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A Closer Look With Jack Keough - MSC Industrial Direct, Inc.

Fri, 02/08/2013 - 4:20pm
Jack Keough, Contributing Editor, Industrial Distribution

This article first appeared in the 2013 Industrial Distribution January/February issue. You can view it here.

In releasing its earnings for its first quarter of fiscal 2013, MSC Industrial Direct reported revenues of $577.5 million, an increase of six percent compared to the same period in fiscal 2012, making it a strong quarter for the giant distributor.

From Past to Present

Now is a good time to take a look at MSC, how it grew to where it is today and its outlook for the future.

MSC, one of the largest MRO distributors in the country with more than $2 billion in annual sales, has achieved remarkable success over the years, but it wasn’t that long ago when it was considered just a regional metalworking distributor.

From its humble beginnings after being formed in 1941 as Sid Tool, by Sid Jacobson, MSC has evolved into an MRO powerhouse. Jacobson started the business selling tools from the back of his car in New York and 54 years later the company started trading on the New York Stock Exchange with the ticker symbol “MSM.”

MSC has used a variety of approaches to spur that tremendous growth. In 2006, MSC made its huge acquisition of J&L Industrial Supply, launched an excellent vending machine installation program for customers, and expanded its huge “Big Book” catalog that adds thousands of new products each year. In addition, MSC greatly expanded its e-Commerce initiatives, its private labeling program, and added hundreds of new sales associates.

The company, which has been headquartered in Melville, NY for many years, will soon have a co-headquarters location in Davidson, NC. The new North Carolina building is expected to be completed this year. And separately, indicating another sign of growth, MSC will break ground on a new customer fulfillment center in Columbus, OH that will be completed in 2014.

Selected acquisitions have greatly helped the company. In addition to J&L, MSC purchased Rutland Tool in 2010 and American Tool Supply and its affiliate American Specialty Grinding Company in 2011. And last year, MSC acquired ATS Industrial Supply, a metalworking and MRO distributor with locations in Salt Lake City, UT, Phoenix, AZ and Tijuana, Mexico.

The Latest Numbers   

MSC also has indicated it may not be through with acquisitions.
“Overall I would say the M&A funnel is pretty full. We have a lot of good constructive dialogue going on and it’s still a good environment,” MSC CEO and President Erik Gershwind told financial analysts during a Q1 earnings call.     

Technology continues to be a driving force for MSC’s growth even more than just a few years ago, Gershwind noted.
Gershwind, who had been serving as president and Chief Operating Officer, became CEO of the company on Jan. 1, 2013. He is the grandson of Sid Jacobson. Gershwind succeeded David Sandler, who led the company to unprecedented growth during the mid 2000s and is now MSC’s executive vice chairman of the board of directors.

During that earnings call, Gershwind said that the fiscal cliff, a slow economy, and the uncertainty surrounding business taxes caused sales for companies such as MSC to be basically flat in December. Customers were going “hand to mouth” in buying MRO supplies, he added.  Also, sales were slow because Christmas occurred on a Tuesday, meaning many companies lost several days of selling time as many factories shut down for the entire week. Compounding that problem was, of course, Superstorm Sandy that devastated the Northeast.   
Based on those slowing signs, MSC moderated its earnings forecast but still expressed confidence about the year ahead. MSC now expects sales in 2Q to be between $563 million and $575 million.

Gershwind told analysts there are several reasons to be cautiously optimistic for growth this year. He identified MSC’s vending solutions and e-Commerce programs as reasons for optimism, as does the latest ISM report that showed manufacturing expansion in December.

Gershwind said MSC’s vending solutions installation program exceeded the company’s internal targets and this will eventually translate into revenue growth and increased market share. Company officials did point out that although installations were strong, companies with existing vending machines did not buy as much product because of the weakened economy.
MSC’s customized vending systems are located in manufacturing plants across the U.S. and the systems help customers with their inventory management as well as reducing tooling and labor costs.

In addition, its e-Commerce revenue, as a percentage of sales, has reached nearly 43 percent. MSC believes this number will only increase in the months ahead as customers use MSC’s newer, easier to use website that has better product information and better navigation capabilities.

This is remarkable when you think that MSC, at least in the minds of some industry observers, was late in adopting e-Commerce capabilities. But as company executives later explained, MSC wanted to make sure it was done right. And they seem to have succeeded.

As part of its strategic plan, during the first several months of 2012, MSC added more than 300 sales associates. But in mid-year, as the company started to see a slowdown in the economy, MSC put the brakes on hiring. Several analysts have praised MSC’s ability to quickly control costs as the economy weakened.
MSC believes it is positioned to take market share from smaller competitors if the economy does slow down because it has better financial capabilities, strong inventory, and a technological edge.

If MSC grows in this decade as it did in the last one, the future does seem bright for this MRO distributor.  

Jack Keough is contributing editor for Industrial Distribution. He can reached at john.keough@advantagemedia.com.

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