Grade: F — One Cash-Coverage Red Flag
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-19, FY ended December 31, 2025) + Yahoo Finance
Auditor: Ernst & Young LLP (signed report) / PricewaterhouseCoopers (referenced in filing) — Unqualified opinion (1 critical audit matter: valuation of goodwill for Canadian reporting unit)
One-line verdict: Grainger had a decent operating year masked by one-time charges from exiting the UK market. GAAP net sales grew 4.5% to $17,942M, but GAAP net earnings fell 10.6% to $1,706M because of a $186M Cromwell divestiture loss and a $10M Zoro UK closure charge recorded in SG&A. On an adjusted basis, diluted EPS rose 1% from $38.96 to $39.48; GAAP diluted EPS fell 9% from $38.71 to $35.40. The business story is two-speed: the big High-Touch Solutions N.A. segment grew sales 2% but operating earnings declined 1% (pricing/volume pressure); the smaller Endless Assortment segment (Zoro + MonotaRO) grew sales 16% and operating earnings 33%. The screening engine flags cash-to-debt as a failure because the cash position of $0.6B covers only 20% of $2.9B total debt, but leverage of 1.0x Debt/EBITDA is the healthiest in the screening set. M-Score -2.55 and Z-Score 10.73 are both firmly in safe territory.
| Metric | Result |
|---|---|
| Red Flags | **1** (C4 cash/debt) |
| Watch Items | **2** (B2 capex, D3 soft assets) |
| Checks Completed | **17/18** |
| Beneish M-Score | **-2.55** (clean) |
| Altman Z-Score | **10.73** (very safe) |
A Distributor Under Pricing Pressure, Cleaning Up the UK
Grainger operates in two segments. From Item 1. Business: "High-Touch Solutions N.A." is the traditional Grainger MRO distribution business in the U.S., Canada, Mexico, Puerto Rico and China. "Endless Assortment" is Grainger's "streamlined and transparent online platform with one-stop shopping for millions of products. The Endless Assortment segment includes the Company's Zoro Tools, Inc. (Zoro) and MonotaRO Co., Ltd."
In 2025 Grainger "performed an assessment of its businesses in the United Kingdom (U.K.) and made the decision" to exit — divesting Cromwell (the MRO distribution business) and closing Zoro U.K. These actions drove the $186M + $10M in one-time SG&A charges.
Financial Performance: Adjusted Beats GAAP Because of UK Exit
From the consolidated statements of earnings (MD&A):
| Metric | FY2025 | FY2024 | Change |
|---|---|---|---|
| Net Sales | $17,942M | $17,168M | +4.5% |
| Cost of Goods Sold | $10,933M | $10,410M | +5.0% |
| Gross Profit | $7,009M | $6,758M | +3.7% |
| SG&A | $4,514M | $4,121M | +9.5% |
| Operating Earnings | $2,495M | $2,637M | **-5.4%** |
| Income Tax | $622M | $595M | +4.5% |
| Net Earnings | $1,808M | $1,989M | -9.1% |
| Net Earnings attrib. GWW | $1,706M | $1,909M | **-10.6%** |
| **Diluted EPS** | **$35.40** | $38.71 | **-8.6%** |
From the MD&A: "we have adjusted the current year results to exclude one-time losses recorded in SG&A expenses of $186 million within Other and $10 million within Endless Assortment related to the Cromwell divestiture and closure of Zoro U.K., respectively."
Adjusted metrics:
The GAAP vs. adjusted gap tells the real story: strip out the UK exit charges and Grainger had a tepid but positive year.
Margin Compression
Gross profit margin of 39.1% was down 30bp from 39.4%. SG&A (ex-one-time) rose 5% — the MD&A attributes this to "higher payroll and benefits and marketing expenses in 2025." The combination produced a 160bp drop in GAAP operating margin from 15.4% to 13.9%.
Effective tax rate rose from 23.0% to 25.6% (adjusted: 23.0% to 23.7%). The MD&A explains: "The Company's adjusted effective tax rate increase was primarily due to the prior year benefit from the expiration of a statute of limitation period in 2024."
