramping up as we speak. And so that's already exists. Houston will go live in 2028. It's a very big building, which expands our capacity in the Texas market, which is important. I would say, as we go forward, based on our growth, there may be other areas where we add to existing positions or scale from midsized to much larger positions. We aren't really missing geographies at this point. So there'll still be investments we make, but they won't be kind of fully new greenfield that we may move a building from one location to another and expand capacity or find ways to expand capacity in those markets. It's more likely.

And there are no further questions at this time. So I'll hand the floor back to management for any final remarks.

I'd just say thank you for joining the call. Really appreciate your time. We feel good about the way things are going. Obviously, there's a bunch of uncertainty in the world, but our job is to perform through that uncertainty and to make sure we're building for the future, and we are focused on doing those things. And we feel like we're a business that is very resilient, and we're in good shape. So we're pretty optimistic about where we're headed. So thanks again. I hope you have a great rest of the week. Thank you.

Thank you. And this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.

Good morning. I'm Sam Darkatsh. On behalf of Raymond James, we'd like to welcome you to the Grainger presentation for today. With us today from Grainger, Dee Merriwether, Senior Vice President and Chief Financial Officer; as well as Kyle Bland, Vice President of Investor Relations.

Dee, I think you mentioned your prepared remarks are maybe 15, 20 minutes or so, which should give us a little bit of time for the Q&A here, but most of the granular Q&A will be done at the breakout session that will immediately following. I think it's concord over 3, I think. And with that, Dee, welcome back.

Thank you. Thanks, Sam, and good morning, everyone. As a reminder, some of my comments today may include forward-looking statements. Actual results may differ materially as a result of various risks and uncertainties, including those detailed in our SEC filings. Reconciliations of our non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of the presentation, and this presentation will be available on the Grainger investor website following the meeting.

For those who aren't familiar with Grainger, we exist to fulfill our purpose of keeping the world working. We were founded in 1927 and have since evolved into the largest distributor of maintenance, repair and operating products in North America with nearly 25,000 team members that are energized to support more than 4.6 million customers. With access to more than 35 million unique products across our 3 platforms, we deliver exceptional service in all of the geographies in which we operate.

While all MRO customers are looking for B2B partners that can provide a flawless experience and provide them value, how this translates on site is different among customers that have different sizes and have different levels of complexity. For this reason, we operate 2 go-to-market models. One, high touch exists for larger and more complex customers, where we win with deep product knowledge, value-added solutions and strong customer relationships. Here, we create value by helping our customers across North America solve their most challenging problems and challenges.

Our best-in-class website helps customers quickly find products for their unique application and our multichannel origination and fulfillment capabilities allow us to serve customers in this preferred way. This is all supported by a team of experts, a curated digital experience that helps us manage our inventory, remove safety risks, assist in achieving their sustainability goals and work to help them improve their operating and procurement productivity. The high-touch model goes to market under the Grainger brand, which most people know, and accounts for 80% of our total company revenue.

Our Endless Assortment model is for small and midsized businesses that have simpler needs who want to buy products generally online. They're looking for a distributor that can be a one-stop shop, which is why we have around 13 million SKUs on zoro.com and 29 million SKUs on monotaRO.com in Japan. The Endless Assortment business accounts for about 20% of our total company revenues.

We compete with these 2 models in a very large, fragmented and attractive market. Within our high-touch business, we are largely a pure player with only 7% share. We have many competitors in this space who go to market in different and unique ways. We believe if we continue to invest and invest and enhance our capabilities to serve customers better than our competitors, we have a long runway to continue to grow profitably.

Our Endless Assortment model offers product categories beyond MRO, allowing us to reach new customers and take advantage of the scope of the small business market in the U.S. In Japan, we've been a pioneer in our space and are committed to investing in innovation to expand our market-leading position with B2B customers. These large TAMs are supported by attractive market characteristics that help insulate us through the cycle.

Over the last several years, we've invested heavily in building market-leading data and technology capabilities, including developing proprietary product and customer information systems. These data assets underpin our 5 strategic growth engines noted here, marketing, merchandising, seller coverage and effectiveness and customer solutions and fuel our ability to gain share with our high-touch model. The advantage we've built across the product and customer information scale allows us to unlock ability to tap into new and emerging technologies to better serve customers and extend our leadership position in the MRO industry.

We've leveraged the data assets to fuel our artificial intelligence and machine learning strategy, and we look for new ways to increase revenue, drive efficiencies and enhance our service. We've been developing a variety of different capabilities across the business, including homegrown machine learning and AI models to expand our product breadth and depth, improve our marketing return on investment and streamline seller tasks. We feel we're well positioned to accelerate these efforts in the future.

The Endless Assortment flywheel is all about creating an endless aisle for our customers, attracting them through organic and paid search opportunities, then driving repeat business by narrowing down the most relevant SKUs based upon their type of business. This flywheel drives sustainable growth and profitability for both zoro.com and monotaro.com. At Zoro, the team is focused on optimizing its assortment, launching Zoro's private brand products and improving customer experience through accurate delivery communication. At MonotaRO, the team remains focused on expanding the enterprise customer landscape, driving repeat business and is playing the future by groundbreaking the new Mito DC outside of Tokyo.

Similar to High-Touch, we have progressed AI and ML capabilities across our Endless Assortment businesses as well. It's early innings, but we're using these technologies to drive productivity and accelerate our momentum across the flywheel. We're investing in Gen AI to assist with pricing, customer service and shopping assistance, for example.

Underpinning the success of each of our segments is our world-class supply chain, one that is built specifically to serve the needs of business customers. That means having the right products at the right place at the right time. To do this, we invest in capacity, we use demand sensing models and workflow automation to ensure we have the right product in stock and can optimally fulfill orders with high accuracy and efficiency. By doing this, we're able to ship quality products with a high number of orders shipped per day, next day and complete.

This is critical for business customers to ensure they can receive what they want when they need it and how they need it and the fewest number of boxes, bill of lading and invoices. And we think our ability to do this now and in the future with our scale makes us a reliable business and amplifies our value proposition to customers.

Our supply chain delivers millions of products to millions of customers each day, allowing us to meet the varying needs of our diverse customer base, which spans across industrial, commercial and government end market segments. Our broad assortment of products and deep industry knowledge ensures customers have access to solutions to address any number of challenges they face, helping our customers to keep their operations running and their people safe.

The final piece of our foundation that I'd like to highlight today is our purpose-driven culture, which we codify under something we call the Grainger Edge. Grainger has always had a very strong culture, but the Grainger Edge framework has focused and rallied all of our organization around our purpose to keep the world working. The 7 principles captured here under the Edge are at the heart of how we work with one another, with our customers, our suppliers and in the communities in which we serve. Living these principles is foundational to our culture, a culture that I'm proud to say has received several awards around industry leadership, operating responsibly and creating a top place to work.

Turning to financials. We performed very well over the last several years, marking a meaningful inflection point in our business. This step change in growth has been fueled by progress by both of our segments. High-Touch has outgrown the broader MRO market by more than 500 basis points over the last decade with its focus on execution and on our strategic growth engines, notably within merchandising and marketing. These growth engines are all supported by a competitive price offer that is relevant for all customer sizes, by our technology and data transformation and by our advantaged supply chain capabilities.

In addition, our continued compounding growth from our Endless Assortment segment, which has more than doubled its top line over the last 5 years and is fast approaching $4 billion in total annual revenue. This growth has enabled us to generate strong earnings and cash flow at exceptional returns, all while allowing for a consistent return of cash to shareholders.

Flipping to the total company guide for 2026. We laid this out in our most recent earnings call in February. At the total company level, we expect revenue between $18.7 billion and $19.1 billion and daily organic constant currency sales growth between 6.5% to 9%, driven by strong top line performance in both segments. This assumes the High-Touch business continues to drive strong volume outgrowth above a muted U.S. MRO market and that we will benefit from pricing actions taken to help offset tariff-related price pressures.

We expect Endless Assortment segment will grow roughly in line with our long-term earnings framework, which is in the low teens. We expect margins to improve meaningfully as we benefit from exiting the U.K. market in late 2025 and as the High-Touch gross margins recover as price/cost improves and we lap prior year LIFO headwinds. This, in addition to core SG&A leverage will result in operating margin expansion between 40 and 90 basis points. We expect EPS for the year between $42.25 and $44.75 per share, up 10% at the midpoint. Overall, we remain confident in our ability to drive strong results in 2026.

As we look beyond 2026, the core tenets of our earnings algorithm remain firmly intact. We remain confident we can drive share gain in the U.S., grow the EA business in the teens, stabilize total company gross margins around 39% and grow SG&A slower than sales through process improvements and technology. Combined with our disciplined capital allocation philosophy, we believe this represents a very attractive total shareholder return opportunity.

Finally, on this slide, we can see we have a strong balance sheet and a consistent record of prudently allocating capital. This includes investing back in the business at high returns, delivering pretax adjusted ROIC over 39% in 2025 and also includes returning capital to shareholders, which is supported by our 54-year history of consecutive dividend increases and our consistent track record of high-return share repurchases. We think this balanced approach affords us the flexibility needed to ensure we deliver on our commitments, and we can maximize value to shareholders in the future.

Summing all this up, our 2 models and the work we've done over the past 5 years have positioned us extremely well for the future to gain share profitably. We play in a large, attractive market. And as the industry leader, we know there is opportunity to continue to grow. We have strong customer value propositions that allow us to serve B2B customers of all shapes and sizes using technology, data and nearly 100 years of know-how. Our supply chain is uniquely designed to serve business customers, and we continue to make investments to strengthen our position.

We are strong financially. We are well capitalized and have a consistent track record of returning cash to shareholders. And during -- and driving all of this is our purpose-driven culture, where we emit the importance of doing the right thing for our people, for our customers and the external environment. As a result, customers trust Grainger to support their business. All told, this foundation leaves us well positioned to continue to drive shareholder value for years to come.

And with that, I'll turn it back over to Sam to moderate for some questions.

Terrific. Question for Dee. I'll start the public forum. So January was up 10%. Your guidance for -- or at least your implied guidance for the first quarter is up, call it, what, 7.5%. What are your thoughts right now in terms of how the quarter is progressing versus those original anticipations? And what other metrics are you watching right now?

Yes, we still feel good about the guide at 7.5% for Q1. We're continuing to watch what's going on with tariffs, of course. One of our key metrics we look at every day is our order volume as well as our sales volumes. We don't report monthly sales anymore. So I can't share any more about that other than we feel like the quarter is well within the range that we provided.

You typically raise prices couple of times during the year. May is one of them. What were your anticipated pricing actions for May prior to the IEEPA being struck down. Now with Section 122 going into effect at least temporarily, how does that affect the May pricing?

Yes. So our teams are hard at work, as you can imagine, looking at harmonized tariff codes and seeing what is going to go into effect by when. And then those teams are working back with our national product providers to understand what their positioning will be. We can't pass on anything through price until we see the cost. So our main focus is on things that we can actually control. So we're looking at our private label products and understanding how the harmonized tariff codes will change those product costs. That is something that we can control. And based upon the effective date of those changes, those will be bled into our May price changes.

So could you go into that a little bit more? So you have roughly 20% or so of your business is private label. How much of that is -- was IEEPA exposed versus 122? And what's the net effect right now on your private label?

I think what I will point you to is it's probably about half of the 232 is what we're kind of seeing now, but we're still working through all of those details.

Okay. Got you. Question here, yes.

You mentioned that one of your competitive advantages of having the broadest and deepest selection to become a one-stop shop for your customer. Just interested in how you're thinking in how AI changes that competitive advantage and [indiscernible]

Sure. So part of our business is the one-stop shop, which is endless assortment. The Grainger brand is more curated and stocked assortment than the Endless Assortment brand. I will say your question is about how AI will impact, I would say, both of those models, but you started with the Endless Assortment model. What I will say is we've always had price transparency. Will this make prices more easily transparent? Probably. We've been able to compete under those circumstances and believe we will continue to be able to do so.

The other thing I will point you to is that even though you may have an AI agent that can help consolidate potentially who to buy from whoever that is, they still need a supply chain. They still need to be able to pick, pack, ship it and they need to be able to deliver it. And that is where we have invested our dollars and continue to do so. So we feel like we are very well positioned to compete in that area.

And as it relates to like LLMs, having access to data, we're working really hard to fool proof for that, but making sure that we can compete. So ensuring that the data that we expose to the LLM enables it to drive customers to us just like Google does. Those are the types of things that we are focusing on right now at Grainger in a smart way.

Last few years or so, there have been a number of divestitures, small, but notable. At what point or is there a point where M&A becomes more of a focus for Grainger? And if so, what areas?

So we focus on it. We're just -- we've been pretty quiet, and we've been very selective. So we have established for a number of years and definitely since I've been in this role, the last 5 years, we have filters as it relates to what geographies we believe works well for the High-Touch business as well as the Endless Assortment business. And so we are always looking mostly reactively in that case. But most of our time is spent actively looking and working with each of our functional areas on their strategy. And if there is something out there that could be purchased that we may not want to build, right?

So that is where our focus has been is looking at and investing more business development, looking at and investing in areas that we're piloting and making small investments in businesses that could potentially become a larger part of our solution.

Question here, yes.

[indiscernible]

Sure. So we use our product information and our customer information once you land on the site, especially if you're in your account, where we can, based upon how you're searching, help you find the right product for your industry. I know you've heard us use the example of like the metal blue detectable ear plugs if you're a food processor or making sure that you have the right electrical raceway and componentry so that when you go to implement a project, you will not accidentally purchase something that you do not need and requires a return.

We have very low returns because we work upfront to help you make sure that you have brought the right solution to solve the problem that you are trying to solve. That is more complicated than just a simple search of a SKU number. We try to actually leave you with a solution. It may be one SKU, but a lot of times could be multiple SKUs to help you solve that problem.

I will say, in addition to that, the other services, if you start to bring in our branch network and our sellers, we work with companies to ensure that they could pass OSHA regulations by working with them on safety audits and helping to select the right product to eliminate and mitigate risk, including workers' comp risk in their businesses.

And then lastly, from a sustainability perspective, we sell well over $1 billion worth of classified as sustainable products. And so we work with our customers on those products and solutions, and we bring partners to bear to assist them in selecting the right solution.

Other questions in the room? Your margin guidance is 40 to 90 basis points higher in '26 versus '25. Some of that is -- I think, 40 bps of that is because of the absence of the U.K. business, which was divested. The reason why I'm saying all this is, what's an incremental margin expectation, a normal incremental margin expectation for Grainger beyond '26, assuming kind of mid- to upper mid-single-digit growth?

Yes. We don't guide to incremental margins. But as you noted, when you look at our 2026 numbers and you normalize for the U.K. exit, you're at about 20%. And so I will say, generally, high teens to 20% is something that we believe is healthy and we should be able to achieve over time.

And the point at which you leverage margins typically, what kind of organic growth would be needed to...

4 to 5 points. Yes, 4 to 5 points.

Any other -- yes, question here?

[indiscernible]

It appears to be getting improving is what I'd say after some -- a pretty long period of being flat to down. And so we're hopeful like everyone that serves the manufacturing market and market segment that it will continue to accelerate through 2026 since it's been so soft for so long.

