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MSC Industrial Supply (MSM -4%) is trading lower following its Q2 (Feb) earnings report this morning. This distributor of metalworking and MRO products reported a decent EPS beat. However, revenue fell 4.7% yr/yr to $891.7 mln, which was light of expectations. MSM is a company that Briefing.com keeps an eye on because it provides a glimpse into the industrial economy.

• ADS (average daily sales) is a key metric for MSM. It declined -4.7%, which was at the lower end of its -5% to -3% prior guidance range. However, MSM was encouraged by January and February exceeding historical month-over-month trends. MSM concedes that the demand environment remains soft, but MSM is improving execution and returning the company to growth. MSM guided to Q3 (May) ADS growth of -2% to flat.
• Switching to the macro environment, MSM said that IP (Industrial Production) readings across most end markets continue to contract and weigh on MSM's performance. However, customer sentiment and future outlook have been improving as is evidenced by recent MBI readings, which have hovered around 50 for the past couple of months.
• The near-term remains choppy. MSM says it is seeing hesitancy and caution among its customer base around future production levels due to tariff uncertainty, potentially looming inflation and sustained high interest rates. MSM feels well-positioned to navigate this uncertain environment for a number of reasons.
• MSM also addressed tariffs on the call. The company noted that its direct COGS exposure to China is approximately 10%, and it has low-single digit exposure in Mexico and Canada. While the tariff situation remains fluid, MSM is confident that it has a playbook in place which covers all aspects including purchasing, pricing, assortment management and productivity tools for customers.
• Importantly, MSM took advantage of its strong balance sheet by accelerating purchases ahead of tariffs on high return products during the quarter. On pricing, MSM implemented select tariff-related price increases in late March and will continually evaluate additional moves as warranted. MSM also has a good amount of made in the USA product offerings, which are being more prominently marketed on its website.

Overall, this was a mixed quarter for MSM. Demand remains soft as customers remain cautious. However, a bright spot is that ADS is expected to improve sequentially in Q3. Also, while MSM has exposure to tariffs, it sounds pretty manageable. Despite the mixed results, MSM should benefit from long term macro drivers, like reshoring. Finally, the stock action today looks to be fueled by both the top line miss and concerns about the tariff policy.