MSC Industrial Direct Q1 Earnings Call Highlights

MSC Industrial Direct (NYSE:MSM) executives highlighted continued progress on growth initiatives and stable end-market demand trends while acknowledging a seasonally weak December and lingering uncertainty around early fiscal second-quarter conditions on the company’s fiscal 2026 first-quarter earnings call.

Leadership transition and near-term priorities

Chief Executive Officer Martina McIsaac, speaking during her first week in the role, said she has spent recent months engaging with employees, suppliers, and customers and remains confident in the company’s direction. McIsaac outlined near-term priorities focused on reconnecting with MSC’s core customer base, strengthening sales execution, and improving operational decision-making.

She said MSC has spent the past year optimizing its sales organization by aligning resources with customer potential and redesigning geographic territories. At the end of the first quarter, the company began applying similar principles to its service model, which McIsaac said should improve customer experience and help further optimize costs in early fiscal second quarter.

McIsaac also pointed to leadership changes intended to streamline decision-making, including the addition of Jaida Nadi as senior vice president of sales and Kim Shacklett’s move into the role of senior vice president of customer experience.

Supplier collaboration and technology roadmap

McIsaac said MSC is working to deepen supplier partnerships, building on a supplier council created more than a year ago. She announced the company will host an inaugural “growth forum” in late February that will bring together about 1,400 customer-facing associates and supplier partners. Management described the three-day event as a data-driven working session designed to pair sellers and suppliers to build a pipeline of customer opportunities. Executives also noted the event is expected to shift some revenue from the fiscal second quarter into the third quarter.

On technology, McIsaac said the company’s CIO and IT organization are continuing to evaluate a systems roadmap and will provide recommendations when the review is complete. She also emphasized improving financial visibility through MSC’s operating system and said the company continues to prioritize hiring a permanent CFO, with Greg Clark serving as interim CFO.

Fiscal Q1 results: price-driven growth, government shutdown headwind

MSC reported fiscal first-quarter sales of about $966 million, up 4% year over year. Average daily sales also increased 4% and landed at the midpoint of the company’s outlook. Management attributed the growth primarily to price, which contributed roughly 420 basis points, while volumes declined about 30 basis points. Executives said the volume decline was largely tied to a federal government shutdown that reduced sales by about 100 basis points, with the biggest impact in the public sector.

• Core customers: Average daily sales rose about 6% year over year, which management attributed to initiatives around e-commerce, marketing, and sales optimization.
• National accounts: Average daily sales increased 3% year over year, with management noting a return to growth.
• Public sector: Average daily sales declined 5% year over year due to the government shutdown, though management said public sector sales resumed growth in December after the shutdown ended.

McIsaac said field sales activity improved again in the quarter, citing year-over-year growth in customer-location touches and a high single-digit increase in sales per rep per day. Management added that these trends were achieved with fewer sellers due to the new territory design, and said it plans to apply similar learnings outside the U.S.

Solutions growth and profitability trends

MSC said it continued expanding its solutions footprint. The installed vending base was up roughly 9% year over year, with vending daily sales also up 9% and representing 19% of total company sales. Daily sales to customers with implant programs increased 13% and represented about 20% of total company net sales. Management noted that while implant signings remained strong, net program growth moderated because the company increased its focus on financial discipline in the field. As part of that effort, MSC worked with some customers to shift from implant programs to lower-cost-to-serve models such as traditional VMI while retaining revenue.

Gross margin in the quarter was 40.7%, flat year over year and at the midpoint of guidance. Executives said gross margin and price-cost improved as the quarter progressed after MSC took pricing actions in late September and early October to address inflation-related price-cost pressure that emerged late in fiscal fourth quarter.

Reported operating margin was 7.9%, while adjusted operating margin was 8.4%, which came in at the upper end of the company’s outlook. MSC delivered GAAP EPS of $0.93 versus $0.83 a year ago, and adjusted EPS of $0.99 versus $0.86, an increase of 15%.

Cash flow, balance sheet, and Q2 outlook

MSC ended the quarter with net debt of about $491 million, which management said equates to roughly 1.2 times EBITDA. Capital expenditures were about $22 million. Free cash flow was $7.4 million, representing about 14% of net income, with management attributing the year-over-year decline to inventory investment and higher receivables and prepaid expenses. Despite the “slow start,” the company reiterated its expectation of about 90% free cash flow conversion for the fiscal year.

Management also said it amended its accounts receivable securitization facility in fiscal second quarter, increasing capacity by $50 million to $350 million, and expects the change to lower annual funding costs by more than $1 million versus alternative sources such as the revolver. MSC returned about $62 million to shareholders in fiscal first quarter through dividends and share repurchases.

For fiscal second quarter, MSC guided for average daily sales growth of 3.5% to 5.5% year over year and a sequential decline of about 4% to 6%. Management said the outlook reflects several moving pieces, including:

• About a 50 basis point headwind from the timing of the late-February supplier conference shifting some revenue into Q3.
• Weaker-than-normal December sales tied to holiday timing and customer shutdown activity; the company said December average daily sales were up about 2.5% year over year, but sales from Christmas through the end of the fiscal month were down about 20% year over year.
• A sequential benefit of roughly 50 basis points expected from public sector comparisons, assuming no repeat of the prior quarter’s government shutdown disruption.

At the midpoint of the Q2 range, management said it implies year-over-year growth of a little more than 5% in January and February. The company guided to adjusted operating margin of 7.3% to 7.9%, with gross margin expected to be about 40.8% plus or minus 20 basis points. Management said Q2 operating expenses will include costs related to the supplier conference that are not funded by supplier registration fees, including travel, representing about a 10 basis point headwind to adjusted operating margin. Executives also said headcount actions early in Q2 tied to service-model optimization are intended to help offset the impact of having two additional months of annual merit increases in Q2 versus Q1.

On pricing, management said it expects to pass through mid- to high-single-digit supplier price increases in metalworking starting in mid-January, driven in part by sharp increases in tungsten prices, which it described as exceeding 100%. McIsaac said tungsten affects carbide cutting tools, and management estimated tungsten exposure impacts about 15% of MSC’s sales. Executives said price in Q2 could be “a little north of 5%” year over year, and noted there could be additional supplier-driven inflation later in fiscal 2026.

While visibility into early January demand was limited at the time of the call, management reiterated its expectation that under a mid-single-digit growth scenario, adjusted incremental operating margins should be approximately 20% for the full fiscal year, supported by pricing, productivity initiatives such as network optimization, and continued execution on growth programs.

About MSC Industrial Direct (NYSE:MSM)

MSC Industrial Direct Co, Inc (NYSE: MSM) is a leading distributor of metalworking and maintenance, repair and operations (MRO) products serving a broad range of industrial customers across North America. The company offers an extensive portfolio of cutting tools, abrasives, measuring and inspection instruments, fasteners, safety supplies and other essential components used in manufacturing, metalworking and production environments. MSC delivers products through a multi-channel distribution network, including an extensive branch system, e-commerce platform and dedicated sales force.

In addition to its core product offerings, MSC Industrial Direct provides value-added services designed to improve productivity and reduce downtime for its customers.