Other questions? Grainger is very focused on market outgrowth. It's for years been a KPI at the variable comp level. Why is outgrowth such an important variable for you? And what gives you the confidence that the right outgrowth number is 400 to 500 basis points?

Yes. Great question. So if you go back, I don't know, probably about 20 years, which our economists at Grainger has done, and you look at the market and you break it out between volume growth and price growth, there has been very little volume growth. All of the growth has actually come through price. And so our focus has been if we're going to maintain a market-leading position, it means we have to take share from someone else since the market itself is not growing. And so that became a guidepost for us to figure out and measure ourselves against.

We set the -- first it was 3 to 4 a couple -- probably, I don't know, 7 years ago. And then when we went through the pandemic and then the supply chain crisis, we were trying to evaluate what the right target should be. We had done so well during the pandemic and had attempted to rightsize our results for our supply chain advantage. And when we looked at all those and our initiatives and what we were planning to spend over the long range, it looked like 4% to 5% was much more achievable than 3% to 4%. And so we made that change after the pandemic. We still feel confident in that. When you look at our incremental investments, our investments in capacity and then our use of AI to be able to do that over the long term.

Any other final questions? Yes?

[indiscernible]

Yes. When I joined 13 years ago, I will say our Endless Assortment business, it wasn't called that, was more in its infancy. We had created the joint venture with Japan at that time, and they were progressing, not quite profitable yet, but they were hitting their ramp goals. So the Japanese market was -- we were going to create a new market. There were no distributors. There wasn't that segment in the market. There were wholesalers and there were buyers. So that was an opportunity.

We thought that, that would also be a great opportunity for the U.S. because when you went back and looked at Grainger's results over a 20-year period, we were growing with extra large customers, large customers, not so well with midsize and not at all with small. And so being able to introduce a go-to-market model that would enable us to grow with all market sizes in the MRO space and be able to do it profitably and scale our supply chain cost, fixed cost, we felt would help us drive incremental margins over a very long period of time as we took share.

And with that, we're out of time. We'll continue this in the breakout in Cordova 3. Thank you all.

Greetings, and welcome to the W.W. Grainger Fourth Quarter 2025 Earnings Conference Call and Webcast.

[Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions]

It's now my pleasure to introduce your host, Kyle Bland, Vice President, Investor Relations. Kyle, please go ahead.

Good morning. Welcome to Grainger's Fourth Quarter and Full Year 2025 Earnings Call. With me are D.G. Macpherson, Chairman and CEO; and Dee Merriwether, Senior Vice President and CFO.

As a reminder, some of our comments today may include forward-looking statements that are subject to various risks and uncertainties. Additional information regarding factors that could cause actual results to differ materially is included in the company's most recent Form 8-K and other periodic reports filed with the SEC.

This morning's call includes non-GAAP financial measures, which reflect certain adjustments in previous periods as noted in the presentation. There were no adjusting items in the fourth quarter 2025 period. We have also included organic revenue adjustments in the presentation, which normalized sales growth to reflect our exit from the U.K. market, including the Cromwell divestiture and the closure of Zoro U.K. Definitions and full reconciliations of our non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our earnings release, both of which are available on our IR website.

We will also show results related to MonotaRO. Please remember that MonotaRO is a public company that follows Japanese GAAP, which differs from U.S. GAAP and is reported in our results 1 month in arrears. As a result, the numbers discussed will differ from MonotaRO's public statements.

Now I will turn it over to D.G.

Thanks, Kyle. Good morning, everyone, and thank you for joining. Despite the macroeconomic uncertainty and challenging environment in 2025, the Grainger team continued to execute against our strategy, delivering exceptional service and a best-in-class experience for our customers.

During 2025, we made strong progress. We leveraged our technology capabilities and MRO know-how to strengthen our competitive advantage in each segment. We streamlined our portfolio by exiting the U.K. market. We invested in new supply chain capacity to extend our service leadership. We lived the Grainger Edge each day to foster a workplace environment where team members can build a rewarding career. And we delivered on our financial commitments for the year. Overall, this progress positions us well as we move into 2026.

Before I dive into these 2025 accomplishments in more detail, I thought it would be helpful to reiterate our go-to-market strategy and how each of our operating models addresses the needs of MRO customers, providing a flawless experience and delivering tangible value. This context is important as it drives most of the incremental investment we are making across the business and prioritizing the work our team does every day.

Over the last several years, we have invested heavily to build marketing data and technology capabilities. This includes core product and customer information assets, which have taken on even greater importance as AI accelerates and creates new opportunities to unlock additional value. These data assets underpin our 5 strategic growth engines and fuel our ability to gain share within our High-Touch Solutions segment. In 2025, we made great progress across these 5 areas.

In merchandising, we have consistently gained share through this important initiative and focus on building a highly curated product assortment. This includes continued work across our category review process and the expanded use of the Grainger brand name within our private label offer. Our category reviews focus on improving product search, organization and content, and have more recently had an increasing emphasis on new product introductions, including expansion into new categories.

Recent examples include efforts to build out a relevant offer to support data center customers as well as an expanded breadth of factory automation products such as sensors, machine controls and actuators. In total, our merchandising efforts in 2025 resulted in net assortment growth of over 85,000 SKUs, our largest net SKU growth for the High-Touch segment in nearly a decade.

In marketing, the team remains focused on delivering strong returns while also finding ways to improve program effectiveness to deliver better outcomes for the dollars we're spending. During 2025, we found new and creative ways to further leverage our advantaged information assets to increase personalization and improve our marketing investment strategy. On the latter, we are leveraging our know-how and machine learning to optimize investment at the SKU level based on our knowledge of relative pricing, product availability and customer lifetime value. The success we continue to see across this space supports further incremental investment in 2026 and beyond.

Pivoting to our seller coverage initiative, we continue to leverage our improved customer data to expand our sales force with a focus on underserved business locations. After slowing our pace and adjusting our approach with this initiative in 2023 and 2024, we added around 110 new sellers across 2 geographies in 2025. This brings our total program expansion to over 300 sellers across 6 geographies since 2022, more than 10% increase in our U.S.-based sales team. The collective performance to date at these geographies has been in line with expectations, and we are planning to address 2 more regions in 2026.

Our sellers are crucial to providing value for our customers and generating demand, and we remain committed to investing in tools and resources to increase their effectiveness. In 2025, we saw a strong usage of our new seller insights platform. As you may recall, this platform integrates with existing Grainger data sources to provide sellers with a one-stop shop for customer insights. In 2026, we'll leverage AI on this platform to deliver actionable insights, identify new customer contacts and strengthen leader coaching opportunities. We're just scratching the surface of our potential in this area and we're excited about the path ahead.

Lastly, we continue to see increased demand for value-added services as labor scarcity and cost savings initiatives become customer imperatives. In KeepStock specifically, this has resulted in new customer installations and product category expansions, driving further embeddedness and deeper share of wallet.

Additionally, the KeepStock team made progress over the past year further developing customer-facing tools, and we anticipate a broader rollout of these new capabilities to begin in 2026. These tools provide customers access to enhanced data and insights aimed at improving their user experience and driving procurement cost savings. While it's already a critical part of our offer, we expect KeepStock to become even more valuable going forward.

We're excited about the progress we've made across these 5 strategic growth engines and remain confident in our ability to drive share gain as we execute against these important initiatives.

Now given the critical role that technology is playing in our space, I thought it would be helpful to provide a few use cases of how we are leveraging AI and machine learning across the business. While the ramp curves differ by initiatives, as these efforts mature, they could help increase productivity, enhance service and create revenue opportunities over time. We have broad experience with AI and machine learning, and when underpinned by our differentiated data assets, we can create tremendous value.

I've already touched on how machine learning is optimizing our marketing investment strategy and how AI is helping us improve seller effectiveness. On the slide, you can see several other areas of the business where these new technologies are fueling advancements. The point here is to show how prevalent these powerful tools have become and highlight how we can leverage our data assets to create solutions that add real value to our customers or to our bottom line. We've learned a great deal in the past 2 years about AI and feel well positioned to accelerate these efforts moving forward.

Moving to Endless Assortment segment. We made great progress propelling both businesses forward in 2025. At Zoro, the team has regained its growth momentum, focusing on driving improved repeat purchase rates through an enhanced customer experience. Their progress during the year included optimizing the assortment to improve delivery times, launching Zoro branded private label products, improving the quality of customer acquisitions to enable better repeat rates, enhancing direct marketing capabilities through better analytics and improving the customer experience through more accurate delivery communication. These actions helped reaccelerate sales growth back into the high teens for the full year.

At MonotaRO, the team continues to execute well, driving strong results, including 25% growth with enterprise customers. They continue to improve and expand their distribution capabilities by extending the reach of same-day shipping to regions beyond Tokyo and Osaka, while also planning for the future with the groundbreaking of the new Mito DC outside Tokyo.

Similar to High-Touch, we have also progressed our AI and ML capabilities across both EA businesses. It's still early innings, but we are using these technologies to drive productivity and accelerate our momentum across the flywheel, and we have included a few examples on the slide. All told, we delivered great results across the Endless Assortment segment in 2025 and are positioned well to continue this momentum into the new year.

Turning to Slide 9, I'm very pleased with the continued progress we're making across our distribution network as we stay focused on extending our industry-leading ability to deliver next-day complete orders to customers across both segments.

Notably, we made meaningful progress on 3 new facilities across the U.S. and Japan. The Northwest DC, which is located outside of Portland, is set to start full outbound operations later this year. This building will improve our service and reduce transportation costs throughout the Northwest. We also continue to make great progress with our Houston distribution center and expect inbound operations to begin in the second half of 2027, with outbound following a few quarters later. In Japan, MonotaRO is making great progress on their new highly-automated DC in Mito, scheduled to open in 2028. This facility when complete will nearly double the shipping capacity that MonotaRO has in the country.

Outside of new capacity investments, the supply chain team has also worked hard and leveraged inventory and transportation solutions to improve service in certain markets, including Florida and Canada. Overall we continue to invest across our supply chain to make sure that we maintain and extend our leading position in customer fulfillment.

The heart of our organization remains our people who work hard every day to fulfill our purpose to keep the world working. As you can see on Slide 10, our culture was again recognized externally during 2025. We were recertified as a Great Place to Work in the U.S., Canada and Mexico, affirming our commitment to being an employer of choice and a place where every team member feels valued and empowered.

We were honored for the first time as one of the World's Most Ethical Companies, named once again as one of Fortune's Most Admired Companies and recognized by Glassdoor as a Best Place to Work. These recognitions are a testament to the culture we've built over almost a century in this industry. Grainger will always be a place where every team member can have a fulfilling and meaningful career if they're willing to work hard to serve our customers.

Now turning to our full year financials, 2025 certainly had its share of challenges between shifting tariff dynamics, soft MRO market demand and the government shutdown. Despite these challenging macro headwinds, we still delivered total company sales growth of 4.5% on a reported basis or 4.9% on a daily organic constant currency basis, with total sales finishing the year at $17.9 billion.

Growth for the year included continued share gain from our High-Touch Solutions U.S. business, which finished the year with roughly 250 basis points of outgrowth on a volume basis. In Endless Assortment, the segment showed significant top line improvement with daily organic constant currency sales up 15.6%. Both Zoro and MonotaRO continue to win with their core B2B customer base and drive improved repeat purchase rates, positioning them well for the future.

Alongside the solid top line, the team also did a nice job managing strong margins despite LIFO headwinds, with operating margin finishing at 15% for the year. We delivered adjusted EPS growth of 1.3% or $39.48 per share. ROIC finished at 39.1%. And operating cash flow was $2 billion, which allowed us to return $1.5 billion to Grainger shareholders through dividends and share repurchases.

Overall, I'm proud of what we accomplished in 2025. We continue to focus on improving in core areas of the business to perform well over the long term. With that, I will turn it over to Dee to review our fourth quarter results.

Thanks, D.G. I want to echo D.G.'s sentiment on our 2025 performance. Not only did we make progress on a number of strategic initiatives, but the team was also able to drive top and bottom line results within the original 2025 outlook we provided a year ago, a strong outcome despite the challenging macro environment we faced.

Now turning to our fourth quarter results. We had another solid quarter to finish the year with results roughly in line with expectations. For the total company, daily sales grew 4.5% or 4.6% on a daily organic constant currency basis, which included growth in both segments. Sales were healthy in the period despite softness during the start of the quarter from the government shutdown and the lapping of a prior year hurricane-related sales benefit. If you were to normalize these events, sales for the total company would have been up approximately 6.5% for the quarter on a daily organic constant currency basis.

Total company gross margins for the quarter were strong, ending at 39.5%, down about 10 basis points over the prior year period, driven by segment mix headwinds from faster-growing Endless Assortment. Operating margins were down 70 basis points year-over-year due to increased SG&A expense, which came in higher than expected in the period due to unforeseen health care costs above our normal run rate and a softer top line in the High-Touch Solutions segment.

Overall we delivered diluted EPS for the quarter of $9.44, which was down 2.8% versus the fourth quarter of 2024, but above the midpoint of our implied fourth quarter guide.

Moving to segment level results. The High-Touch Solutions segment delivered sales growth of 2.2% on a reported basis or 2.1% on a daily constant currency basis. Results included nearly 3 points of price inflation for this segment, showing meaningful sequential improvement as tariff costs continued to be passed.

From an end market perspective, our indicators suggest the MRO market gained momentum sequentially but remained muted in the period. For Grainger specifically, we saw a strong performance with contractor and manufacturing customers, which helped to offset slower growth in other areas of the business, including year-over-year softness in the government end market. If you were to normalize government sales for the impact of the shutdown and the prior year hurricane-related sales benefit, sales for the High-Touch segment would have been up roughly 4.5% for the quarter on a daily constant currency basis.

On profitability, gross margin finished the quarter at 42.3%, flat versus the prior year. We continue to see tariff-related inflation, which caused further LIFO inventory valuation headwinds, although the magnitude of these charges came in favorable to our expectations. These charges were offset by positive mix and a number of other smaller tailwinds.

Price/cost on a LIFO basis remains negative, but improved in the quarter as our pricing actions took hold. Similar to last quarter, if we excluded the LIFO headwind and we wanted to compare ourselves to our peer set which report on FIFO, our implied FIFO gross margin rate would have increased year-over-year, with price/cost roughly neutral on this basis.

On SG&A, margins delevered in the period as payroll and higher-than-expected health care costs, along with continued marketing investment, were only partially offset by productivity. We also saw a softer top line in the period due to the impact of the government shutdown, which further weighed on margins. Taking all this together, operating margin for the segment finished at 15.8%, down 120 basis points versus the prior year quarter.

Before moving on, I want to share a brief update on where we are with tariffs. In the fourth quarter, we remain engaged in active dialogue with our supplier partners and took modest price increases in November to help offset continued cost pressure. These actions were on top of the price increases in May and September when we began to pass through tariff-related costs. In January of this year, we passed further price in response to previously delayed tariff inflation and to offset annually negotiated cost increases with our suppliers, which were largely in effect as of February 1. These actions are net of a partial rollback on certain Chinese tariffs announced at the end of last year.

As we look ahead, we've passed the majority of known tariff-related costs to date, but the situation still remains fluid. Importantly, our team is staying agile and we remain confident in our ability to adhere to our core tenets to reach price/cost neutrality over time while maintaining competitive pricing.

