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MSC Industrial (MSM) is trading slightly lower following its Q3 (May) earnings report this morning. This distributor of metalworking and MRO products reported in-line EPS. Revenue fell 7.1% yr/yr to $979.4 mln, which was also in-line. MSM is a company that Briefing.com keeps an eye on because it provides a glimpse into the industrial economy. Roughly 45% of its sales are metalworking products, and about 70% of its business is sold into manufacturing environments, both light and heavy.

• The company had just provided downside guidance on June 13, so these results were in-line with that guidance. While MSM does provide guidance mid-quarter sometimes, it tends not to guide for EPS/revs when it reports earnings. It does provide some guidance on select metrics. For FY24, MSM lowered its ADS (average daily sales) guidance to (4.7)-(4.3)% from +0-5% and it cut its adjusted operating margin outlook to 10.5-10.7% from 12.0-12.8%.
• ADS is a key metric for MSM, and it declined -7.1% in Q3, driven by non-repeating Public Sector orders in the prior year and softness in manufacturing verticals where MSM has heavy exposure. This ADS decline was an acceleration from -2.7% in Q2 (Feb), but MSM did see sequential improvement. MSM began the second half of its fiscal year with unexpected gross margin pressure following the full rollout of its web price realignment and a slower than expected recovery in ADS, particularly within its Core customer base.
• The company has responded with swift corrective actions to improve gross margins. Part of this was accelerating the rollout of its web enhancements. The good news is that MSM says the corrective actions it took during May are working. This has resulted in gross margin improvement in June vs Q3 lows in April and early May. With these issues resolved, its web price realignment initiative is now performing as planned.
• On the call, MSM was asked when heavy manufacturing might see a bottom. The company said that softness is more acute in core metalworking-related end markets, which includes machinery, equipment, metal fabrication. Also, visibility in the business is generally pretty limited because it is such a short-cycle business. That is also probably why MSM does not guide regularly.

As we suspected, the Q3 results were in-line with the recent guidance, so not a big story there. Investors were likely focusing more on commentary for Q4 (Aug) and perhaps FY25. We did not get specific guidance, but it does sound like its end markets will remain weak in the near term. What would really help would be the Fed lowering rates, which would give its customers more confidence.

On the positive side, it sounds like the online issues are subsiding, which could help restore margins going forward. Also, MSM still feels really good about where it's positioned with North American manufacturing, including macro issues like reshoring trends and the strengthening North American manufacturing footprint. But in the near term, there is more softness and limited visibility. Overall, this report does make us more cautious on industrial/manufacturing names heading into earnings season in a few weeks.