Market Overview

MSC Industrial Direct Report Inline Earnings on Higher Revenues

Industrial marketer and distributor MSC Industrial Direct (NYSE: MSM) reported results for its second quarter of fiscal 2012 operations on Wednesday.

The company said its revenues for the quarter increased to $563 million, up 16.5 percent from last year's quarter and 1.5 percent over consensus estimates. The company also beat its own guidance going into the quarter, which had been between $548 to $560 million.

The company has executed on its strategy to take advantage of the need for efficiencies across its client companies. With much of the industry still fragmented and with multiple channels of distributions, the company has sought to consolidate both the supply and demand of an industry that is characterized by inefficiencies in product procurement.

In addition to creating a solid e-commerce presence and technology, the company has been active in selective acquisitions, such as Rutland Tool & Supply and American Tool Supply in 2011, both of which already accretive to earnings. As such, the company now offers upward of 600,000 products that are fulfilled accross five centers in the US (four) and the UK (one) and distributed through 105 branch offices in 50 states.

David Sandler, Chief Executive Officer, said, "There is no doubt that the industrial market place is now rewarding the narrowing field of distributors who are capable of consolidating customers' spend across multiple locations, and providing the technology and technical expertise required to improve productivity and reduce supply chain costs."

Earnings per diluted shares in the period met consensus estimates at $0.95 a share and compared favorably to $0.78 a year ago. EPS upside came on net income that, at $60.1 million, was nearly 21 percent up from second quarter of last fiscal year. Although the company's cost of goods sold increased at a slightly higher rate from revenues - possibly due to increased material costs from manufacturers - they were partially offset by operating expenses that shrunk as a percentage of revenue (28.9 percent of net sales vs 30.2 last year).

Erik Gershwind, President and Chief Operating Officer, stated, "Our gross margins remain strong despite near-term headwinds from our growth initiatives, including our recent acquisitions. However, we expect those headwinds to abate over time as the acquisitions mature and our vending program drives broader relationships with those customers. At the same time, we are maintaining highly efficient operating levels and record productivity as evidenced by the leverage within our SG&A."

MSM closed at $84.27 on Tuesday, and has opened down $2.04 or 2,34 percent. Investors may be reacting briefly to the earnings not fully tracking revenue growth.

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