Turning to Slide 16. We wanted to share an update on our volume outgrowth for the High-Touch U.S. business. When we last spoke about outgrowth in detail, it was during the first quarter of 2025 as we observed a meaningful inflection in the underlying single-factor IP benchmark that we use to measure MRO market volume. This inflection was misaligned with what we're seeing on the ground with our MRO customers and likely caused by shifting macroeconomic dynamics. These dynamics are driving bifurcation across industries where tariffs are impacting demand in some industries while others are experiencing a tailwind, notably those tied to aircraft manufacturing and data center build-outs.

As we've been discussing over the past few years, we built a separate market model back in late 2023 after a sustained period of dislocation between what we were hearing from customers and what the single-factor model was implying about market volume growth. This multifactor model was developed after testing over 1,000 publicly available economic indicators to find the best combination of explanatory factors with a high correlation to underlying U.S. economic census data for MRO products. Specifically, the model pulls in several different supply and demand factors, including net core capital good shipments, import/export dynamics and end-user activity to formulate a comprehensive view of the MRO landscape.

When comparing the 2 model inputs side by side, while neither model mirrors the exact weight of Grainger's customer end markets, the multifactor model does capture a broader base of end market activities outside of manufacturing while also eliminating non-MRO product categories. Further, the multifactor model captures a more dynamic view of the economy, relevant trade flows, and shows a stronger correlation to underlying MRO product consumption data. And while the inner workings of the multifactor model are less accessible externally and no model is perfect, the comprehensive nature of the model would suggest it more accurately reflects the performance of our markets, specifically in periods of economic disruption or change.

With this context in mind, if you turn to Slide 17, we've charted the historical results for both models, starting at the point at which economic inputs were first published for the multifactor model. As you can see, the 2 models are highly correlated. And over this 20-plus-year period, the average annual growth rate is nearly identical. However, the models do experience disconnects during periods of macroeconomic shifts.

Typically, when the multifactor model trails the single-factor model or vice versa, it eventually catches up, but the duration of these dislocations is unpredictable. As you see, we've experienced a prolonged period of dislocation since the pandemic, including each model moving in opposite directions after new tariffs were enacted in early 2025. It's unclear to us how long this divergence will last.

With this, given its comprehensive nature and the fact that we've studied each model exhaustively over the last couple of years, we are more confident in the demand signals from the multifactor model, and we'll use it to measure our outgrowth progress going forward.

On this basis, turning to Slide 18 and using our multifactor MRO model, we estimate that Grainger finished full year 2025 with roughly 250 basis points of outgrowth on a volume basis, as our High-Touch Solutions U.S. business grew volume by 1.4% compared to our multifactor MRO model which was down between 1.5% and 0.5% for the year. Albeit short of our 400 to 500 basis point long-term target, we're continuing to take healthy share.

Marketing and merchandising remain our largest contributors to outgrowth. And on a go-forward basis, we're anticipating a more consistent impact from seller coverage and seller effectiveness as new geographies ramp and seller tools mature. Overall we remain confident in our strategic growth engines and their ability to drive share over the long term, and continue to target 400 to 500 basis points of average annual outgrowth over time.

Now focusing on the Endless Assortment segment. Sales increased 14.3% on a reported basis or 15.7% on a daily organic constant currency basis, which normalizes for the FX headwinds realized in the period and the closure of our Zoro U.K. business. Zoro U.S. was up 16%, while MonotaRO achieved 18.4% growth in local days local constant currency.

At a business level, Zoro continues its momentum driving strong growth from its core B2B customers along with improving customer retention rates. At MonotaRO, sales remained strong with continued growth from enterprise customers coupled with solid acquisition and repeat purchase rates with small and midsized businesses. Additionally, MonotaRO experienced increased web traffic stemming from a competitor's cyber outage, which provided a tailwind to sales in the period.

On profitability, operating margins increased by 200 basis points to 10.6%, with favorability across the segment. MonotaRO margins remained strong at 13.6%, up 100 basis points, and Zoro margins improved to 6.3%, up 260 basis points, with both businesses benefiting from gross margin flow-through and healthy top line leverage. Overall we're proud of the exceptional performance throughout 2025 within the Endless Assortment segment and look to continue the momentum this year.

Moving into our outlook for 2026. At the total company level, we expect revenue to be between $18.7 billion and $19.1 billion, driven by growth in both segments. This translates to daily organic constant currency sales between 6.5% and 9%, which is 230 basis points higher than reported sales growth at the midpoint after adjusting for FX headwinds and the impact of our exit from the U.K. market.

Within our High-Touch Solutions segment, we expect daily constant currency sales growth between 5% and 7.5%. In the U.S., we anticipate continued demand pressure as tariff-related price increases weigh on market volumes. And while we expect industry-specific tailwinds in certain areas of the economy will persist, many of these green shoots are outside of core MRO product categories. With this, while we acknowledge falling interest rates and other macro factors could reverse the multiyear volume contraction in our industry, we're conservatively modeling the market to be down 1.5% to flat.

On share gain, we're assuming outgrowth improves through the year as we ramp investment and gain traction with our growth drivers. We expect this will deliver outgrowth at or below our long-term target range in 2026.

Lastly, we expect meaningful price contribution to revenue, which includes the wrap of 2025 actions and incremental price this year to fully catch up on the costs we're seeing from suppliers. This price contribution factors into the partial rollback on certain Chinese tariffs announced in November of last year, but excludes any impact from future unknown tariffs or rollbacks that may or may not occur in 2026.

In the Endless Assortment segment, we anticipate daily organic constant currency sales to grow between 12.5% and 15%, in the range of their long-term framework. This segment-level growth will be roughly 230 basis points lower on a reported basis when you normalize for the expected foreign currency exchange headwinds and the closure of our Zoro U.K. business.

At the business unit level, Zoro is anticipated to grow in low teens as they continue their momentum in driving higher repeat rates, consistent service and improved [ mix of ] marketing. MonotaRO is also expected to grow in the low teens in local days and local currency, which normalizes for 1 less Japanese selling day in 2026 and expected FX headwinds from the yen. This strong performance is fueled by growth with new and enterprise customers, strong repeat rates with core B2B customers, and a carryover benefit from the competitor's cyber outage.

Moving to our margin expectations, we expect total company operating margins to range between 15.4% and 15.9%, up 40 to 90 basis points compared to 2025. This reflects improvements in both segments as well as a 45 basis points tailwind from our exit of the U.K. market split roughly evenly between gross margin and SG&A leverage.

In the High-Touch Solutions segment, we expect operating margins between 16.9% and 17.4%, up 35 basis points at the midpoint. Gross margin will improve as price/cost normalizes and LIFO inventory valuation headwinds subside in the back half of the year. This favorability is partially offset by a modest headwind from our private label portfolio where tariff dynamics have changed competitiveness on certain SKUs.

We expect SG&A leverage to improve as the accelerating top line and our productivity efforts offset ramping investment across our demand generators. In Endless Assortment, we anticipate operating margin will continue to ramp between 10% to 10.5%, up 20 to 70 basis points versus 2025. Gross margins are expected to be down slightly at the midpoint, and we expect continued healthy operating leverage improvement in both businesses. Our closure of Zoro U.K. is also positively contributing to segment-level operating margin.

Turning now to capital allocation. Our business is positioned to generate strong cash flow in 2026 with expected operating cash of approximately $2.1 billion to $2.3 billion, reflecting conversion of around 100%. Our capital allocation priorities remain consistent and largely unchanged from prior years. We'll continue to invest in the business with CapEx in the range of $550 million to $650 million, supporting supply chain initiatives, construction of new facilities in the U.S. and Japan, and ongoing technology and data investments.

We'll pursue selected inorganic opportunities while maintaining strategic and price discipline. And beyond investment, we expect to return excess cash to shareholders through dividends and share repurchases. We'll formally set the 2026 dividend in the second quarter, but again anticipate high single to low double-digit annual increases. Share repurchases related to Grainger common stock are expected to be around $1 billion for the year. Overall, our return-focused philosophy gives us flexibility to invest efficiently while delivering strong returns for our shareholders over the long term.

In summary, at the total company level, we plan to grow top line by 4.2% to 6.7% on a reported basis or 6.5% to 9% on a daily organic constant currency basis which normalizes for FX headwinds and our exit of the U.K. market. You can see margin improvement through the P&L, which reflects the previously mentioned tailwinds from the U.K. exit, High-Touch gross margin recovery and healthy leverage in both segments. These margin benefits will be partially offset by continued segment mix headwinds as Endless Assortment grows faster than High-Touch.

We're expecting the effective tax rate in 2026 to be roughly 25%, about 130 basis points unfavorable versus the prior year adjusted rate, mainly due to the impact of recent federal tax law changes and the lap of onetime tax planning initiatives that won't recur in 2026. Taking all this together, including our share repurchase outlook, we expect EPS of $42.25 to $44.75 per share, up over 10% at the midpoint.

From a seasonality perspective, we expect year-over-year sales growth to be relatively consistent as we move throughout the year on a daily organic constant currency basis. Gross margin will deviate from its normal seasonality given LIFO and price/cost dynamics as we comp over tariff headwinds in the prior year and reflect the impact of this year's annual Grainger Show meeting.

With this, first half gross margins will be at or slightly below our annual guide, before rebounding in the back half of the year as the tariff-related impacts subside. Operating margin will follow a similar trajectory where the first half is at or below our full year guide, before rebounding in the back half of the year.

The first quarter is off to a strong start with preliminary January sales up over 10% on a daily organic constant currency basis. This start supports our expectation for the first quarter sales of around $4.5 billion to $4.6 billion, up north of 7.5% on a daily organic constant currency basis or roughly 200 basis points lower on a reported basis.

First quarter gross margins will remain healthy, but decline sequentially versus the fourth quarter of 2025. This differs from our normal seasonal pattern as we continue to face tariff-related pressures and reflect the impact from the Grainger Sales Meeting, which flips to a gross margin headwind in 2026. This gross margin pressure will be offset by sequential leverage improvement and we anticipate first quarter operating margins will be just north of 15% for the total company.

Lastly, as I've consistently done at the end of the past few years, I've included our long-term earnings framework for reference. The only change from the last time I shared this framework is a modest change to our go-forward tax rate assumption to reflect new federal legislation. Importantly, all the core operating tenets of this framework remain intact and we are well positioned to deliver great results for our shareholders for years to come.

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

Thanks, Dee. Before I open it up for questions, I want to acknowledge our nearly 25,000 Grainger team members who consistently demonstrate our principles and drive strong performance for Grainger. Every day they show up, start with the customer and compete with urgency to deliver on our purpose and create an exceptional experience.

Looking ahead, I'm excited about how 2026 is shaping up and confident in our ability to extend our advantage for the long term. Regardless of the environment, we will continue to provide a best-in-class MRO offer while investing in the core of our business, an industry-leading distribution network and innovative technology capabilities. By staying focused on what matters most to our customers and creating a great workplace for our team members, we are poised to deliver continued growth, share gain and strong returns for our stakeholders.

With that, I will open it up for Q&A.

[Operator Instructions] Our first question today is coming from David Manthey from Baird.

My first question is -- statement really, 10% growth, daily organic constant currency in January. Looks pretty good. As we're looking at Slide 21 and thinking about your guidance for the High-Touch business, it looks like share gain is similar to 2025. Pricing is a key delta there at up about 300 basis points. But you also have market growth at minus 1.5% to flat, which is the same backdrop you had in 2025. And given other industry participants and what you're seeing in January, could you just talk about what drives your cautiousness for the year overall?

Yes. So thanks for the question. So as we planned, we always start planning relatively conservatively. We try to. There's no advantage in planning for growth that we haven't seen yet.

What I would say about January, certainly, it was strong across the board, but we did get a bit of a tailwind from the competitive outage in Japan, that adds a little bit to that total as well. But as Dee described, we're pretty confident in sort of that 7.5% number for the year. So we feel like we're off to maybe a little bit better start than we expected, and we may be wrong on the market, but that's always a variable that we have.

Yes. Sounds good. And then I wonder if you could give us an update on digital channels. A few years ago, you told us KeepStock was 16%, website 30% and EDI/ePro was 25% of order origination. I don't know if you have those offhand, or we could take it offline.

Yes, sure. So what I would say is everything direct connection to customers has become more of a share. So actually, EDI/ePro is the biggest share we have at this point, closer to 40% at this point. G-com is still a big part of that and then KeepStock has grown a little bit as well as a percentage of the total. So the vast majority of our contract customers now have a combination of ePro and KeepStock on site. And so that's a big part of what we do in terms of creating stickiness and creating value for our customers.

Our next question today is coming from Jacob Levinson from Melius Research.

Maybe just thinking about David's question a little bit of a different way, D.G. If you talk to your customers, your large customers, can you just give us a sense of what the tone of those conversations have been like? Because it certainly feels like we've seen some sort of cyclical inflection this quarter, obviously, ISM, for example. But just trying to get a sense of when you talk to the CEOs, your peers, what the tone of those conversations are like, particularly if we're talking more of the rate-sensitive end markets, not necessarily aerospace or data center?

Yes. I think the tone hasn't changed too much. There's no -- I'd say there's no panic, but there's not really enormous tailwinds that people are seeing from a volume perspective. I think everybody is seeing price, which obviously helps with the revenue numbers. But generally, it's very, very industry-specific at this point. So you can run the gamut from very high optimism to fairly strong pessimism as well. Overall, I think the mood is okay, but not expecting huge market growth.

Okay. That's helpful. And just on the medium customer front, it seems like there's been quite an acceleration there the last couple of quarters. And I'm not sure if that's a structural change in how you're approaching those customers or maybe there's just some price in there. But maybe you could speak to what's really driving that?

Yes. I mean it's a little bit of acceleration. There were some comps that we had that make it look a little bit favorable. We certainly are focused on growing with midsize customers, and a lot of things we do in marketing and merchandising help those efforts. So it's good to see a little bit of traction, but it's not a huge inflection point, although we expect to continue to grow midsize faster than the rest.

Our next question is coming from Ryan Merkel from William Blair.

I wanted to start with gross margins, I guess a 2-part question. First, gross margins in 4Q were a little bit better than we were thinking. Where did the upside come from there? And then secondly, can you put a finer point on first quarter gross margins? I think you said down sequentially. And just what was the reason?

Yes. The main headwind that we received in the quarter was really related to LIFO. So we had kind of laid out that LIFO would be a little bit more negative than what it actually came in, still increase but softer than that. So that helped us out from a gross margin perspective. And then as we continue to talk about, we did continue to take price. So price helped offset that a little bit in the quarter. So those were the 2 largest things that impacted Q4 from a gross margin perspective.

And then in Q1, we do expect some of those LIFO costs to shift into Q1 as well.

Correct.

Okay. So it's really LIFO which is why gross margins are down sequentially into 1Q?

Yes.

Yes.

All right.

The other piece in the first quarter is related to, as you heard in the prepared remarks, we discussed the Grainger Sales Meeting. And so any time we have customers attend the Grainger Sales Meeting, which is every other year, then our supplier rebates, due to our accounting methodologies, allow us to offset a portion of those rebates in SG&A. So therefore, it becomes a headwind on GM. And so that's going to happen in Q1 of 2026 as well.

