GWW - NYSE

Greetings and welcome to the W.W. Grainger, Inc. Fourth Quarter 2025 Earnings Conference Call and Webcast. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. 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 Donald G. Macpherson, Chairman and CEO, and Deidra Cheeks 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-Ks 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, normalized sales growth reflect our exit from the U.K. Market, including the Cromwell divestiture, and the closure of

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, invested in new supply chain capacity to extend our service leadership. We did the greater 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 prioritizes the work our team does every day. Over the last several years, we have invested heavily to build market-leading 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 five strategic growth engines and fuel our ability to gain share within our high-touch solutions segment. In 2025, we made great progress across these five areas. In merchandising, we have consistently gained share through this important initiative by building a highly curated product assortment. This includes continued work across our category review process and 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 are 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. Moving to our seller coverage initiative, we continue to leverage our improved customer data to expand our 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 two geographies in 2025. This brings our total program expansion to over 300 sellers across six geographies since 2022, more than a 10% increase in our U.S.-based sales team. The collective performance to date of these geographies has been in line with expectations, and we plan to address two 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 strong usage of our new SellerInsights platform. As you may recall, this platform integrates with existing Grainger data sources to provide sellers with a one-stop-shop customer insights. In 2026, we will leverage AI in this platform to deliver actionable insights, identify new customer contacts, and strengthen leader coaching opportunities. We are just scratching the surface of our potential in this area, and we are 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 is already a critical part of our offer, we expect KeepStock to become even more valuable going forward. We are excited about the progress we have made across these five 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 can help increase productivity, enhance service, and create revenue opportunities over time. We have broad experience deploying AI and machine learning, and when underpinned by our differentiated data assets, we can create tremendous value. I have 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 to highlight how we can leverage our data assets to create solutions that add real value to our customers and to our bottom line. We have learned a great deal in the past two years about AI and feel well-positioned to accelerate these efforts moving forward. Moving to the Endless Assortment segment, we made great progress propelling both businesses forward in 2025. At

Thanks, DG. I want to echo DG'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 healthcare costs above our normal run rate and a softer top line in the high-tech solutions segment. Overall, we delivered diluted EPS for the quarter of $9.44, which was down 2.8% versus 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 three points of price inflation for this segment, showing meaningful sequential improvement as tariff costs continue 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 strong performance with contract 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 LIFO, our implied FIFO gross margin rate would have increased year over year with price cost roughly neutral on this basis. On SG&A, margins delivered in the period as payroll and higher-than-expected healthcare 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 remained 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, 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 have 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. U.S. Business. We wanted to share an update on our volume outgrowth for the High Touch Solutions segment. 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 benchmark that we use to measure MRO market volume. This inflection was misaligned with what we were seeing on the ground with our MRO customers and likely caused by shifting macroeconomic dynamics and bifurcation across industries. These dynamics are driving where tariffs are impacting demand in some industries while others are experiencing a tailwind, notably those tied to aircraft manufacturing and data center build-out. As we have 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 goods shipments, import-export dynamics, and end-user activity to formulate a comprehensive view of the MRO landscape. When comparing the two 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 market, specifically in periods of economic disruption or change. With this context in mind, if you turn to Slide 17, we have charted the historical results for both models, starting with the point at which economic inputs were first published for the multifactor model. As you can see, the two models are highly correlated, and over this twenty-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 a single-factor model or vice versa, it eventually catches up, but the duration of these dislocations is unpredictable. As you see, we have 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 is unclear to us how long this diversion will last. With this, given its comprehensive nature and the fact that we have studied each model exhaustively over the last couple of years, we are more confident in the demand signals from the multifactor model. And we will 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-tech 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 points long-term target, we are continuing to take healthy share. Marketing and merchandising remain our largest contributors to outgrowth, and on a go-forward basis, we are 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

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 a 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.

Thank you. We will now be conducting a question and answer session. Our first question today is coming from David Manthey from Baird. Your line is now live.

Hey, good morning, everyone. My first question is a 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 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?

Yeah. So thanks for the question. So, you know, as we plan, we always start planning relatively conservatively. 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. We did get a bit of a tailwind from the competitive outage in Japan that adds a little bit to that total as well. As Dee described, we're pretty confident in sort of that 7.5 number for the year. So we feel like 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 25% of order origination. Don't know if you have those offhand or we could take one.

Yeah. Sure. So, what I would say is everything direct connection to customers has become more of our share. So, actually, eDiePRO is the biggest share we have at this point. Closer to 40 at this point. GCOM is still a big part of that, and then KeepStocks growing 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.

Alright. Thanks, DG.

Thank you. The next question today is coming from Jacob Levinson from Melius Research. Your line is now live.

Hi, good morning everyone.

Good morning.

Maybe just thinking about David's question a little bit of a different way, DG, 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, I'm 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, you know, more of the rate-sensitive end markets, not necessarily aerospace or data center.

Yeah. 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, you know, it's very, very industry-specific at this point. So you can run the gamut from very, very high optimism to fairly strong pessimism as well. Overall, I think the mood is okay, but not expecting huge, huge market growth.

Okay. That's helpful. And 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 some price in there, but maybe you could speak to what's really driving that?

Yeah. 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 midsized customers, and a lot of things we do in 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.

Fair enough. Thank you, DG. I'll pass it on.

Thank you. Next question is coming from Ryan Merkel from William Blair. Your line is now live.

