MSC Industrial Supply (MSM, Financial) saw its shares drop by 4% after reporting Q2 earnings. The company, a distributor of metalworking and MRO products, exceeded EPS expectations but faced a 4.7% year-over-year revenue decline to $891.7 million, falling short of forecasts.

• Average Daily Sales (ADS): A crucial metric for MSM, ADS decreased by 4.7%, aligning with the lower end of its -5% to -3% guidance. Despite soft demand, MSM noted improved performance in January and February and projects Q3 ADS growth from -2% to flat.
• Macro Environment: MSM highlighted ongoing contraction in Industrial Production across most markets, affecting performance. However, customer sentiment is improving, as evidenced by Manufacturing Business Index (MBI) readings around 50 recently.
• Market Hesitancy: Customers are cautious about future production due to tariff uncertainties, potential inflation, and high interest rates. MSM believes it is well-positioned to manage these challenges.
• Tariff Impact: MSM's direct cost of goods sold exposure to China is about 10%, with minimal exposure in Mexico and Canada. The company has a strategy to manage tariffs, including purchasing, pricing, and productivity tools for customers.
• Strategic Moves: MSM leveraged its strong balance sheet to accelerate purchases of high-return products before tariffs. It implemented selective tariff-related price increases in March and continues to evaluate pricing strategies. Additionally, MSM is promoting its made-in-USA products more prominently online.

Overall, MSM experienced a mixed quarter with soft demand and cautious customers. However, it anticipates sequential improvement in ADS for Q3. While tariff exposure exists, it appears manageable. Despite mixed results, MSM is poised to benefit from long-term macroeconomic trends like reshoring. The stock's decline today is likely due to revenue shortfall and tariff policy concerns.