So it's a headwind to GP and a positive to SG&A, yes.

Net-net neutral, at operating margin.

Okay. That's great. And then for the '26 margin guide, it doesn't look like there's a lot of organic margin lift ex Cromwell. For example, at the bottom end of the guide, I think margins are flat. So what are some of the key factors on the margin guide? And I think you said gross margins for the year are going to be flat to down.

Yes. If you look at it year-over-year '25 to '26, don't forget, EA is going to continue to grow faster than High-Touch, and that's a headwind for us of about 10 basis points. As you noted, the U.K. market exit is going to be a tailwind for us. And then when you look at High-Touch, there's a lot of puts and takes there. We talked a little bit about Grainger Sales Meeting, price/cost and the LIFO tailwind that we will get mostly in the second half; that's going to contribute about 20 basis points. So when you add all that together, that's the 30 basis point difference between where we ended in 2025 to where we believe we will end in 2026.

Our next question is coming from Christopher Glynn from Oppenheimer.

Just in terms of the continued outgrowth for HTS, obviously, it's been resilient in some very varied macro environments. But just curious what you think is really behind the differential in the current trend line versus the long-term expectation?

Yes, I think that I would point to you a couple of things. Certainly, some factors were out of our control. We have more exposure to government, and the government shutdown hurt share gain in this year. But we also, if you remember, paused some more seller adds a couple of years ago when they weren't -- when we weren't seeing the performance we needed to see, and adjusted. And now we are seeing the performance, we've reaccelerated that. But that's had an impact over the last couple of years as well.

I would say that we're seeing good things on that front. We're seeing good things with seller effectiveness. We're seeing good things in on-site performance with KeepStock. And we also, along with marketing and merchandising, we're pretty bullish around net contracts that we've been seeing recently. So that's a positive for us as well. So we think all that's going to get us get that improvement that we want to see.

Great. And then on the comment on seeing improved Endless Assortment repeat rates, just wondering if you could double-click on that.

Yes. I mean the business has been super focused on getting consistent purchases from core business customers. They've changed a lot. I won't go into the details as some of that's probably not worth sharing, other than to say the way we're acquiring customers, what we're doing with marketing, the way we're talking about service and communicating service delivery promise to customers, all that has helped. And they've seen significant increases in repeat rates over the last 18 months. So that's good to see.

Great. And just a quick house cleaning, Dee, could you remind me what the January -- or the 1 -- first quarter guidance for organic ADS was?

7.5%.

Our next question today is coming from Tommy Moll from Stephens.

D.G., I wanted to follow up on your comment a second ago about the trend below your target for long-term outgrowth in recent years. Point taken on the pause that you've communicated previously on the seller adds. But if we just look high level here, you had outperformance versus your target pretty meaningfully during the years '22 and '23. So I'd characterize what those had in common as an external stress on the supply chain just globally, where you had scale, your competitors lacked scale, that nets to your benefit.

If we think about a lot of the other years, there's a more normalized environment where you're performing below that 400 to 500 target. Is the simplest answer here not just that 400 to 500 is an average, but you're really going to punch above that in times of stress in the market, and in a "more normalized environment," you're probably going to be a bit below the target?

I think that, certainly, we handled that supply stress well. I would definitely agree with that. It was a smaller portion of -- we had 875 basis points of outgrowth 2 years in a row, it was a small portion of that total. So I do think that that may be a general statement to make, that could be true. But I don't think -- I do think, we've averaged 540 basis points through the last 5 years of outgrowth, and we expect to be able to get to that 400 to 500 mark again. So I think that some of that is just our own execution and some of it's external factors, as I mentioned before.

On that execution point you mentioned for seller coverage you're going to add, I think you added 2 markets last year, add 2 more this year. If you look across the folks you're hiring in these roles, in an increasingly digital environment, are you targeting different types of sellers than you have historically? And if you think about the average tenure of the folks you're hiring in these new geos, does it skew perhaps below the average tenure of the rest of your sales force?

I'd say that the process we use when we add sellers haven't changed all that much. We're looking for general selling skills and some sort of interest in the types of product we sell and the environments we sell in. And that hasn't changed much.

I think there's a broader trend here that has been an important one from our customers, which is generally a lack of mechanical talent, I'd say. I'm not sure that's the right word, but I'd sort of say that. There are fewer people who are mechanically inclined. And it's actually been good for us in many ways as customers have asked us to do more on site. And so that's a trend that we do see. But in terms of who we're hiring, we're still looking for a lot of the same skills we've looked for in the past.

Our next question is coming from Chris Dankert from Loop Capital Markets.

I guess, like you said, we've seen some nice market share gains and some optimization of what's within Grainger's control here the past couple of years. But just looking back at the market share numbers, it looks like we're guiding for a fifth consecutive year of contraction in the market. Maybe just does it imply we're in an impaired or shrinking market? Does that imply the reshoring is a bit of a mirage? Just maybe, D.D., what do you see when you see that contraction 5 years running? What are you pulling out of that?

I think if you look over a 30-year history, the reality is that manufacturing activity has been pretty stable in the U.S. It hasn't been increasing much and employment has gone down. I think that sort of gives you a sense that long term, from a volume basis, our market has never been a fast-growing market. And so that's why we have the earnings algorithm we have, gain share consistently, a little bit of price, and then manage expenses and get SG&A. That's what we have to do.

I think in all industrial markets, you would see something similar, to be honest. And you studied industrial markets in the past, it's not -- most of them are not fast growth markets.

Fair, fair. I guess just shifting gears a bit to the digital investment. I know a lot of your peers look at clicks to success. Maybe just is that a metric you guys track? Any kind of color you can give us on improvements there? Is there a different KPI that you measure with the digital investment and the AI investments? Just any thoughts there.

Well, so are you asking about like online, how we measure success online?

Yes. Just how quickly customers kind of get to what they need digitally online, yes.

Yes. So we look at a whole bunch of metrics. We track the process sort of soup to nuts as we look at it. And certainly, conversion rate, which is I think what you're talking about, is a big metric that we do look at, for sure. And we also do a lot of surveys to understand competitiveness and how we do competitively on a bunch of digital sort of journey factors. And so I'd say we're super well-measured in that space.

Our next question is coming from Stephen Volkmann from Jefferies.

Most of mine has been answered, but I wanted to go back, Dee, to your slide around tariffs, which is helpful. But is the message that you've now priced for all the tariff increases that you've seen?

Yes. We have essentially passed through all known tariffs and working in this quarter to also correct for some of the Chinese tariffs that were rolled back in November. So based upon our annual cost negotiations that the team went through in the back half of 2025, we feel like we're fairly caught up in passing costs on to customers at this point in time. Now anything in the future that is unknown, whether for additional tariffs or further rollback, we have not included any estimates of that nature in our outlook.

Okay. Great. And it seems like in some of the businesses that we follow, some producers have been pretty slow to pass these price increases through. Do you think your suppliers are kind of where they need to be? Or do you think there's a good chance that we'll see additional sort of pass-throughs as the year progresses?

So what I would say is suppliers had choices to make, and their choice was usually "Do I pass dollar amount or do I pass percentage?" And so I think overall, we're somewhere between dollar and percent, is what I would say what we've seen from our suppliers. That doesn't mean necessarily that they need to add any more price. I don't think that would drive necessarily at this point.

Our next question today is coming from Guy Hardwick from Barclays.

I think last year, the growth in underlying operating expenses was 5%. It looks like the guidance for this year is better than that, like just under 4%. Is there any particular reason for that? Was that just a benefit of the Cromwell operating expenses dropping away? And I think the OpEx ratios were worse for Cromwell than the overall group. But you also said in the prepared remarks -- sorry -- yes. Maybe I'll let -- just leave it at that and let you just mention that before I follow up.

It's a lot of Cromwell, is the answer, and then there is more leverage in EA and High-Touch as well. But a lot of it is Cromwell.

Okay. And you also said in your prepared remarks that marketing and merchandising is a big driver to outgrowth. So given that you're guiding to a much greater outgrowth this year than last year, I mean, should we assume that your OpEx has factored in that higher merchandising and marketing expense for 2026?

Yes.

Yes. That's right. That's right.

Our next question today is coming from Christopher Snyder from Morgan Stanley.

I hopped on a little late, so I apologize if this got discussed. But could you provide the level of price embedded in the '26 guide? And then specifically, how much is wrap from the intra-year actions in '25? How much is new price? And has there been any growing pushback to price in the market from customers?

Yes. So generally, we've noted in the prepared remarks that our price into 2026 is north of 3%. And then if you look at all the wrap and price that -- and run rate price that we've discussed previously, we believe that amounts to about 2.5% to 3% of that. So all of all in, in 2026, we're north of 3% for price.

And we haven't seen tremendous pushback from customers. The elasticity has been what we generally expect at this point.

I appreciate that. And then if I could follow up on the earlier point that gross margin would be down sequentially into Q1. Obviously, a different than normal seasonality. I'm not sure it's ever been down sequentially into Q1. I guess, can you just kind of maybe help unpack some of the moving parts there? Because it seems like the price/cost improved as Q4 went on following the November price action. So I would have just thought that you would have a continuation of that into Q1. And I would have also thought maybe Q1 would have the full realization of the benefit from Cromwell going away, that was probably not fully reflected in the Q4 gross margin. So just any color on some of the moving parts there would be helpful.

Sure. So again, LIFO, even in Q1 of 2026, will continue to be a headwind because, of course, we are passing and have received new costs from customers. That does subside as the year goes on. But Q4 to Q1, that is a headwind.

We talked about the Grainger Sales Meeting, I don't know if you were on for that. But that is a 20 basis points drag as well. This is the year where we have customers at the show, and supplier rebates that would normally remain up in gross margin, go down to SG&A to offset some of the SG&A costs. So then that becomes a headwind this year, a tailwind in next year when we have no customers.

And then you may have heard us talk, we haven't talked about it as much today, but our private label business with the tariff impacts and looking to remain competitive based upon where we actually manufacture those products. And being able to pass on the tariff increases, mostly we have done that great, like D.G. just noted. So that creates a headwind in gross margins for us, specifically as customers are transitioning to a national brand for some of those products. So that's also a drag.

And then what you noted was like the normal seasonality recovery, price/cost favorability, things like that, that is accounted for as a positive, but it's only about 10 basis points. So all those things together take us from 39.5% to 39.1%, Q4 to Q1.

Our next question is coming from Connor Cerniglia from Bernstein.

Just a quick one. On Slide 8, you touched on the Zoro branded private label product. Can you talk a little bit about the progress you've seen so far, maybe just some customer feedback, repeat rates, et cetera? And then can you speak to the margin impact on the business overall?

It's not material enough at this point to have any impact on margins, but we have seen good early success in repeat rates. And that core business customer that Zoro serves really likes the Zoro private brand that we've launched so far.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any or further closing comments.

Great. Thanks, everyone, for joining today. Really appreciate it, and thanks for the questions. You'll have many opportunity for questions with our IR team after the meeting if we didn't get to you.

I just want to reiterate the fact that we feel really good about how things are set up moving forward. We are hearing positive things from our customers. We're providing great service. And we're getting some of the growth drivers accelerated again. So I look forward to having a great year and look forward to seeing you around. Thanks so much.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

Greetings, and welcome to the W.W. Grainger Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

As a reminder, this conference is being recorded.

It is now my pleasure to introduce Kyle Bland, Vice President, Investor Relations. Please go ahead.

Good morning. Welcome to Grainger's Third Quarter 2025 Earnings Call. With me are D.G. Macpherson, Chairman and CEO; and Dee Merriwether, Senior Vice President and CFO.

As a reminder, some of our comments today may include forward-looking statements that are subject to various risks and uncertainties. Additional information regarding factors that could cause actual results to differ materially is included in the company's most recent Form 8-K and other periodic reports filed with the SEC. This morning's call will focus on our non-GAAP adjusted results for the third quarter of 2025 which exclude the $196 million loss recognized from the pending sale of our U.K.-based Cromwell business and the proposed closure of our Zoro U.K. business.

Definitions and full reconciliations of our non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our earnings release, both of which are available on our IR website. We will also share results related to MonotaRO. Please remember that MonotaRO was a public company and filed Japanese GAAP, which differed from U.S. GAAP and is reported in our results 1 month in arrears. As a result, the number discussed will differ from MonotaRO's public statements.

With that, I'll turn it over to D.G.

Thanks, Kyle, and certainty. Our customers remain focused on improving their operations through increased efficiency and productivity. The value of the fundamentals of having inventory where and when they need it and a partner who understands their business and can bring the right solutions. As I spent time in the market with large customers this past month, these themes are true. I was proud to see Grainger deliver the critical fundamentals that help our customers every day. I recently had great discussions with an aerospace customer and municipality about how Grainger's deep-rooted inventory management expertise can save them time and reduce costs.

I saw that when we deliver a great service experience customers take notice and lease to more opportunities and deeper relationships. I also had the opportunity to speak with several experts focused on technology. Tech and AI will continue to be an ongoing focus for Grainger, enabling us to provide great solutions for customers and drive productivity in our operations. The promise of the new transformation technologies has never been greater but the key will be leveraging our proprietary data and know how to build solutions that connect to business processes and create a more seamless user experience. I'm excited about the work we're doing to bring more digital capabilities to both our customers and team members to make things better with every interaction. Making these better and staying focused on what matters is core to how Grainger operates, and we take that responsibility to heart in our communities as well.

Last month, at our annual bucket build on like fourth, more than 500 Grainger team members came out to pack over 4,000 disaster relief kits. This included filling 5-gallon buckets with essential cleaning supplies and hand tools that will help families and individuals begin the process of recovery after a natural disaster. Grainger has a long-standing commitment to emergency preparedness and response efforts. And this is another reason I'm proud of how the Grainger team lives our principles every day.

Now moving to our third quarter results. We delivered a solid performance that in total outpaced our August thermal guide particularly on the gross margin line. Total company reported sales for the quarter were nearly $4.7 billion, up 6.1% on a reported basis or 5.4% on a daily constant currency basis. Gross margins for the company were 38.6%. Operating margins were 15.2%, and diluted EPS finished the quarter up $0.34 to $10.21. Operating cash flow came in at $597 million which allowed us to return a total of $399 million to greater shareholders through dividends and share repurchases. Our results continue to reflect tariff-related LIFO inventory valuation headwinds, consistent with what we discussed last quarter, which came in lighter than expected in the period. As Dee will discuss, without this LIFO impact, our operating margin would have increased year-over-year in the period.

Looking ahead, while we're continuing to see more costs in the market, these headwinds will eventually dissipate as inflation cools and our gross margin will recover to our [indiscernible] expectation. As you likely saw, we recently announced that we've entered into an agreement to sell our U.K.-based Cromwell business and plan to fully exit the U.K. market. Given the economic dynamics post-Brexit, we had to alter our assumptions around the go-forward potential in the region. With this planned divestiture, we are now focused entirely on growing our North America and Japanese businesses where we can deliver the greatest long-term impact. Overall, while it has been an eventful few months, the business continues to perform well and in line with expectations. With this, we are narrowing our earnings outlook, which Dev will outline in a few minutes. It's important to note we factored in the October headwind of last year's active hurricane season and an estimated impact from the government shutdown.