Hey, everyone. Thanks for the question. I wanted to start with gross margins. I guess a two-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 you put a finer point on first-quarter gross margins? I think you said down sequentially just what was the reason? Thank you.

Yes. Hi. The main headwind that we received in the quarter was really related to LIFO. So we had kind of laid out, you know, that LIFO would be a little bit more negative than what it actually came in, you know, still increase what 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 two 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. Okay. Alright. Yes. The other piece in the first quarter is related to it. You heard in prepared remarks we discussed the Grainger sales meeting. And so anytime 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 gonna happen in 2026 as well.

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

Net net neutral operating margin.

Okay. That's great. Thanks for that. 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 in the margin guide? And 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. You as you noted, The UK market exit is gonna 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, you know, Grainger sales meeting, price cost, and the LIFO tailwind that we will get mostly in the second half. Gonna contribute about 20 basis points. So when you add all that together, that's a 30 basis point difference between where we ended in 2025 to where we believe we will end in 2026.

Thank you. Our next question is coming from Christopher Glynn from Oppenheimer. Your line is now live.

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

Yeah. I think that, you know, I would point you to a couple of things. Certainly, some factors were out of our control. We have more exposure to government. The government shutdown hurt the share gain in this year. But we also, if you remember, paused some more seller ads a couple of years ago when they weren't we weren't seeing the performance we needed to see and adjusted, and now we are seeing the performance, so 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 in that front. Seeing good things at seller effectiveness. We're seeing good things in on-site performance with KeepStock. 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 force as well. So we think all that's gonna get us, get that improvement that we wanna 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 of 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 eighteen months. So it's good to see.

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

Seven point seven point five yes.

Great. Thank you.

Next question today is coming from Tommy Moll from Stephens. Your line is now live.

Good morning and thank you for taking my questions.

Good morning.

DG, 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 ads. But if we just look high level here, you had outperformance versus your target pretty meaningfully during the years 'twenty two and 'twenty three. So I would I'd characterize what those had in common as an external stress on the supply chain, just globally, where you had scale, your competitors lack scale, that 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 gonna punch above that in times of stress in the market. And in a, quote, unquote, more normalized environment, you're probably gonna 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 two years in a row. It was a small portion of that total. So I do think 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 five years of outgrowth, and we expect to be able to get to that 400 to 500 mark again. So I think that, you know, some of that is just our own execution and some of its external factors, as I mentioned before.

Okay. On that execution point, you mentioned for seller coverage, you're going to add I think you added two markets last year, add two more this year. If you look across the folks you're hiring, 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 usually add sellers hasn'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. It's I'm not sure that's the right word, but I'm 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 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 performed in the past.

Thank you. I appreciate the insight. We'll turn it back.

Thank you. Next question is coming from Chris Dankert from Loop Capital Markets. Your line is now live.

Good morning. Thanks for taking the question. 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 that reshoring is a bit of a mirage? I just maybe, DG, what do you see when you see that contraction five years running? What is where do you pulling out of that?

I think if you look over a thirty-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. So that's why we have the earnings algorithm we have gain share consistently, a little bit of price, and then managing 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 when 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 improvement there? Is there a different KPI that you measure with the digital investment and the AI investment? Just any thoughts there?

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

Yeah. Just how quickly customers can kinda get to what they need digitally online. Yeah.

Oh, yeah. Yeah. Yeah. 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 factors. And so I'd say we're super well measured in that space.

Got it. Thanks so much.

Thank you. Next question is coming from Stephen Volkmann from Jefferies. Your line is now live.

Hi, good morning. 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?

So, yes. We have essentially passed through all known tariffs and are 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, you know, cost onto customers at this point in time. Now anything in the future that is unknown, whether, you know, for additional tariffs or further rollbacks, 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 that necessarily at this point.

Okay. Great. Thank you, guys.

Thank you. Next question today is coming from Guy Drummond Hardwick from Barclays. Your line is now live.

Hi, good morning.

Good morning.

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 on the 4%. Same particular reason for that. Was that just the 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, 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's 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 is factored in that higher merchandising and marketing expense for 2026?

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

Okay. Got it. Thank you.

Thank you. Our next question today is coming from Chris Schneider from Morgan Stanley. Your line is now live.

Thank you. 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 wrapped 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? Thank you.

Yes. So generally, we've noted in the prepared remarks that our price into 2026 is north of three. 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 two and a half to three of that. All in 2026, we're north of 3% for price.

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

Thank you. I appreciate that. And then if I could follow-up on the earlier point that gross margin would be down sequentially into Q1. Obviously, different than normal seasonality. I'm not sure it's ever been down sequentially into Q1. I guess, 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. 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, you know, the full realization of the benefit from Cromwell going away. That probably not fully reflected in the Q4 gross margin. So just any color on some of the moving parts there would be helpful. Thank you.

Sure. So, again, LIFO even in 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 at rate like DG 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 percent Q4 to Q3.

Thank you. I appreciate that.

Thank you. Our next question is coming from Connor Maniglia from Bernstein. Your line is now live.

Great. Thanks for having me this morning. Just a quick one. On Slide eight, you touched on the

It's not material enough at this point to have any impact on the margins, but we have seen good early success in repeat rates and that core business customer that

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

Great. Thanks, everyone, for joining today. Really appreciate it and thanks for the questions. You'll have many opportunities 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 look forward to having a great year and look forward to seeing you out. Thanks so much.