Business conditions for MSC Industrial (MSM, Financial), a distributor of metalworking and MRO products, have not improved since its lackluster Q2 results in late March. The company issued downside preliminary Q3 results, missing EPS and revenue expectations, and lowered its FY24 average daily sales (ADS) and adjusted operating margin guidance.
- Similar to competitors Grainger (GWW, Financial) and Applied Industrial Technologies (AIT, Financial), MSM's financial performance is heavily influenced by its exposure to the economically sensitive manufacturing industry. This connection makes MSM a good indicator of the industrial economy's health. The weak Q3 results suggest that high interest rates, inflation, and geopolitical factors continue to impact the macro environment.
- MSM CEO Erik Gershwind highlighted ongoing heavy manufacturing softness and a slower than anticipated ramp in its core customers as key reasons for the disappointing results.
However, MSM is also facing internal challenges.
- Mr. Gershwind mentioned that unexpected dilution from its web price realignment and customer mix headwinds drove gross margin approximately 60 bps below expectations. During the earnings call, MSM noted that the web pricing realignment was a complex project, and some pricing anomalies emerged during testing, causing negative surprises.
- Due to these web pricing setbacks, MSM is delaying directing new customers to its website until the improvements are finalized. This is a primary reason for lowering its FY24 ADS guidance to (4.7)%-(5.3)% from the previous outlook of 0-5%.
- While some improvements are expected this year, most won't be in place until early FY25. However, MSM is already seeing some improvement in gross margin trends as pricing adjustments are made.
- Despite macro pressures being beyond MSM's control, the company is taking steps to mitigate the negative impact. MSM is focusing on stronger areas of its business, including high-touch solutions, the public sector, where budgets are loosening, and its OEM fastener business.
The main takeaway is that MSM is facing a mix of macro and company-specific headwinds, setting the stage for a challenging 2H24. However, once web improvement issues are resolved and if the Fed lowers interest rates, MSM could be positioned for a turnaround in FY25.
