• Revenue: Fiscal second-quarter sales of $892 million, a decline of 4.7% year over year.
• Average Daily Sales: Declined 4.7% year over year; sequential decline of 5.5%.
• Gross Margin: 41%, a decline of 50 basis points year over year.
• Operating Margin: Reported operating margin of 7%; adjusted operating margin of 7.1%, a decline of 340 basis points year over year.
• Net Income: GAAP earnings per share of $0.70 compared to $1.10 in the prior-year quarter; adjusted earnings per share of $0.72 compared to $1.18 in the prior year.
• Public Sector Growth: 13.2% improvement year over year.
• National Accounts: Declined 5.4% year over year.
• Core and Other Customers: Declined 6.8% year over year.
• Vending Sales: Average daily sales up 1% year over year, representing 18% of total company net sales.
• In-Plant Program Sales: Grew 1% year over year, representing approximately 18% of total company net sales.
• Cash Flow Conversion: Operating cash flow conversion of 139% in the quarter.
• Free Cash Flow Conversion: Approximately 63% in the fiscal second quarter and 125% fiscal year-to-date.
• Capital Expenditures: Increased approximately $4 million year over year to $30 million.
• Share Repurchase: Approximately 158,000 shares repurchased during the quarter.
• Capital Return to Shareholders: Approximately $60 million returned in fiscal 2Q and $125 million year-to-date.
• Net Debt: Approximately $498 million, representing roughly 1.2 times EBITDA.

• Warning! GuruFocus has detected 5 Warning Signs with CAG.

Release Date: April 03, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• MSC Industrial Direct Co Inc (NYSE:MSM) reported improved trends in January and February, outperforming historical sequential averages.
• The company maintained momentum in its high-touch solutions, with a 24% increase in In-Plant programs and a 9% increase in installed Vending machines year-over-year.
• Website upgrades have been completed, improving product discovery, streamlining the buying journey, and increasing personalization, which has led to positive early indicators such as increased website traffic and new customer acquisition.
• The company has a robust made-in-USA product offering, which is expected to differentiate MSC in the marketplace amid tariff uncertainties.
• MSC Industrial Direct Co Inc (NYSE:MSM) is on track with its network optimization initiatives, aiming for $10 million to $15 million in annualized savings by fiscal year 2026.

Negative Points

• Average daily sales declined 4.7% year-over-year, reflecting a soft demand environment.
• Gross margin declined by 50 basis points year-over-year due to higher-priced inventories, customer mix, and acquisition headwinds.
• Operating margin decreased significantly, with a reported operating margin of 7% compared to 9.7% in the prior year.
• The macro environment remains uncertain, with hesitancy among customers due to tariff uncertainty, potential inflation, and high interest rates.
• E-commerce sales were down 4% in the quarter, with some movement in e-commerce being depressed at the end of December and beginning of January.

Q & A Highlights

Q: Can you provide more details on the top-line guidance and expectations for the back half of the year? A: Kristen Actis-Grande, CFO, explained that the guidance assumes some softening in end markets at the low end. The company is cautious about the end markets but is focused on delivering share gain initiatives. They are not assuming significant further erosion and expect to see improvements in the fourth quarter based on normal seasonality.

Q: What are the moving pieces for margins in the back half of the year? A: Kristen Actis-Grande, CFO, noted that the main driver in operating expenses will be variable expenses. The company expects an 8% to 10% variable expense associated with top-line changes, excluding tariffs. They are not giving a specific number for Q4 but are focused on managing expenses effectively.

Q: Can you provide more detail on the price increases announced in late March? A: Kristen Actis-Grande, CFO, stated that the price increase was small, covering items where MSC is the importer of record, primarily from China. The increase is about 0.5% of the top line, and they do not expect to see much of it in the third quarter. The situation is fluid, and they are monitoring supplier communications for further cost and timing information.

Q: How are the web enhancements and recent marketing initiatives progressing? A: Erik Gershwind, CEO, mentioned that progress is on track, with no areas behind schedule. The company is seeing positive momentum in new customer acquisition and website KPIs. They have a solid foundation in place for web upgrades and marketing efforts, which are expected to drive core customer growth.

Q: Are you seeing any prebuy activity from customers trying to get ahead of tariff announcements? A: Erik Gershwind, CEO, stated that they have not seen evidence of outsized prebuying to date, including in March. The customer spend is fragmented across many SKUs, making it challenging to detect significant prebuying activity.

Q: Can you discuss the impact of the shift towards Vending and In-Plant programs on margins? A: Kristen Actis-Grande, CFO, explained that National Accounts participating in these programs tend to have lower gross margins, but mature programs benefit operating margins. Core customer growth, which has higher gross margins, is expected to be accretive to operating margins as initiatives come online.

Q: How are you thinking about price-cost dynamics in an inflationary period? A: Erik Gershwind, CEO, believes that early stages of an inflation cycle are positive for distributors. MSC expects to pass pricing along and will leverage their made-in-USA product offerings and productivity tools to support customers. The situation is fluid, but they expect to be price-cost positive.

Q: Can you provide more details on the types of products imported from China and the impact of tariffs? A: Kristen Actis-Grande, CFO, clarified that less than 5% of COGS is where MSC is the importer of record from China. The products are a broad spectrum, more weighted towards MRO than metalworking. The company is working with suppliers to understand the impact of tariffs and adjust pricing accordingly.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.