As we wrap up 2025, I'm confident that we'll continue to serve our customers well, deliver on our financial commitments and drive solid results for all stakeholders.

I will now turn it over to Dee to go through the details.

Thank you, D.G. Turning to Slide 7. You see the high-level third quarter results for the total company, including $4.7 billion in sales, up 5.4% on a daily constant currency basis. While gross margin finished ahead of our previously communicated expectations on a less-than-expected LIFO impact, we were still down 60 basis points year-over-year as segment X headwinds and tariff-related cost impacts within the high-touch business weighed on results. This led to total company operating margins of 15.2% for the quarter, down 40 basis points compared to 2024, and but 70 basis points ahead of our communicated expectations.

Diluted EPS for the quarter was $10.21, up $0.34 or 3.4% higher than the prior year period. Moving to segment level results. The High Tech Solutions segment delivered solid growth quarter. In total, sales were up 3.4% on both a reported and daily constant currency basis. Results were driven by volume growth and price inflation for the segment, with the latter improving as tariff costs continue to be passed. From an end market perspective, our indicators suggest that the MRO market remained muted as the heightened inflationary environment continued to weigh on demand. For Grainger specifically, we saw strong performance with contractor and health care customers and improving results with manufacturing customers which helped to offset slower growth in other areas of the business.

For the segment, gross profit margin finished the quarter at 41.1% and down 50 basis points versus prior year, driven by similar things to what we discussed last quarter. We saw negative but improving price/cost spread as we progress negotiations with suppliers through the quarter and pass incremental price in September. Further, we pulled through [indiscernible] to reflect the impact of supplier cost increases albeit less than expected as certain increases were pushed into latter periods. These 2 tariff-related headwinds were only partially offset by mix and freight. I would note that if we excluded our LIFO headwind and wanted to compare us our peer set, which report on FFO, our implied FIFO gross margin rate would have increased year-over-year.

On SG&A, margin improved in the period as continued investments in our seller initiatives and marketing were more than offset by productivity and sales leverage. Taking all this together, operating margin for the segment finished at 17.2%, down 40 basis points versus the prior year quarter. Now focusing on the Endless Assortment segment. Sales increased 18.2% on a reported basis or 14.6% on a daily constant currency basis, which normalizes for the FX tailwinds realized in the period. Loral U.S. was up 17.8%, while MonotaRO achieved 12.6% growth in local days, local constant currency. At the business level, Zoro momentum driving efficiencies with marketing and working to further enhance customer experience, including improved search, better fulfillment and continued optimization of the assortment.

Taken together, these actions are driving strong growth from its core B2B customers, along with improving customer retention rates. At Monitor, sales growth remained strong with continued growth from enterprise customers, coupled with acquisition and repeat purchase rates with small and midsized businesses. On profitability, operating margins increased by 100 basis points to 9.8%, with favorability across the segment. MonotaRo margins remained strong at 13.2%, up 80 basis points and Zoro margin improved to 5.8%, up 150 basis points, with both businesses benefiting from gross margin flow-through and healthy top line leverage. Overall, we had another strong quarter across endless assortment, and we expect the team will carry this momentum forward as we wrap up the year.

Before moving into guidance, I wanted to share a brief update on where we're at with tariffs. In the third quarter, we remain engaged in active dialogue with our supplier partners and use our September price increases to help offset continued cost pressure. While our initial pricing actions back May only apply to a small portion of our products, large wheels where Grainger imports the product directly. The September increase was much broader and included initial pricing actions on supplier import products, where we have finalized negotiations. As we move into the fourth quarter, we're seeing inflationary pressure continuing to build, including impacts from the recent Section 232 expansion.

As a result, we are taking some incremental pricing actions to better align price/cost timing as the tariff landscape unfolds. These actions are only modest in nature, but are in addition to the price pass earlier in the year. On profitability expectations for the fourth quarter, we anticipate gross margins will improve sequentially with our normal seasonal recovery and improving price costs. The LIFO impact is expected to be roughly consistent quarter-over-quarter. Looking ahead, based upon what we're hearing from suppliers as part of our annual cost cycle, we expect further inflationary pressure into 2026.

With this, assuming no further material changes to the current tariff landscape, we are -- we now anticipate the inventory accounting dynamics from LIFO will persist over the next couple of quarters until inflation pools. That being said, consistent with our long-term earnings framework, we anticipate gross margin will stabilize around 39% for the total company, subject to normal quarterly seasonality. We while we will experience continued segment mix headwinds and some pressure within a subset of our private label assortment, these will be offset as price cost normalizes back to neutral and the LIFO impact subsides. On LIFO specifically, we thought it would be helpful to provide a view of how inventory accounting dynamics impact our gross margin over time, especially because of how the cycle is playing out relative to 2022.

While LIFO expense is always a drag relative to implied FIFO margins, it's not typically a material impact in every period, depending on what else is impacting our gross margin results. As you can see on Slide 12, during periods of normal cost inflation, the LIFO headwind, the difference between LIFO margin and the implied FIFO margin is roughly 20 to 30 basis points reflecting the real-time impact of higher costs flowing through our P&L. As we enter into a heightened inflationary cycle, like what we see in 2022, and like what we're seeing again today, this LIFO impact becomes more pronounced as the difference in COGS diverges between the 2 inventory methodologies. However, as inflation pools, the life of expense will normalize life and FIFO margins will converge. And as this happens and we pass further price, our reported margin will recouple.

With this, we expect our total company gross margins will stabilize around 39% and consistent with our long-term earnings framework. Now moving to the updated outlook for the remainder of 2025, as D.G. mentioned at the beginning of the call, we're narrowing our full year 2025 adjusted EPS outlook, which reflects slightly lower sales to account for the Cromwell divestiture updates and the impact of the government shutdown, which were selling reaches a resolution by mid-November. These top line headwinds are offset by higher margins resulting in an EPS midpoint consistent with the prior guide. In total, the updated guide includes daily organic constant currency sales growth of between 4.4% and 5.1% and a diluted adjusted EPS range of $39 to $39.75.

If you squeeze to the annual guy to get an implied fourth quarter, the revised revenue outlook implies a Q4 daily organic constant currency growth rate of 4% at the midpoint which assumes more than 3 points of price contribution to revenue within the high-tech segment. October growth is off to a slow start of approximately 1% on a preliminary daily constant currency basis as we lapped a fairly significant hurricane real benefit in the first 2 weeks of the month. And as we face current year headwinds from the government shutdown. However, if we just looked at the last 2 weeks of the month, which it grew the prior year hurricane impact, our total company sales are up in the 4% to 5% range on a daily constant currency basis, more in line with what we saw in the third quarter, but still reflecting the impact of the government shutdown, which is weighing on public sector sales.

Annual margin expectations have increased from our previous guide due to improved price cost and lifeful timing. If you were to squeeze the implied operating margins from the updated annual guide and [indiscernible] the fourth quarter, it shows a sequential step down in the fourth quarter to around 14.5% at the midpoint. While the puts [indiscernible] are different, this sequential movement is roughly in line with no seasonality. Overall, despite the tariff-related noise over the last couple of quarters, we remain poised to deliver a solid year.

Before I hand it back to D.G., I thought it would be important to reiterate our long-term earnings forward in light of the recent tariff uncertainty and as we look ahead. While we have made some minor edit CapEx to reflect the latest estimates around our global DC expansion, the core tenets of our framework remains solidly intact. We remain confident we can drive share gain in the U.S., while the EA business in the teens, stabilized total company gross margins around 39%, and grow SG&A slower than sales through process improvements and technology. Taken together, these actions will drive attractive returns, and we remain well positioned to deliver great results for our shareholders for the years to come.

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

Thanks, Dee. As we head into the final of the year, our team will continue to navigate the complex environment and the value for our customers, our communities and our shareholders. And as Dee mentioned, we continue to work through this visionary environment and the challenges from the government shutdown. And while there is some short-term noise, we remain confident in our ability to pass through cost increases and achieve the core tenets of our long-term earnings framework. We'll continue to stay focused on driving strong execution, providing industry-leading service and building innovative capabilities to deliver on what matters most to our stakeholders. And with that, we will open it up to Q&A. .

[Operator Instructions] Our first question is from David Manthey with Baird.

Question on the 2025 guidance and the Cromwell. So Cromwell held for sale as of September 30, so I assume you're taking any assumption out for that? And just ballpark, are we talking about $75 million, $80 million, I'm guessing, and then from an operating income standpoint, those Cromwell operating losses are pretty immaterial. Is that all correct?

Yes. So 2 things at point yet. We kind of adjust it for the Cromwell impact. And if you go back to the press release that we issued around our proposal to exit the U.K. in total and incorporated both that impact as well as the impact that's being proposed for Zoro U.K. So in total, it's about $40 million.

That's $40 million in revenues for Cromwell and Zoro U.K. as held for sale in the fourth quarter. .

Correct.

Okay. All right. And then on the pricing actions that you've taken thus far in the fourth quarter 2025. Should we assume that those are in endless assortment. I think you said your next opportunity to adjust contract pricing on high-touch customers would be Jan 1. So is that another bite at the apple when we turn the page to 2026?

No. We -- obviously, the actions we've taken over September those have flowed into the fourth quarter, and that was a normal price cycle increase. And then in November 1. Now we're taking another one, and that will flow into contracts as well as noncontract business, and that's all high-touch related. Zoro has had good price inflation this year based on some strategic changes they've made. .

Our next question is from Christopher Snyder with Morgan Stanley.

So you guys said that, I guess, ex LIFO, the gross margin would have been up year-on-year, which I guess implies a LIFO headwind of something at least 70 basis points. I guess my question is, you guys are kind of saying you'll maintain a roughly 39% gross margin through these LIFO headwinds. So I guess as the LIFO headwind go away, does that 39 go to something closer to 40%, just assuming that we're in a 70 bps LIFO headwind backdrop?

Thanks for the question, Chris. So as we've noted during this period of time when we are comparing our results versus those who may be reporting on FIFO. We do have more of a negative impact directly related to the LIFO impact on gross margins. And so what we attempted to do here in our information is to recast and imply FIFO gross margin number for Grainger for more easily easy comparability. But as you know, as we go through the cycle and others eat through the less expensive FIFO layers. And we're already there with LIFO. We believe gross margins will become a little bit tougher for them. And we -- as we pass -- continue to pass price. Our gross margins will continue to elevate, as you noted.

However, there are more things, the size LIFO, that impacts gross margin. product mix, freight and other areas where we receive. We're gaining some favorability. We deem that -- some of those things may not be as favorable in the future as price becomes more favorable. And so that's why we stick to a longer range outlook of around 39% or around the area of 39%. That doesn't mean it can't be a 4 basis points better than that in the future. We just don't want to project out too much because all the information we have today around tariffs and other cost inflation is what we have to use to project from this point.

That was helpful. I guess, if we look at the Q4 guide, overall company up 4%, so a high touch, I guess, would be below that, maybe something more like 3% which is effectively all priced. So it seems like the guide is calling for no volume growth. within high touch. I mean I know the backdrop has been challenged for a while, but that business has continued to grow volumes even if modestly through the first 3 quarters of the year. So is that step down in Q4 to maybe 0 just all because of these government contracts and the risk associated with that? Or is there also maybe macro softening alongside that? Any color there would be helpful.

Yes. In Q4, we have 2 challenges, 1 of which you called out, which is the impact to our business related to the government shutdown. And the other 1 is related to the benefit that really in the prior year in October related to the hurricane. We ranged bound that last year of about $30 million, $40 million in the month of October. So that's also a challenge that we're cycling in Q4.

The one thing I'd also point out is if you look at October by segment, which we don't typically talk about, the government has obviously impacted substantially. Everything else looks normal effectively. So it is mostly -- it is entirely just the government impact that we're seeing from both the hurricane, which affects state governments, 3 states that obviously in the Southeast that were hit hardest last year and then the federal government given the shutdown.

Our next question is from Jacob Levinson with Melius Research.

I realize there are some advantages on the tax front using life of inventories. But wanted to ask if there's been any discussion in terms of shifting the FIFO. It just seems like the last couple of years, we've seen a lot of companies that had LIFO accounting actually moving to FIFO just given maybe a stickier inflation backdrop.

Yes, yes. So we obviously have talked about it evaluated. I mean the thing you need to probably realize is if you make that change, you end up having a cash payment, not an earnings payment, but a cash payment effectively for the cumulative taxes you saved at whatever tax rate is today. So it's not an inconsequential number. So we need to weigh that versus the benefit of being on FIFO and having easy compares. Right now, we're not going to make that change, we might in the future.

Okay. That makes sense. And then just on the government shutdown, I realize these are unfortunately becoming more regular occurrences. But in your experience, is there normally some catch-up in demand once the shutdown is over because I imagine a lot of these facilities are just mothballed right now. So once you ramp back up, maybe there's some pent-up demand there.

Yes. So what I would say is the nature of the shutdown and this one in particular, obviously, some of the nonmilitary entities that we would serve are completely shut down. Typically, you wouldn't see much of a catch-up from those. But we also are seeing this impact given the lack of the number of people who are furloughed and purchasing people furloughed we're seeing a little bit of slowdown in military and other areas as well. And so -- some of that may come back, but typically, it wouldn't all come back. You see a little bit of it maybe come back if there's catch-up projects they stop doing. But we would expect something between 0 and something not huge to come back on that.

Our next question is from Ryan Merkel with William Blair.

Just sticking with the government, did you guys size what the impact you expect in 4Q is from the government shutdown?

Yes. I mean, basically, the way to think about that is every day one point or more impact on our total business. And so if it goes 6 weeks, it will be 0.5 point. If it goes all the time, it will be a point or more impact. That's what we've seen so far. I would say that if it doesn't get resolved, it could become even bigger if it goes on a long time. But that's what we typically would see and expect to see now.

Okay. Got it. And then it sounds like you put through another price increase in 4Q and that would be off cycle for you, which I think I thought you were trying to stick to the national account timing there. So is that sort of a change in how you're doing things? Or why the off-cycle price increase?

I think a lot of this is just probabilistic. So when tariffs first hit, we actually didn't know how they would play out and we didn't want to get out in front of it. So we've been actually taking price increases when we have cost increases as opposed to speculatively. And there's been over 1,000 negotiations with our suppliers at this point. That's not normal for the record. And so what we saw was a number of cost increases come in after -- between the time we set the 91 prices and the time we would now -- and so what we've done is we've raised price to compensate for that, and we think it's the right thing to do, and our customers understand that.

And I would just add, a lot of that is price changes and corrections based upon what we're seeing in the marketplace. So I wouldn't assume that, that change was as big as like the 5.1 change as an example. .

Our next question is from Stephen Volkmann, Jefferies.

And apologies for beating this dead horse D.G. But the price increase in November, was there any aspect of that would be -- I think your word was speculative that did you try to get ahead of any of this?

No, it's not speculative. It's just matching what we're seeing and what we're seeing in the market. we're sticking to our pricing tenants, which are basically priced to market at this point.

Okay. Great. And then I think you also talked about in your private label business, some headwinds, competitive kind of headwinds. How does that play out? Or what can you do to sort of address that going forward?