Segment Performance
High-Touch Solutions N.A. (the big segment):
| Metric | 2025 | 2024 | Change |
|---|---|---|---|
| Net Sales | $13,993M | $13,720M | +2.0% |
| Gross Profit | $5,832M | $5,741M | +1.6% |
| SG&A | $3,478M | $3,356M | +3.6% |
| Operating Earnings | $2,354M | $2,385M | -1.3% |
The MD&A notes: "The increase [in net sales] was primarily due to volume." Gross profit margin declined 10bp to 41.7% and operating earnings actually fell 1% despite the 2% sales gain — classic operating deleverage from SG&A outpacing gross profit growth. This is the core US distribution business showing modest organic weakness.
Endless Assortment (Zoro + MonotaRO):
| Metric | 2025 | 2024 | Change |
|---|---|---|---|
| Net Sales | $3,625M | $3,134M | +15.7% |
| Gross Profit | $1,085M | $923M | +17.6% |
| SG&A | $740M | $663M | +11.6% |
| Operating Earnings | $345M | $260M | **+32.7%** |
The growth engine. The MD&A explains: "The increase was due to repeat business for the segment and enterprise customer growth at MonotaRO." Operating margin rose from 8.3% to 9.5% — the segment is scaling nicely, though still well below High-Touch Solutions' 16.8% segment margin.
Cash Flow
| Metric | FY2025 | FY2024 | FY2023 |
|---|---|---|---|
| Operating Cash Flow | $2,015M | $2,111M | $2,031M |
| Net Income | $1,706M | $1,909M | $1,829M |
| **CFFO / Net Income** | **1.18** | 1.11 | 1.11 |
| Free Cash Flow | ~$1.3B | ~$1.5B | ~$1.5B |
CFFO held roughly flat despite the 9% net income decline — because the $196M of UK exit charges did not require equivalent cash outflow in 2025. FCF/NI of 0.78 reflects higher capex (which the screen flags on B2 as a watch item).
Balance Sheet
| Item | FY2025 | FY2024 |
|---|---|---|
| Cash & Equivalents | ~$0.6B | n/a |
| Total Debt | $2,862M | $3,183M |
| Goodwill + Intangibles | ~$0.6B | n/a |
| Stockholders' Equity | $3,736M | $3,358M |
C4 Cash vs Debt: FAIL. Cash of $0.6B covers only 20% of total debt of $2.9B. But Grainger's Debt/EBITDA is just 1.0x — the lowest leverage ratio in the screening set. The filing confirms Grainger maintains investment-grade credit ratings and has continuous access to capital markets. The C4 flag is mechanical — Grainger does not accumulate large cash balances, preferring to return capital to shareholders via buybacks and dividends.
D1 passes easily: Goodwill + Intangibles of $0.6B is 17% of equity. This is one of the lowest goodwill-to-equity ratios across the screening set — Grainger has grown organically, not by acquisition.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 47 days, -0 days YoY |
| A2 | AR vs Revenue Growth | PASS | AR +4.3% vs revenue +4.5% |
| A3 | Revenue vs CFFO | PASS | Revenue +4.5%, CFFO -4.5% |
Clean revenue quality. DSO is stable and AR is growing in line with sales — the opposite of Generac's pattern.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | PASS | Inventory +3.8% vs COGS +5.0% |
| B2 | CapEx vs Revenue | WATCH | CapEx +26.4% vs revenue +4.5% |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 64.4% |
| B4 | Gross Margin | PASS | Gross margin 39.1%, -0.3pp |
B2 is on watch — capex is up 26% while revenue grew 4.5%. This is primarily the ongoing distribution center expansion Grainger has discussed for several years (new DCs in the US to support High-Touch growth).
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 1.18 |
| C2 | Free Cash Flow | PASS | FCF $1.3B, FCF/NI = 0.78 |
| C3 | Accruals Ratio | PASS | -3.4% |
| C4 | Cash vs Debt | **FAIL** | Cash $0.6B covers only 20% of debt $2.9B |
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | PASS | $0.6B = 17% of equity |
| D2 | Leverage | PASS | Debt/EBITDA = 1.0x |
| D3 | Soft Asset Growth | WATCH | Other assets +22.4% vs revenue +4.5% |
| D4 | Asset Impairment | N/A | No write-off data |
Acquisition Risk
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | PASS | Goodwill+Intangibles +5% YoY |
Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| F1 | Beneish M-Score | PASS | -2.55 (< -2.22) |
Key Risks from the 10-K
1. eCommerce Platform Dependence
Item 1A: "The growth of Grainger's eCommerce platforms exposes Grainger to additional risks which could adversely affect Grainger's reputation, financial condition and operating results. The successful execution of Grainger's eCommerce growth strategy depends on a number of factors, including Grainger's investment in its eCommerce platforms, consumer preferences and purchasing trends, and the ability to deliver a seamless procurement experience across digital and physical retail channels."
