MSC Industrial Supply (MSM 77.05, -9.99, -11.5%), which is a North American distributor of metalworking and maintenance, repair, and operations ("MRO") products and services, reported its fiscal third quarter results this morning and issued guidance for its fiscal fourth quarter. Neither were particularly strong, yet it is the guidance that is winning out as a driver of the stock this morning.
Briefly, MSC reported a 2.3% increase in net sales of $743.9 million, but a 3.1% decline in net income as higher interest expense cut into its bottom-line. Even so, share buyback activity acted as an offset that helped boost its diluted earnings per share by 3.8% to $1.09, which was in-line with analysts' average expectation.
Despite the increase in net sales, MSC's gross profit margin of 44.3% was nearly 70 basis points below the year-ago-period as most of its 3.8% growth in average daily sales came from customer types and products with lower gross margins. In turn, the company's operating margin of 13.7% was 20 basis points ahead of the midpoint of the company's guidance range, yet it was down 80 basis points from the same period a year ago.
Management said the environment improved through the quarter and that the momentum was sustained into June.
If the momentum of the manufacturing economy continues to improve, management expects to see the expense leverage in its business increase. Assuming price inflation returns or core customer growth improves, the expense leverage should lead to an acceleration in earnings growth and an expansion in operating margins. Even without those helpful factors, though, the company said it is still well-positioned to grow earnings.
Its fiscal four quarter outlook calls for net sales to be between $732 million and $746 million. At the midpoint, average daily sales are anticipated to increase approximately 7% compared to the same period a year ago. Diluted earnings per share, meanwhile, are forecast to be between $0.97 and $1.01.
The midpoint of the net sales guidance range is above analysts' average expectation; however, the midpoint of the EPS guidance range is below analysts' average expectation and 2.9% below last year's fiscal fourth quarter result.
Including today's loss, shares of MSM are down 16.6% year-to-date.