Well, we don't think we're uniquely exposed or competitive disadvantage in private brand. But what has happened with some of the larger tariffs is the difference between a private brand product in some cases, in the national brand product can become very tight. And so then we have decisions to make as to how much price we take in those situations. And so we're still working through all of that. It's a subset of our private brand. It's not -- all of them, it's not a huge portion of them, but for some of those cases, we have to decide how we treat those strategically.

Our next question is from Christopher Glynn with Oppenheimer & Company.

So I appreciate the comments at the beginning on how you're looking at AI and adopting new technology. You've always been very tech forward and investing at scale. And so I'm curious what you're envisioning with that from both sides, commercially layering into the outgrowth algorithm versus the cost of serve side and margin potential.

Yes. I think -- so what I would say is it's going to require all of the above to be successful long term, we think. And we have been out in front in certain areas with AI thinking about back in processing and customer service in those areas that are kind of obvious to attack. I don't -- everybody is going to be doing those things is my expectation. And so creating advantage is probably going to be more on the commercial side. and leveraging our data, our product and our customer data to create solutions that provide better experiences for customers. And so we are investing heavily there as well. We think both areas are going to be critical to our success.

Should we think of that as incrementally constructive to the outgrowth algorithm perhaps for interim period?

Yes, we think we're doing well. I don't know that I'd say it's constructive for the outgrowth at this point, but we think things are going well on that front. And you probably know in our business, having big contracts and getting all the volume are 2 different things sometimes. And so you have to have the contracts and then you have to win at the local level, and we know that. And so that's really how we construct our business and our focus. .

Our next question is from Ken Newman with KeyBanc Capital Markets

Maybe first, just to clarify, sorry if I missed this in response to Dave's first question, but any help on just how to think about the operating profit or loss in the other segment now that Cromwell's divested. Is that segment going to be profitable in 4Q? Or just how do you think about that normalize into next year?

Okay. So the exiting the U.K. shows up in 2 areas. It shows up in other kind of where chroma was, and that's the vast majority of it and a little bit in EA because that was the Zoro U.K. business. So that will positively contribute once we close the deal from a profitability perspective. And it's like in the teens from an operating. Not in the teens, 20-or-so basis point improvement in operating margin.

Okay. That's helpful. I appreciate that. And then for the follow-up here, it looks like there was a pretty sizable increase in midsize customer growth in high touch U.S. this quarter. Is that primarily a price versus volume mix? And then maybe just any color on how you think about how sustainable midsized customer growth can be going forward and its impact on mix?

Yes. So we believe we're doing really well with midsized customers, but the majority of the difference in the increase, I believe, is 7% in the noted slide. Is really due to some softer comps in the prior year?

And I would just add that I think we have a lot of opportunities with midsized customers, and we're learning, and I think we'll continue to do better it's not immediate to [indiscernible]. .

Our next question is from Sabrina Abrams with Bank of America.

So the gross margins in the quarter were, I guess, a lot better than expected. And I know you've spoken to some stuff around LIFO expense timing, but it was a pretty big delta. Just want to understand if there are any benefits from bringing down inventories quarter-over-quarter or anything about LIFO layers? And maybe if you give more color on exactly what happened with the LIFO timing? Did suppliers choose to eat increases?

Yes. Thanks for the question, Sabrina. So it's really around the fact that LIFO is really difficult to estimate because based upon your inventory purchase and the specific changes on cost, you have to be able to estimate that by SKU. And then whatever you sell, you have to go back in prior periods and pull those adjustments and make a very good estimate for your prior year inventory at the same time. So we do the best we can at trying to estimate a pretty complicated quantification of LIFO impact. And so our team here was always continue to negotiate with suppliers.

And based upon where those negotiations landed, some of those cost increases are being pushed into prior periods. And so based upon that, that is some of the LIFO charge improvement. In addition to that, we have some benefit from price costs as well. That impacts gross margin. And they also -- we also had benefits from favorable mix and freight.

Okay. Got it. And maybe if you could talk a little bit about market growth has been and your daily sales growth has been very stable this year. with the exception of, I guess, what's handing in Q4, and you've already explained that. Barring that, just any early thoughts on how you're thinking about the growth in 2026. Are you thinking it will be similar to this year?

So we'll provide that information at the end of the year in January. We typically don't provide that. We do expect to have a significant price rollover, as you might guess. And so and we still expect to gain share at our target rate. So -- but we will have more news on what we think the market will do as we get to that point. .

Our next question is from [indiscernible] with UBS.

I wanted to ask about asking the price question another way. We hear about some price fatigue with respect to customers in the industrial channel. Can you talk about your conversations with your suppliers? I think you mentioned over 1,000 negotiations. So is there a sense that they're not fully passing on costs. And so the inflation you see is a bit below market?

Yes. I don't know if it's a bit below market. What I would say is that for a manufacturer, they have decisions to make about whether they pass percent or dollars. And I would say that a lot of them have passed somewhere in between that, too, in many cases. So just because the headline is 20% tariff increase, they may not pass 20% in all cases. And so we've seen really a mix of things and a wide range of things from our suppliers on [indiscernible]

Okay. And I know we'll get more on this one in January. But like any kind of initial thoughts on 2026, not so much on the top line, but you mentioned gross margins around 39%. So any kind of like puts and takes when we think about how that drops through to operating profit?

I mean I would just point to 2 things that probably set us up well, one is a life of thing we've been talking about that should improve as a year going on and the other is exiting the U.K. market, if we can [indiscernible], that will help too. So I would only point to those 2 things at this point. We'll talk about others as we get to the end of the year.

Our next question is from [indiscernible]

I was hoping as we closed the books on Cromwell, D.G. can share some of the lessons. This was not the first time Grainger had tried to expand in Europe. There was also Fabory. So what doesn't work with the MRO model in Europe that's kind of moot now, I think. But then more importantly, do you still have all kinds of opportunity to outgrow North America and it's still highly fragmented. So isn't that still the growth opportunity? So [indiscernible] question there.

And the second one is really easy. So yes, we do think the opportunity is to grow in North America. And and in Japan with MonotaRO, we've got great growth opportunities there. I'd say favor and [indiscernible] are very different experiences. I think Cromwell is a very good business. It we bought it right before Brexit happened. We thought we had an opportunity to learn and build off that platform for Zoro U.K. and then potentially think about expansion and learn about the European market. that turned out to not be true, obviously, when Brexit happened.

And at some point, it becomes clear that you've got a midsized business that isn't really material to our portfolio. And we want to make sure that our attention goes to things that really matter from a -- that can move the needle for us. And so that's why we made the decision. We do think Cromwell is a good business and will continue to be a good business going forward.

Good to hear. And then just to clarify on the government shutdown, and I appreciate how you size it. Is there been any difference in behavior, demand, I mean, between federal state, local, I mean, we -- this is -- the focus is on the federal shutdown, but what's been the ripple effect across the rest of your government business?

Very little, actually. I think the state business is down in October only because of the hurricane, basically. So if you look -- remove the hurricane from the 3 states that had big hurricane events last year, state would be on a good path. Local hasn't really been impacted that much. So from a government shutdown perspective, it's really the military so far that's been hit and things like VA hospitals that are linked to federal that had slowed down as well. .

Our next question is from Nigel Coe with Wolfe Research.

I appreciate the attempt to teach in on LIFO accounting [indiscernible], But the more we dig into it, the more confusing it comes. But just on -- I don't know if you quantified it , but we calculated a $52 million impact this quarter, just the change in the life of the reserve. And I'm assuming that's the charge. And then I think the PR talks about still some impact in the first half of -- or by mid-2026. I think it's the wording. Would you expect more moderate impacts in the first half of next year?

So yes, your math is right. And what I will say about next year is that we're right in the middle of the cost cycle for 2026, which is why it's so difficult for us to talk about 2026 outlook because we're not done with that. So -- but what we do know as more cost is coming into the year. And so therefore, we're going to have additional LIFO impacts into the year. And so without having Chris numbers to lay out at this point. We know we're going to have a LIFO impact. We know we're going to have additional cycles of price to pass as a result into 2026.

But as it relates to actually sizing those incremental things that haven't been locked down right now, it's really hard to do. But we do think we get through the back half of next year, we'll be in a good position because we would have had multiple pricing cycles to catch up on any impacts and new costs that come through.

Right. Okay. And then obviously, good news on the price is starting to come through here. How do we think about price elasticity? And the spirit of the question is there is a sort of a vague kind of ore of price [indiscernible] out there with some companies. And I'm just curious how the customers are sort of responding to these price increases? And how do you think about elasticity of demand, especially for the white label goods?

Yes. So we are having very good conversations with our customers. They are seeing everybody come to them with what we're talking to them about generally. So we haven't really seen price fatigue, and we've been very measured in how we've done this. I guess there could be a point where that might be a challenge. But certainly, for most of what we sell, it's a very small portion of our customers expense. And so we find that as long as our prices are competitive, we are usually in a good shape.

Next question is from Tommy Moll with Stephens Inc. .

I want to tighten up my understanding here on the U.K. exit. Two-part question. The $40 million sales impact that was over what time frame? And then the 20 basis points operating margin impact. Just want to clarify, you meant to say or what you meant was assuming the exits go as planned, that would be the uplift to consolidated company margins.

Yes. So yes, the $40 million is just tied to Q4. And the 20 basis points impact is for total company on an annualized basis.

Okay. And the $40 million is for the entirety of Q4, correct?

So we're estimating that we will be able to close on the Cromwell deal by the end of November, early December.

And that's the $40 million from that point.

After that point in time.

And that's both Cromwell and what we expect to happen at Zoro U.K. as well complied.

Perfect. Okay. We're clear now. And then just on high touch and the exit rate on pricing. For the fourth quarter, I think you said somewhere north of 3 points and then also that there are continuing supplier conversations suggesting there's probably going to need to be more pushed, let's call it, first half '25. So as we just think about the wrap here -- excuse me, first half '26 as we think about the wrap, I mean, could we end up in a world where 2026 pricing on high touch is, I don't know, 4 points or better if we just put all these data points, one after the other.

Yes. I mean, we're estimating that the ramp will be close to 3%. So since we don't know the other numbers, it's highly likely that it's going to be north of 3 for next year.

Our next question is from Guy Hardwick with Barclays Capital.

Most of my questions have been answered, but just a quick one for me. Looking at the sales growth by customer end market for high-touch solutions you as warehousing is down mid-teens, which is sharply against the kind of trend or slightly up, slightly down the last few quarters. Can you explain that?

Yes, sure. That's entirely around one customer where there was a shift is what I would say.

We talk a loss contract or a closure of facility, that sort of changed?

Just a contract adjustment. .

Our next question is from Patrick Baumann with JPMorgan.

I had a couple of quick ones here, touch on transit high touch again. What do you estimate the MRL market volume did in the third quarter? And in context of that, can you touch on if you're still happy with the returns you're getting on your investments share gain investments?

Yes. Yes. Roughly 2% [indiscernible] the debt below 2% in volume for the quarter 2%. [indiscernible]So a market would have been down 2%.

That's correct.

I'm sorry, I thought you're asking what our volume was our volume but be 1% to 2% in the quarter. And yes, the short answer is yes. We are seeing significant returns on our investments, getting more effective and more efficient in some of those investments. So yes, we're pretty bullish on what we're seeing from what we're investing right now.

Yes. And I would just point you to our return on invested capital is still north of $40 million. it was lower than prior year. However, the main impact from that is just us continuing to build assets and in this case, build networking assets related to a lot of investments that we're making in DC capacity to ensure that we have great service and availability.

Okay. And then my follow-up is on the margin side again. So the LIFO charge I get is hard to size for '26, so we can make our assumptions around how much of that 80 to 90 basis point drag to add back as a starting point. But the slide mentions price cost as being net as well. Can you size that? I assume that's incremental to that 80 to 90 basis points and then as you sit in front of the whiteboard and [indiscernible], if the EPA tariffs are ruled to legal, mechanically, how do you guys think about that in terms of the flow-through to results?

So I'll start and then D.G. Can kind of focus -- so as we look at a follow-up, when we look at next year, we're still going to have LIFO impact, right? They're still going to exist. The difference will be our price will continue to build and so we will see gross margin from a Grainger perspective, improve next year as it relates to that. Now the piece that we don't -- and that's based upon all we know today, right? We're working on additional cost increases. When we start the year, generally, we -- based upon the cost negotiations, we pushed through cost increases in line with the negotiations that we have completed. And so the cycle kind of will start again.

And those details we don't have to share, but usually lives heavily on our business at the beginning of the year. And then again, we catch up from a price perspective. through our cycle of increases. So LIFO will not be going away. It will normalize what we're experiencing this year would normalize. But then we will be on a path where price will continue to build. And that's why we feel pretty confident that as we get to the second half of next year, just like we're ending this year, if you look at the midpoint of the guide that we're going to be at about of 39%.

Your second question is probably more theoretical at this point, which is a territory what would happen. First of all, we have followed the guys -- our own guidelines here that we only do things that actually are happening. And so we would have to actually see what the law change will look like and figure out what would happen. I'd say 2 things. One is we have worked closely with suppliers to tag what the tariff cost increases are. So we could, and we would know how to unwind those if that was in fact required. We do that. And certainly, as that happened, we would then, of course, get a benefit because when we the lower cost product than we have the reverse of what's happened in some way. But I don't know how big a benefit that would be. So we'd have to come back to you and model all that is at, in fact, happen. .

Our next question is from Chris Dankert with Loop Capital Markets.

I guess focusing on analyst assortment here. Nice results. Maybe can you comment on how much of that's being driven by the more targeted selection continue to provide some benefit, how much of that is kind of the customer acquisition flywheel, just larger invoice -- maybe just any commentary on kind of what we're seeing in terms of trends inside EA?

Yes. So what I would say is that most of the improvement we've seen -- and I'll start -- I'll focus on Zoro because or has been a pretty big shift in terms of performance has been improved fundamentals on being more attractive to customers and then getting them to buy frequently. Average order size hasn't really changed at all. It's all been a frequency of orders when you look at it. That's been the driver, and that's been better customer acquisition to acquiring customers with the right products that gives us higher probability of actually get to repeat.

And it's also just doing better at marketing to those customers and creating a relationship on a digital -- through digital means. So really, the fundamentals have improved a lot, and we've seen repeat rates go way up. We've seen them do things as a business with pricing that has helped and we've seen service in. So all those things have contributed to improved performance.

Got it. And I guess as a follow-up, I mean we're seeing better drop-through now on the SG&A leverage. Are any additional investments similar to the Tokyo D.C. or anything else we should keep in mind into 2026, 2027 that would impact kind of that drop-through rate? Or should we expect pretty good incremental margins in EA going forward from here?

Other than Meta, I don't know of any other investment that is on the horizon. They would have a lot of capacity in both Osaka and Tokyo after Meta, and that be the expectations they would it for a while. .

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Great. So thanks for joining the call today. One thing I'd highlight is that I think the underlying business trends are really good and we're doing a lot of great things to improve the customer experience to prepare to improve our cost structure, the continued work on building technology and building service capabilities through the rate network changes on the distribution center network. So while we spent a lot of time talking about LIFO, I hope you get the sense that -- that's not really what we're focused on as a business, we're focused on actually underlying performance, and we felt that in line performance is pretty good.