The filing continues: "Grainger relies in part on internet search engines to drive traffic to its websites, and the reach of Grainger's eCommerce channels is impacted by how and where its websites rank in both paid and unpaid search results. Potential changes to search engine ranking rules could cause Grainger's websites to place lower in search results and cause Grainger to incur increased advertising costs in order to increase its visibility."
With Endless Assortment (Zoro + MonotaRO) now growing at 16%/year and contributing 20% of revenue, search engine algorithm dependence is a material business risk.
2. MonotaRO Controlling Interest Governance
Item 1A: "Grainger has a controlling ownership interest in MonotaRO, which is listed on the Tokyo Stock Exchange (TSE). MonotaRO's disclosure and reporting obligations under TSE listing requirements and Japanese securities laws, including the timing of such obligations, vary and may continue to vary from Grainger's obligations under New York Stock Exchange listing requirements and U.S. securities laws. MonotaRO's listed securities may be subject to the same volatility, price and securities litigation risks to which Grainger's common stock is subject."
MonotaRO is the fastest-growing piece of Grainger's business and its separate Japanese listing creates a dual-reporting regime.
3. Canadian Goodwill — The Critical Audit Matter
EY (or PwC) identified the Canadian reporting unit's goodwill as the critical audit matter: "At December 31, 2025, the goodwill balance of the Canada business reporting unit was $119 million... Auditing management's annual goodwill impairment analysis for the Canada business reporting unit was complex due to certain assumptions that were significant to the analysis. Management performed an annual impairment analysis in the fourth quarter to evaluate changes in key assumptions and operating results since the last impairment test. The more subjective assumptions used in the analysis were projections of future revenue growth, and operating expenditures, which are all affected by expectations about future market or economic conditions."
The Canadian business sits inside High-Touch Solutions N.A. At $119M goodwill, the absolute exposure is modest (0.7% of total assets), but the auditor's highlight suggests margin compression or revenue softness in Canada has narrowed the impairment cushion.
4. High-Touch N.A. Margin Deleverage
The core US distribution business posted -1% operating earnings on +2% sales. If this trend persists, the high-margin engine of the company enters a de-leveraging phase. The MD&A attributes SG&A growth to "higher payroll and benefits and marketing expenses" — wage inflation and competitive pressure from Home Depot/Lowes/Amazon Business in the MRO space.
5. UK Market Exit Execution
The 2025 charges for Cromwell ($186M) and Zoro UK ($10M) recognize that international expansion into mature distribution markets is hard. The lesson from the UK exit will shape Grainger's appetite for international M&A.
Summary
Grade: F. But this is the cleanest F in the screening set — only one flag (cash/debt, a capital structure choice, not a risk signal), leverage of 1.0x, goodwill at 17% of equity, M-Score clean, Z-Score at 10.7.
Grainger's story in 2025 is one of operational steadiness obscured by one-time UK exit charges. Adjusted EPS rose 1%, GAAP EPS fell 9%. The cleanest comparison — Adjusted Operating Earnings of $2,691M vs. $2,653M adjusted prior year — shows +1.4% growth. This is a low-growth environment for US MRO distribution, and the fastest-growing portion of the business (Endless Assortment at +16%/year) is lower-margin than the legacy Grainger.com channel.
The screening engine's F grade is misleading here. The F is driven entirely by the cash-to-debt ratio, which is a capital allocation choice (Grainger returns cash via buybacks and dividends rather than hoarding it) and the debt itself is 1.0x EBITDA and investment grade. If the framework distinguished "failed because of aggressive capital return" from "failed because of distress risk," Grainger would cleanly pass.
Three things to watch in 2026:
The balance sheet is clean, the franchise is real, and the business is demonstrably cash generative. GWW is structurally much safer than the F grade implies.
**Disclaimer**: This report is based on W.W. Grainger's FY2025 10-K filed with SEC EDGAR on February 19, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K (Accession 0000277135-26-000011) + Yahoo Finance
Auditor: Ernst & Young LLP / PricewaterhouseCoopers LLP referenced (Unqualified opinion, 1 critical audit matter — valuation of goodwill for the Canadian reporting unit)
Fiscal year ended: December 31, 2025