MSC Posts Choppy 1Q as Manufacturing Sales Turn Negative - Modern Distribution Management

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MSC Posts Choppy 1Q as Manufacturing Sales Turn Negative

The figures signalled a bumpy period for fellow metalworking and MRO supplies distributors.

As the first publicly traded industrial distributor typically to report its financial results each quarterly earnings season, MSC Industrial Supply’s latest results signal a bumpy period ahead for the sector.

For its 2024 first quarter that spanned Sept. 3, 2023 to Dec. 3, 2023, the metalworking and MRO supplies distributor posted net sales of $954 million — down 0.4% year-over-year (YoY). That YoY rate trailed 4Q23’s 1.3% growth and 3Q23’s 10%, reflecting a considerable slowdown in industrial demand.

Sales Breakdown

That slowdown was choppy for MSC throughout the quarter and into its 2Q24, with average daily sales growth moving from 1.3% growth in September, to -1.7% in October, -1.2% in November and -2.5% in December (preliminary). On a sequential basis, sales growth moved from -7.6% in September, to -2.4% in October, to +0.1% in November and -11.9% in December (preliminary).

Nonetheless, MSC’s 1Q sales decline outperformed the U.S. Industrial Production Index by 10 basis points.

MSC’s -0.4% 1Q24 YoY sales decline was comprised of a -3.1% impact from volume; +1.6% impact from pricing; +0.8% impact from acquisitions; and +0.3% impact from foreign exchange.

By end market in 1Q24, MSC saw a 3.7% YoY decline in average daily sales from manufacturing customers, compared to growth of 4.1%, 5.8% and 10.0% in the previous three quarters. Meanwhile, 1Q24 average daily sales growth to non-manufacturing customers was 7.0% YoY, likewise down from 21.3% and 25.3% in the previous two quarters.

MSC saw average daily sales growth for national account customers grow 4.0% YoY in 1Q24, down from 6.4%, 8.1% and 15.9% in the previous three quarters, respectively. Public sector customers grew 9.3% YoY in 1Q24, down from 61.0% and 81.1% in the previous two quarters. Core and other customers declined 4.9% in 1Q24, following growth of 3.3% and 5.2% in the previous two quarters. 

“Though sales fell short of our expectations, I am encouraged by our strong start in gross margin performance, which stems from the operating improvements we have implemented over the last few quarters,” MSC CFO Kristen Actis-Grande said in the company’s 1Q24 fiscal report.

Profit & Margins

In 1Q24, MSC had a gross margin of 41.2%, down 30 bps YoY and sequentially up 70 bps from 4Q23. The company said the YoY decline was mainly driven by price/cost headwinds as expected with higher product costs, partially offset by supplier rebates and other cost of goods sold adjustments.

MSC had a 1Q24 operating profit of $101.6 million on 10.6% margin, down from the $116 million and 12.1% margin of a year earlier. The company said the yearly declines were mainly driven by lower gross margins and volumes, as well as higher costs from investments and payroll.

MSC reported a 1Q24 net profit of $69.4 million, down from the $81.3 million of a year earlier and $88 million in 4Q23.

MSC said it reduced its net debt by said the $512.7 million in net debt it had at the end of the 1Q24 was down $241 million YoY, which improved its net debt to EBITDA from 1.33x in 1Q23 to 0.94x in that same span.

Full-Year Outlook

MSC maintained its the full-year outlook it provided in its 4Q23 report, forecasting average daily sales growth of 0%-5% for fiscal 2024 vs. 2023, along with adjusted operating margin of 12.0% to 12.8%. MSC said the sales outlook assumed 160 bps headwind from non-repeating public sector sales and that market headwinds related to the fall 2023 UAW strike alleviate in early fiscal 2Q24, which spans Dec. 4, 2023 to March 2, 2024.

“Looking ahead, despite a slower start to the fiscal year, I am encouraged as we continue building our market position, introducing strategic investments centered on reaccelerating our core customer base and implementing operational initiatives to drive productivity and expand margins,” MSC President and CEO said. “Together, this positions us to achieve our annual revenue growth and adjusted operating margin ranges in fiscal 2024.”

eCommerce & Headcount Update

In 1Q24, 63.3% of MSC’s total sales came via eCommerce (including website, EDI, VMI, vending and more), up considerably from 60.6% in 4Q23 and 61.9% in 1Q23.

MSC ended its fiscal 1Q24 with a total headcount of 7,408, up 4.5% year-over-year in what has been a steady incremental sequential increase. Recent headcount increases include 90 associates from the company’s 2Q acquisitions of Buckeye Industrial Supply and Tru-Edge Grinding, and 189 associates from its 4Q22 acquisitions of Engman-Taylor and Tower Fasteners. MSC ended 1Q24 with 2,619 field sales associates — a 7.1% increase from two years earlier.

Other Recent Notes from MSC

On Jan. 2, cutting tool product data platform MachiningCloud said it had reached a partnership with MSC that enables MachingCloud users to directly purchase tooling from MSC within the MachiningCloud application.

MSC released its 2023 ESG Report in mid-December, which highlighted the company’s commitments and impacts across pillars of waste reduction, climate change, ethical supply chain stewardship, and people & communities.

In early October, MSC announced that its shareholders approved a previously announced reclassification of the company’s equity structure, including the elimination of the company’s Class B Common Stock held by the Jacobson/Gershwind family and entities affiliated with the family.

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