With that, I wish you all a safe and happy Halloween. And thanks for joining the call today.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to the W.W. Grainger Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

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

Good morning. Welcome to Grainger's second quarter 2025 earnings call.

With me are D.G. Macpherson, Chairman and CEO; and D. Merriwether, Senior Vice President and CFO.

As a reminder, some of our comments today may include forward-looking statements that are subject to various risks and uncertainties. Additional information regarding factors that could cause actual results to differ materially is included in the company's most recent Form 8-K and other periodic reports filed with the SEC. Results for the second quarter of 2025 are consistent on both a reported and adjusted basis, but will be compared to adjusted results from the prior year period, which were normalized for restructuring costs incurred in the second quarter of 2024.

Definitions and full reconciliations of our non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our earnings release, both of which are available on our IR website. We will also share results related to MonotaRO. Please remember that MonataRO was a public company and files Japanese GAAP, which differs from U.S. GAAP and is reported in our results 1 month in arrears. As a result, the numbers discussed will differ from MonotaRO's pulled up statements.

Now I'll turn it over to D.G.

Thanks, Kyle. Good morning, everyone, and thank you for joining today.

In the second quarter, the external environment continued to present a degree of uncertainty. What we're observing in the field though, is largely business as usual with a sharp focus on execution. Customers are seeking reliable partners who can help them manage the current complexity, and Grainger is proud to be that partner.

I recently spent some time with manufacturing and industrial customers in Salt Lake City. These conversations consistently focused on how Grainger can help them drive efficiencies, lowering their purchasing costs, and improving inventory management. In times of uncertainty, our role becomes even more important, and we are uniquely positioned to help our customers strengthen their purchasing processes and overall operations. To that end, we continue to collaborate closely with our supplier network to uphold our standard of getting customers the right products when and where they need them. We've built a strong foundation anchored by a world-class supply chain and enhanced by strategic investments in product information and digital capabilities. These efforts, combined with our scale, deep supplier relationships and ability to provide alternative product solutions allow us to deliver unmatched value in any environment. Beyond serving our customers' operations, we also recognize a broader responsibility to the communities we serve. In times of need, we remain steadfast in our commitment to supporting local communities with emergency response and recovery efforts. It's a part of who we are, and how we show up every day. I am proud of the resilience and dedication demonstrated across our organization and remain confident that our team will continue to deliver value for our customers, our communities and our shareholders.

In the second quarter, we delivered solid results that in total were largely in line with our May verbal guide. Total company reported sales for the quarter were nearly $4.6 billion, up 5.6% or 5.1% on a daily constant currency basis. Operating margins for the company were 14.9% and diluted EPS finished the quarter up $0.21 to $9.97. Operating cash flow came in at $377 million, which allowed us to return a total of $336 million to greater shareholders through dividends and share repurchases. Importantly, while the headline results for the second quarter played out largely as expected, they do reflect our estimate of tariff-related LIFO inventory valuation headwinds. As D. will discuss, without this LIFO impact, our operating margin would have been flat year-over-year in the period. As we look ahead, we anticipate the continued LIFO headwinds along with further price/cost timing pressures will impact our performance in the back half of the year. And as a result, we are updating our earnings outlook for 2025, which D. will detail in a moment. Importantly, these accounting and timing impacts are mostly transitory, and our expectation is that gross margin will begin to recover over time as we work back toward our price cost neutrality target.

And with that, I'll turn it over to D. to go through the details.

Thank you, D.G.

Turning to Slide 7. You can see the high-level second quarter results for the total company, including $4.6 billion in sales, up 5.1% on a daily constant currency basis. Within the period, we saw gross margin softness from segment mix and from the aforementioned tariff-related impacts within the high-touch business, including noise from LIFO inventory accounting. This led to total company operating margins of 14.9% for the quarter, down 50 basis points compared to 2024, but roughly in line with our communicated expectations. Diluted EPS for the quarter of $9.97 was up $0.21 or 2.2% higher compared to the prior year period.

Moving to segment level results. The High Tech Solutions segment delivered solid growth in the quarter. In total, sales were up 2.5% on a reported basis or up 2.8% on a daily constant currency basis, with growth across all geographies and local days, local constant currency. Results were driven by continued volume growth and modest price inflation in the segment. From an end market perspective, our indicators suggest the MRO market remained muted but was softer than expected. We saw strong performance with contractor and health care customers, which helped to offset slower growth in other areas of the business. For this segment, gross profit margin finished the quarter at 41%, down 70 basis points versus prior year. In the quarter, we saw a negative price/cost spread as we progress negotiations with suppliers and elected to not pass any off-cycle price increases on to our customers. This caused timing-related lumpiness in the period. However, as pricing catches up, starting with our regular September cycle, we expect price/cost will begin to recover. Further, because we are on LIFO, we had to pull through the current estimated impact of all effective cost increases known to date, putting further pressure on margins in the quarter. These 2 tariff-related impacts were only partially offset by favorable mix and freight in the period. And I would note that if we were not on LIFO, our gross margin rate would have been flat compared to the prior year quarter.

On SG&A, we slightly delevered in the quarter as we continue to invest in marketing. These costs, along with our annual merit increases that went live to start the quarter, were only partially offset by productivity gains and sales leverage. Taking all of this together, operating margin for this segment finished at 16.6%, down 90 basis points versus the prior year quarter.

Now focusing on Endless Assortment segment. Sales increased 19.7% or 16.3% on the daily constant currency basis, which normalizes for the FX tailwinds realized in the period. Zoro U.S. was up 20%, while MonotaRO will achieve 16.4% growth in local days local constant currency. At a business level, Zoro continues its strong momentum driven by growth from its core B2B customers, along with improving customer retention rates. At MonataRO, sales growth remained strong with continued growth from enterprise customers coupled with solid acquisition and repeat purchase rates with small and midsized businesses.

On profitability, operating margins for the segment increased by 200 basis points to 9.9%, with both businesses contributing to the favorability. MonotaRO's margins remained strong at 13.2% as they continue to gain operating leverage. At Zoro, operating margins accelerated sequentially and were up 380 basis points year-over-year to 5.8%, aided by gross margin flow-through and strong top line leverage. As sales comps become more pronounced for Zoro in the back half of the year, we do anticipate this margin outperformance will moderate slightly as the year continues. Beyond the results, you will see in the appendix that the team took steps in the period to optimize roles assortment. Specifically, net SKUs declined by $1.1 million in the quarter, driven by the elimination of some low volume, low service items. This near-term reduction as part of the ongoing effort to further improve the customer experience at Zoro and has no impact on our go-forward strategy or expected financial performance.

Looking forward, our optimization efforts will continue over the next several quarters, but we expect net assortment growth for the business over time. Overall, we had an exceptional first half across Endless Assortment, and we remain confident in the team's ability to continue delivering strong results going forward.

As we look to the back half of the year, I thought it would be helpful to share a brief update on where we are with tariffs. As we shared during our first quarter earnings call, we took initial pricing actions in May, primarily related to Section 232 and the first wave of announced tariffs on China. These initial pricing actions only apply to a small portion of our products, largely those where Grainger is importing the product directly. As part of this initial way, we did not take any pricing action on the reciprocal escalations. Consequently, we expect our initial pricing actions to hold as they relate to tariff levels that remain in place today. At this point, it's a bit early to get an accurate elasticity read, but as the full competitive set takes price through the cycle, we still expect these may price actions will approach the previously discussed 1% to 1.5% net annualized price inflation run rate for the high touch business. Of the vast majority of our remaining products where Grainger is not the direct importer, we continue to work with our supplier partners regarding tariff-related cost increases. We've finalized negotiations on a number of impacted SKUs but expect conversations to be iterative throughout the balance of the year as the tariff environment remains highly fluid.

Looking ahead to the third quarter, we expect to adhere to our regular cycle with our next pricing action slated to go live in early September. This route will include some further increases on products directly imported by Grainger to reflect current tariff rates, which are higher than what we passed in May. The September cycle will also include initial pricing actions on supplier imported products where we have finalized negotiations. The past price from this route is expected to result in net annualized incremental price of 2% to 2.5% on a run rate basis for the high touch business. Note that these run rate price figures are annualized and on a cumulative basis, we'll lay across the full year 2025 to deliver close to 1% price in total for the High Touch business.

As we wait on pricing actions until September, we do anticipate continued headwinds from price costs and further LIFO inventory valuation impacts in the third quarter. But as we pass price, we expect gross margin will recover to more normal levels over time. The team continues to stay nimble as the cost environment evolves, and we take actions as needed over the remainder of the year and into 2026. Despite the anticipated lumpiness, we remain focused on adhering to our 2 core pricing tenants to remain price competitive and to achieve price cost neutrality over time.

Now moving to the updated outlook for the remainder of 2025. First, we're adjusting our sales outlook to reflect both the latest FX rates and the aforementioned pricing actions, the latter of which we expect will contribute around 1% in total for the High Touch business in 2025. These tailwinds are partially offset by the softer-than-expected MRO market we've seen to date, which we don't expect will recover in the back half of the year. More notably, as D.G. mentioned at the beginning of the call, we're updating our outlook to reflect the tariff-related price/cost timing headwinds and our current full year estimate for the LIFO valuation impact. Consequently, we've lowered our gross margin guide with the total company now expected to be between 38.6% and 38.9% or down 80 to 50 basis points year-over-year. Our SG&A outlook remains largely unchanged, and therefore, this gross margin pressure will flow through to operating margins where we now expect the total company will finish between 14.7% and 15.1%. This all translates to earnings per share between $38.50 and $40.25, up roughly 1% year-over-year at the midpoint. Updates were also made to our supplemental guidance, which included a $100 million increase in expected capital expenditures due to the timing of DC network investments and the related offset to our share repurchase outlook. This updated outlook assumes no changes to the effective tariff schedule as of July 31st. The third quarter is off to a solid start with preliminary total company July sales up slightly north of 6% on a daily constant currency basis and aided by softer comps in the prior year period. We expect growth will moderate as the quarter goes on and anticipate total company sales for the third quarter to be up north of 5% on a daily constant currency basis. As discussed, gross margin will see further pressure in the quarter, driving a sequential decline in total company operating margin to around 14.5%.

With that, I'll turn it back to D.G.

Thanks, D.

Overall, I'm encouraged by how the team continues to manage through this uncertain and evolving environment. Although we did slightly lower our 2025 outlook, it is primarily the result of a softer-than-expected market and transitory impacts on gross margin, neither of which changed our view of how the business is operating overall. I remain confident in our strategy and our ability to drive long-term value for all stakeholders.

And with that, we'll open it up for Q&A.

[Operator Instructions] And your first question comes from David Manthey with Baird.

First question on the LIFO accounting and the operating income impact. It looks like it was about, I don't know, 50 basis points or something. And I guess the question that's out here is if you are on average cost for accounting here in book. Would your second out -- the second half outlook has changed at all, or is this just a timing factor of the LIFO and price increases, et cetera?

So our performance as we were on [indiscernible] would have been different, as you noted. However, as it relates to the outlook, our outlook would not have included the negative impacts of LIFO. But our underlying operations, I will say, are still very similar. When you look at our ability to estimate the price increases outside of the LIFO impact and the timing of our cost changes. Those things, I believe, will remain the same. So the only real difference is that we would not have had this LIFO accounting impact flow through COGS and through the P&L in the way it is flowing through today. So when you look at, specifically, our EPS year-over-year just comparing ourselves to ourselves instead of being up 2, EPS would have been up north of 6%.

That makes sense. And then as we're looking forward, you gave us some insight into third quarter. I think you said gross margin would step down again in the third quarter and operating income would come in at 14.5%, if I heard you correctly. Could we think about the progression from there? So I know operating income usually takes a step down seasonally in the fourth quarter, but not necessarily gross margin. So anything directionally you can talk to us about how the P&L is going to move from the third quarter to the fourth quarter, just so we incorporate that correctly?

Yes. I do believe seasonally stepping from Q3 to Q4, we will still see the revenue trend through normal seasonality, but the point you make related to pricing, pricing will continue to build, with our September pricing change heading into the fourth quarter. And so we will start to see improvement in gross margins and expect to exit the year with improved price cost. And that's what helps with Boeing operating earnings at the end of the year.

Your next question comes from Tommy Moll with Stephens.

It sounds like there was a judgment call made on the timing of when you're going to push through the second batch of inflationary factors here. And I think you referenced that you're just going to take it on the normal cycle in September. I'm just curious what went into that decision-making process. Did you consider pushing in a more real-time fashion. Have you seen others do that in the marketplace? What were some of the gives and takes there on arriving at the decision you did?

Yes. So we considered all kinds of different options here. We decided to keep our price increase on a normal schedule. We think it's the best thing from a customer stability standpoint, and we're hearing very good things from our customers about that decision. We will be a little bit upside down on price cost, but there are other factors that are actually moving sort of positively as well. And as we discussed, really the LIFO impact is the biggest impact on our GP now. And so we felt like ex that, we could manage this by going to [ 91 ] and wait until.

Following up on Zoro. Good update this quarter. It sounds like you did some pricing optimization and then also reduced the SKU count, if you can bring us into that decision-making process, how long have those initiatives been under consideration? And what's the lay of the land there as we go forward?

Yes. And I think the pricing decision has been in the works for the better part of the year. We've been considering that and made some changes and have learned our way into what we actually did. It's a bit different tilt on pricing, which provides a better experience for customers. The SKU count one, when you have millions and millions and millions of products, 12 million, 13 million products, it's healthy to go through and say which products are actually noise and not creating a great customer experience. So we basically identified a set of products, a fairly large set of products that we got rid of, we will continue to expand the assortment, but we want to make sure we do it in ways that actually improve the customer experience. So that's really what that was all about.

Your next question comes from Chris Snyder with Morgan Stanley.

D.G., in your opening remarks, you talked about how in times of uncertainty, customers lean more heavily on Grainger. And we certainly saw that through COVID and all the supply chain disruption that followed, but it doesn't seem like we're seeing that same impact here in this current period of disruption. Outgrowth remains sluggish. There seems maybe a little bit of less conviction in pushing price to get value for that supply chain partner status. So I guess, I mean, maybe you would disagree with that. But why do you think maybe we're not seeing that -- those tailwinds that we saw in other times of disruption?

Well, I think the pandemic disruption was very much a supply disruption, which is less the case this time. I think there hasn't been many as many challenges getting supply. So we may have seen some tailwinds there. I would say a couple of things. One is, I don't think we have any lack of confidence in passing price. I think we're just trying to time it correctly for customers and marry it up, so it actually makes sense. And so we still feel like we're going to be able to pass price through this period. We may not see as much cost as others as well. So our price -- [ headline ] prices might not be as big, but there's mix issues and all kinds of things that drive that. And in terms of share gain, actually, the second quarter look better from a high touch share gain, and we continue to see significant disruption between our internal metric and the 1 unit metric, the external one. And the internal 1 would suggest we gained quite a bit of share in the second quarter. And there's been surveys from your peers that have suggested the market was down 2 or 3 even in the quarter. So I think actually, share gain, we feel pretty good about, again, so I don't know that we feel like we're not getting here. We do feel like we're being sure.

