MSC Earnings: Public Sector Growth Will Be a Tailwind to Fiscal 2023 Sales

The market reacted negatively to MSC’s fiscal third-quarter earnings (shares down over 2% in intraday trading), but we remain encouraged by MSC’s resilience in a moderating economic environment. We think investors were focused on the near-term gross margin pressures. The key callouts here are mix headwinds from the recent large public sector contract win, recent small acquisitions, and price/cost dynamics. Management is now expecting annual gross margin to be down between 100-120 basis points compared with fiscal 2022 (compared with a 40-70 basis point contraction previously). It’s important to keep in mind that this new win will increase cash flow and set the company up for more share gains in the future.