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Business conditions for MSC Industrial (MSM), a distributor of metalworking and MRO products like cutting tools, measuring instruments, and fasteners, haven't improved since it reported lackluster Q2 results back in late March. As such, 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) and Applied Industrial Technologies (AIT) -- each of which are trading lower in sympathy with MSM today -- MSM's financial performance carries a little extra weight because of its exposure to the economically sensitive manufacturing industry. This connection makes MSM a good barometer for the health of the industrial economy and based on its weak Q3 results, it's evident that high interest rates, inflation, and geopolitical factors are still weighing on the macro environment.
• MSM CEO Erik Gershwind acknowledged as much, citing ongoing heavy manufacturing softness and a slower than anticipated ramp in its core customers as key causes behind the company's disappointing results. 

However, it's not only external macro-related issues that are plaguing MSM.

• Mr. Gershwind also stated that unexpected dilution from its web price realignment, combined with customer mix headwinds, drove gross margin approximately 60 bps below its expectations. During the earnings call this morning, MSM stated that the web pricing realignment was a highly complex project and that during the testing phase some pricing anomalies didn't surface, creating some negative surprises.
• Because of these web pricing setbacks, MSM is holding off on steering new customers to its website until the web improvements are settled. That's a main reason why the company lowered its FY24 ADS guidance to (4.7)%-(5.3)% from its prior outlook of 0-5%.
• While the company still expects some of these improvements to be rolled out this year, most won't be in place until early FY25. The good news, though, is that MSM is already starting to see some improvement in gross margin trends as pricing adjustments are made.
• Although the macro-related pressures are out of MSM's control, there are some actions that the company can take to mitigate the negative impact. For instance, MSM is focusing on the stronger areas of its business, including its high-touch solutions and the public sector, where budgets are starting to loosen, and its OEM fastener business.

The main takeaway is that MSM is battling a mix of macro and company-specific headwinds, setting the stage for a difficult 2H24. However, once its web improvement issues are fixed, and if the Fed begins to lower interest rates, then MSM could be poised for a turnaround in FY25.