Graco hopes new industry-leading products for contractors help position it for growth

Graco saw a slight dip in second quarter revenue due to a slowing industrial economy, but results might have been worse had it not been for a boost to its contractor division from its new-product strategy.

A slew of breakthrough products over the past year like its QuickShot — which applies spray-foam insulation, paints, stains and other protective coatings — helped the contractor division outperform the rest of the company in the second quarter.

The division recorded 5% revenue growth, while overall sales were down 1% and missed analyst expectations.

"Strength in the contractor segment this quarter was not enough to offset declines elsewhere, resulting in overall sales performance that was below our expectations," said Graco Chief Executive Mark Sheahan in a news release.

Graco's second quarter sales were $553.2 million and net earnings $133 million, or 77 cents a share, both down 1% from the same quarter last year. Analysts expected Graco to report earnings of 76 cents a share on revenue of $563 million. Adjusted earnings increased 3% over the second quarter last year.

While the quarter did not produce results the Minneapolis-based company wanted, multiyear growth has contributed to expansion, including a new distribution center in Dayton that opened in June. And the company is not done introducing new products.

Every two to three years, Graco evaluates products and makes smaller changes and upgrades according to Dave Thompson, president of Graco's Worldwide Contractor Equipment Division.

"In five to seven years, we're going to do a complete overhaul," Thompson said in an interview. "We're going to apply brand-new technologies that really change the game of the product ... to a level that's significantly different."

What Graco's research showed was that contractor customers wanted products that spray coatings to produce less physical fatigue and to be easier to use and to service. The company also is responding to new regulations in some localities and states that demand phasing out of smaller gas-powered motors.

Thanks to a small acquisition a number of years ago, Graco has developed a high-torque, low-RPM electric motor that has proved ideal at applying coatings of various viscosities. The high-efficiency motors can deliver more power from the energy they use, giving users a quieter, more portable product with more pressure control compared to gas-powered motors. This allows for more precise application of coatings, especially thicker coatings typically used in architectural or commercial applications.

"We've had a number of painters say, 'Wow, I can finally hear my radio,'" Thompson said.

A year ago Graco introduced the QuickShot, which uses an industry-first electronic-controlled trigger that is less fatiguing, more consistent and offers more control to the user. More compact and portable than traditional spray guns, the QuickShot technology is being incorporated in most of the new product releases.

Breakthrough technologies can command premium prices, and while not all of the new Graco products have been priced premium, the Ultra QuickShot, designed for small finishing work, has been listed at $1,400 at many retailers. St. Paul-based investment adviser Mairs and Power has been a longtime holder of Graco and portfolio manager Pete Johnson notes QuickShot has been well received.

"Despite being three times more expensive than a typical handheld sprayer, reviews have been very positive and it's already a multimillion dollar product for the company," Johnson said. "The company plans on rolling out this technology across its entire sprayer portfolio this year, which should be a powerful tailwind for the company over the next few years."

Unsolicited YouTube reviews from professional painters, artists and muralists from across the U.S., the United Kingdom and Australia have raved about the Ultra QuickShot, saying they consider it an investment in their business.

In July, Graco introduced three new products that fit their new product breakthrough strategy: E-Mix XT, a variable mix sprayer that automatically adjusts the ratios of two component finishes; Ultra XT and Mark XT Airless Sprayers, commercial units that utilize the Graco's Xtreme Torque electric motors; and TrueCoat 360 Cordless Connect, a product aimed at homeowners and do-it-yourselfers that turns a cordless drill into an airless paint or stain sprayer. With Cordless Connect, Graco was able to produce a smaller overall piece of equipment and the homeowner gains another use for their cordless product.

On the second quarter earnings call on Thursday, Sheahan said that there would be even more new product introductions in the second half of the year.

Graco's new products are starting to move through its 500,000-square-foot distribution center in Dayton that opened in June. The facility uses a number of automations to improve how products are picked, packed and shipped.

There's room at the distribution center for another 200,000-square-foot expansion.

"Our new worldwide distribution center, equipped with cutting-edge automation technology, not only accelerates order fulfillment with unmatched reliability but also embodies our commitment to future growth while prioritizing employee safety and quality assurance," said Angie Wordell, executive vice president of operations, in a news release.

Five years ago, Wordell and Sheahan found and purchased 100 acres in Dayton. Besides the new distribution center there, the company also opened another 500,000-square-foot manufacturing building for its process division. There's room for additional projects on the acreage as well.

"We are positioned for future growth," Wordell said at the grand opening of the distribution center.