MSC Industrial Direct Delivers Disappointing Results, More Upbeat Forecast

must have left investors with mixed feelings after its first-quarter results. In a nutshell, the earnings and second-quarter guidance were below analyst estimates, but the commentary around the trading environment was more positive than it has been for a while. Time to take a closer look.

A brief summary:

First-quarter revenue of $731.1 million versus analyst estimates of $732.9 million
First-quarter adjusted EPS of $0.95 versusanalyst estimates of $0.98
Gross margin of 45.2% versusinternal estimates of 45.1%-45.5%
Second-quarter revenue guidance of $717 million-$729 million versusanalyst estimates of $721.2 million
Second-quarter EPS guidance of $0.84-$0.88 versusanalyst estimates of $0.92

Revenue and guidance came in lower than investment analysts had predicted, and second-quarter EPS guidance is shy of analyst expectations as well. However, the midpoint of second-quarter revenue guidance is above the $721.2 million forecast by Wall Street. So, revenue OK, but earnings not as strong as expected. Let's look at what's going on with margin.

There is little doubt that earnings and guidance were disappointing, but management indicated that some better days could be around the corner. For example, they spoke of "a more optimistic outlook from customers" and highlighted the stabilizing of gross margins as a positive factor. Indeed, gross margin decline has been a significant issue for MSC recently. Note that the midpoint of guidance for the second quarter implies sequentially flat gross margin.

Source: MSC Industrial Direct presentations.

As readers learnedfrom the last set of results, one of the issueswith MSC'sgross margin performancehas beenthat growth from its large customers has been greater than from its smaller customers. This tends to be a negative, because gross margin tends to be higher for larger customers. Unfortunately, that trend appears to have continued in the first quarter.

For example, first-quarter revenue grew by $52.6 million from the same period last year, with the split in the growth contribution as follows:

Source: MSC Industrial Direct presentations.

Moreover, President and Chief Executive Officer Erik Gershwind stated that national and government accounts "continued their strong momentum" by posting double-digit growth rates.Going forward, the hope is that this will trickle down into increased growth at its smaller accounts.

As regular readers already know, the industrial equipment wholesalers are a good barometer of the industrial economy. Unfortunately, the latest set of manufacturing sales figures from MSC indicate a slowing of growth in its first quarter. Interestingly, its nonmanufacturing sales growth is accelerating strongly. For reference, the company generated 70% of its sales from manufacturing customers in the first quarter.

Source: MSC Industrial Direct presentations.

Moreover, on the earnings call, management spoke of an environment of moderate -- albeit "slightly improved" -- growth and soft pricing. With that said, Gershwind also expressed confidence in the outlook for the second half of 2015.

All told, the results were disappointing, but the commentary on customers was a bit more positive from management -- although, in management's own words, its margin mix remains pressured andthe pricing environment is still soft. However, if the growth from its large accounts starts to be replicated in its smaller accounts, and its customers transmit their positive sentiments into purchasing decisions, then conditions could get better in the second half.

The article MSC Industrial Direct Delivers Disappointing Results, More Upbeat Forecast originally appeared on Fool.com.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends and owns shares of MSC Industrial Direct. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.