I appreciate that. And then I guess just on the gross margin, the 50 basis points guide down. Could you just kind of maybe talk about how that splits between the LIFO pressures, which it sounds like are higher than we're expected in April despite general de-escalation versus how much of that pressure is just some price/cost timing into the back half?

So I just want to step back a little bit. So thanks for that question. I think it ties back to the last question too, a little bit, which is back in Q1 when we were looking at the guide, there was information in the market related to tariffs. One piece of information looks like China tariff was like at 135%, which it is nowhere near today. And so when D.G. talked about being really prudent about the timing of when we're going to take price, this is what we mean. Like if we would have taken that assumption, which was very high level, very hard to measure at that point in time and then roll that through our estimates, we would have had some drawing changes to guidance then and then now having had a whole quarter of better information, a little bit more certainty around tariffs and then being able to actually estimate their near-term impacts I think, has put us in a better position. And then that has also allowed our pricing team to take that information and then make better pricing decisions with our customers at this time. Back to your question related to how much is LIFO versus how much is price cost. The vast majority of the impact to us or like as an example, to high touch in this quarter is the LIFO impact. It's like 80 basis points. And so there is impact to price cost, but much smaller than the impact of LIFO. And we believe that will continue to be the case as we move through the year because as we've noted, we will, in September, be then updating for the incremental increase that had been announced on aluminum and steel for some of the other changes that have occurred. And so that will also continue to flow through as subsequent LIFO adjustments. But as it relates to gross margin, none of that reverts unless we have deflation, which we don't see any coming, but gross margin will improve since we're on LIFO because pricing will start to take hold. And so if there's 1 thing to walk away with those of us that are on LIFO, have a hotter impact or more negative impact to gross margin at the beginning of these cycles because we restate our entire inventory to the latest price or cost of goods and that flows through the P&L immediately. Over time, as pricing takes hold and that LIFO impact normalizes, our gross margin starts to recover and improve. Different than those on [ FIFO, ] who have the opportunity to flow through their lower cost inventory while they're taking price leading to higher gross margin that then starts to mitigate through the cycle. So over time, our gross margins will become much more comparable to others based upon the differences in our accounting treatment. So we expect our gross margin and specifically our price cost, which is not the biggest impact here. It is a timing difference to moderate as we go through the end of 2025 and into early 2026 as we continue to take price.

Your next question comes from Jacob Levenson with Melius Research.

I realize these tariffs are a moving target, but if you've got -- if you have a 30% tariff on China today and obviously different rates than some of the other major manufacturing centers. Does -- is the economics of private label really changing versus the branded side? Because I assume it's probably not necessarily straightforward because you've got branded stuff that's also being made in China or Vietnam, but I'm just trying to get a sense of whether there's been a real shift in terms of the economics of private level?

Yes. So I guess, first of all, I would say that we do have a lot of U.S. private label production, so that is not affected. Certainly, the China component of private brand is -- could be impacted. It really depends -- without sort of giving you a direct answer here, it really depends on the SKU level analysis. So there are some SKUs for which a 30% tariff might make them much less competitive to the national brand. And there's many where it doesn't matter. You're still more competitive coming from China. So really, it's happening at the SKU level. We're watching it very closely. I suspect once we get through the next quarter, we'll have a lot more to say about what we're seeing. It's still really, really early in terms of what we're seeing from the cost increases on our private brand. But it's going to very dramatically by SKU, and we'll have a better perspective over time.

Okay. That makes sense. And just on a brighter note, Zoro seems to be heading in stride there. I know Tom asked about it as well. But can you just help us understand like what's really changed in that business? I know there's been a lot of cross-pollination with MonataRO, but it seems like they're finally kind of getting the flywheel going there?

Yes, yes. I think I'd point to a few things. One is, I think they've done a nice job of improving who they target to acquire and then getting to repeat business with those customers. And that includes how they think about what products they promote, how they think about evaluating customers initially, and then how they think about basically marketing to those customers that are attractive. And so a lot of what MonataRO has done to be successful, they built and ported over the logic. It's a little bit different in this context. But to basically get to that repeat business. And that repeat rate is really, really important. That's up about 200 basis points year-over-year, which is a big deal to that business. The other thing I'd say is, as they grow, they had already built out a lot of the capabilities, they get good -- really good leverage when they grow at this point because they don't need to add nearly as much cost. So those 2 things are really working in their favor.

Your next question comes from Ryan Merkel with William Blair.

So it sounds like a key message here on gross margin is that the update is more about LIFO than it is price cost. So my question is, the new 50 basis point headwind to gross margin for the year, how much of that is LIFO and how much of that is price cost timing?

I will say the majority of that is LIFO. And again, I think we'll really start to see the price cost portions of that unwind into 2026. There is a component there, but as I noted, I kind of noted the impact of high touch in this quarter is significant. It is the main event when you look at the year-over-year decline to high-touch gross margin.

Yes. I would just say we said this a few times. RGP would have been flat year-over-year, which is actually better than we expected to start going into the year if we didn't have LIFO. So while we have some price cost headwinds, we have other things that have been positive as well. And so LIFO on the math basis is the entirety of what we're seeing right now.

Okay, that's helpful. And then my follow-up, this might be kind of a hard question, but there's new tariffs being announced today. And 1 of the questions I'm getting from clients is, is there going to be more price cost risk now in the second half if you have more tariff-driven inflation?

Hard to tell. So I mean, clearly, China is the most significant trade partner we have at this point. So some of the countries that are being announced have much smaller impacts than China does. And Mexico hasn't changed. They are a significant trade partners as well. So it just depends on which countries have that happen to them. And right now, there's obviously risk depending on what happens or opportunity as well, depending on what happens going forward. But China is the biggest 1 we have to watch. And so so far, I don't think the things that have been announced today would have a huge impact on us based on [indiscernible]

Your next question comes from Christopher Glynn with Oppenheimer & Company.

So you mentioned a great description of the decision-making process with deferring on price a bit, and you talked about the customer benefits and the good feedback there. I wanted to talk about maybe what long-term strategic goals you might have had in mind there along the way as well. Is this sort of a nice arrow in the quiver as you go through next rounds of contract negotiations and display into the wallet share strategy?

I think our long-term share strategy is based much more on providing exceptional service, helping customers take out costs, helping them with their purchasing process, helping them manage inventory. We -- but we do recognize that you don't want to -- winning the tariff transition is not really a thing for us. For us it's are we doing the right things for the customers and making sure we continue to build loyalty and trust. And so that's a big part of what we do. And we think that does help us in the long term. This wasn't really a specific point we are trying to make around share gain, but we do think it does help. We do think it helps us over time.

Okay. Great. And just a follow-up on Zoro. It's had tremendous sequential momentum in the last few quarters. I think the high India guidance has kind of flattish through the back half. Is that just conservatism relative to 2Q on..

Yes. Last year, they're cycling some tough comps. So it's just a modest deceleration but nothing to worry about. We're still very bullish on their outlook.

Your next question comes from Deane Dray with RBC Capital Markets.

I'd like to circle back on the Zoro SKU pruning. I consider this to be a very healthy process. But I'd love to hear just a bit more detail on the algorithm, the approach here? Is it simplification? Do you look at returns by SKU, the volume that's being done and frequency of ordering. It's probably all of the above, but what is the net impact?

The net impact is basically nothing. These are SKUs that basically weren't moving. And frankly, we're we're probably not helping searchability on the website. And so these are very low risk, like no risk financial decisions that were made in the quarter.

Great. Is there any -- would you be following a similar practice with the core Grainger offerings? Is that -- have you done any meaningful calling of the SKUs? And maybe just kind of size that process paratha.

We do that on an ongoing basis. That is not new for us. We probably have 80,000 SKUs followed every year, roughly or something like that, and then we add a little bit more than that to get to the net assortment number. But that is a very well well-trod path and the analytics to make those decisions a very clear have been in place for a long time. I think with Zoro, the difference is you added so many so fast. We've added things that we didn't know if they were going to sell or not. And so if they didn't, then we made the decision.

Your next question comes from Chris Dankert with Loop Capital Markets.

I guess just -- I'm sorry to come back to pricing here again, but just on high-touch pricing specifically, you'd flag 1 to 1.5 points of kind of target price for the quarter, we came in basically flat. Was that fully offset by negative mix, or was it a measure of weak realization on the price front there?

So when we laid out what we thought we would realize the 1% and 1.5%, that was on an annualized run rate basis. And so you're right. In the quarter, you'd have to look at how much of that in the next quarter, you would actually realize. Well, one, the actions were taken in May, so we didn't have the full quarter. So that's an impact. And then when you compare to prior year 2024 actions, they're so offset there year-over-year because last year's increase was larger than the 1 we took this year. So that explains a portion of it. The rest of it, though, we believe has to do with the fact that our sales and others are taking price on different SKUs at different times, and it's really hard to read elasticity. Based upon what we continue to see, even including in this month, that is improving. And so we have conviction that on a run rate basis, we will get on an annualized basis to the 1% to the 1.5%. And as it relates to September, with that continued conviction and then the new -- an additional pricing of tariffs and other negotiated costs, we plan to pass enough to realize an additional 2% to 2.5% on an annualized run rate basis to cover those increases. And then as we stated in our prepared remarks, when you look at that across all of 2025, we expect to realize about 1%, the combination of those 2 with the timing because we do -- we are starting to see competitors take more price. And so we feel like we'll be in a more normalized environment and realization will get back to what we have seen historically.

I guess just as a follow-up here. I noticed you moved about $100 million from the buyback towards CapEx investment in the guide here. Just maybe some color on what we're spending on, what kind of projects are moving forward here that look more attractive today?

Yes. It's -- what I would say is the vast majority of that is in the supply chain investment, and it was -- there was an opportunity to make an investment for the future. It's not going to be near term, but it's longer term. And so we're thinking about the longer-term network evolution, and there was just an opportunity to make -- to add some money to the budget.

[Operator Instructions] Our next question comes from Sabrina Abrams with Bank of America.

Apologies, I'm also going to go back to pricing. But if I look at like the government pricing data for nondurable wholesalers, like the smaller machinery equipment and supplies wholesalers. The industry data is closer to like mid-single digits up year-over-year. And I just want to understand maybe it's something in the definition of how you report pricing. But just want to understand like maybe the difference between what the government data suggesting inflation is running at versus reported pricing for you guys?

Yes. I mean I think it's -- that's an interesting deal. Obviously, we we look at -- first of all, we think we've got better scale and opportunity to not have the cost increases maybe that others might take. And so we tend to match, try to match our cost with our pricing, and that's what you'll see us do over the next few years. What D. did talk about, though, is we will be run rate 3% to 4% at the end of the year for this year. So you will see us increase prices. But we're not happy to take them maybe as soon as others do. That's not unusual for us when there's an inflationary environment. That's been the history.

And then just on the high-touch volume, they were better, I guess, than what I had in my model in the quarter. I think there we have like some monthly sales. I think July, you said coming a little bit better on the easier comp. Anything to call it on like cadence of demand in the quarter? Like I understand you guys don't have a ton of -- you guys don't really have like big capital project exposure, but I think what we're hearing from some of the other manufacturers is you did feel a little bit better about the macro in July. So just any color there.

Yes. I mean it's hard to talk about the macro. I think the macro has been [indiscernible]. Do you think we've -- like I said before, we are doing better on share gain and volume share gain was pretty solid in the quarter. And again, we'd expect that in July. So it doesn't feel like a huge change, frankly. It feels like the demand environment is still relatively muted, but we do feel like we're doing reasonably well in that environment.

Your next question comes from Ken Newman with KeyBanc Capital Markets.

Maybe this payback -- maybe to piggyback on that last question. Look, it does sound like you feel confident around the net price realization into the back half on the negotiations that are already finalized. I guess, is the confidence that volumes don't have another -- or don't have a negative response as you introduce these price increases really just driven by net customer adds, or is it that you think there's also a stickiness to your current customers as it relates to volumes today?

Well, I mean, I guess what we would say is we think that price increases in general and inflation in general is going to have an impact on market demand. So we do have some -- we have the market demand not doing as well in the back half as we had in the first half. So that's where you see that impact. We don't think we are uniquely exposed. We think everybody is doing the same thing. And so we feel confident in our ability to realize prices with that lower market demand.

Got it. Okay. And then just for my follow-up, switching gears to Endless Assortment. I think the total revenue guide kind of implies Endless Assortment grows similar on the total sales, maybe like in that high teen to low 20% in the back half but maybe the incrementals are slightly lower than what we saw in 2Q. D., is that right? And if so, just any comments on what's driving that deleverage?

Yes. You do have that right. And again, we talked a little bit earlier about the fact that some of it is the comp that Zoro is cycling through because they had a stronger back half last year, after some of the actions they took the prior year. And so when you look at it on a 2-year basis, we feel like the numbers are in the right realm. So it's really a comping issue for EA.

And your next question comes from Patrick Baumann with JPMorgan.

One quick 1 on gross margin. So it looks like the exit rate on gross margin in the fourth quarter is maybe in the high 38% range. given the timing of the price increases coming through, which I think you said we're going to annualize at 3% to 4%, maybe that heads [indiscernible] [ 1.26, ] but starting in late '25, I guess. And then also the LIFO impact to '25, do you think 2026 will be a year of gross margin expansion back to that 39% level just based on all those things and this LIFO dynamic that sounds like it's timing related.

I would say that would be reasonable. All things equal, and no other genetic changes around there and things like that are now...

So today, we able to say that would be very likely [indiscernible]. Obviously, things could change. Yes, that is the way that should flow.

Yes.

I mean, I'll take that an encouraging sign because I actually wasn't really expecting response for you on that. The next question was on government customer dynamics. It looks like things were relatively stable in the quarter after slowing a bit in the first quarter. Can you talk about whether you've seen contract cancellations at all impact your business there and whether you've been able to act fill that with with other activities. Just any dynamics within government, customer, federal versus state local versus military, however you like to talk to it.

Yes. I mean -- so certainly the place we've seen, we don't have contracts canceled. We don't -- we typically are transacting in small orders with our customers, basically. But the nonmilitary federal business certainly has been struggling. It is down. The military business has been good. States [indiscernible] has been okay. Some states doing well [indiscernible]. So really, other than that, the small portion were 70%, state and local 30%, federal, most of our federal and military, we aren't that impacted by this as a very small portion that has some impact.

And there are no further questions at this time. So I'll hand the floor back to management for closing remarks.

All right. Thanks for joining us today. We really appreciate it. It's an interesting moment. From our perspective, obviously, Endless Assortment had a really good quarter and has a lot of momentum. We feel like the high-tech model is gaining share and the volume looks pretty healthy. And our underlying performance would have been pretty good and quite good actually had not been for LIFO, but we are on LIFO. So the reality is we have altered our guide based on largely on that, as we discussed, and that will cycle through. And it's going to be several quarters until that cycle through, and that goes away as an issue. And also, we do believe that market demand is going to be relatively muted, and we've taken that down as well. And that's just a reflection of what we think tariff price increases are likely to do to the market. We also think that's temporary. None of those -- either of those things change the way we think about the business or run the business. And like I mentioned, we run it for long-term health and success. So we feel pretty confident about what we're doing and how we're doing it and appreciate you joining today. Thank you.

This concludes today's conference. All parties may disconnect. Have a good day.