Distribution Solutions (DSGR)

Industrial and safety product distributor Distribution Solutions (NASDAQ:DSGR) fell short of the market’s revenue expectations in Q1 CY2025, but sales rose 14.9% year on year to $478 million. Its non-GAAP profit of $0.31 per share was 12.3% below analysts’ consensus estimates.

Company Overview

Founded in 1952, Distribution Solutions (NASDAQ:DSGR) provides supply chain solutions and distributes industrial, safety, and maintenance products to various industries.

Supply chain and inventory management are themes that grew in focus after COVID wreaked havoc on the global movement of raw materials and components. Maintenance and repair distributors that boast reliable selection and quickly deliver products to customers can benefit from this theme. While e-commerce hasn’t disrupted industrial distribution as much as consumer retail, it is still a real threat, forcing investment in omnichannel capabilities to serve customers everywhere. Additionally, maintenance and repair distributors are at the whim of economic cycles that impact the capital spending and construction projects that can juice demand.

Competitors in the industrial products industry include Grainger (NYSE:GWW), Fastenal (NASDAQ:FAST), and MSC Industrial (NYSE:MSM)

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Thankfully, Distribution Solutions’s 50.3% annualized revenue growth over the last three years was incredible. Its growth beat the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Distribution Solutions’s annualized revenue growth of 17.8% over the last two years is below its three-year trend, but we still think the results suggest healthy demand.

This quarter, Distribution Solutions’s revenue grew by 14.9% year on year to $478 million but fell short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 10.2% over the next 12 months, a deceleration versus the last two years. Still, this projection is commendable and indicates the market is baking in success for its products and services.

Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Distribution Solutions’s gross margin is good compared to other industrials businesses and signals it sells differentiated products, not commodities. As you can see below, it averaged an impressive 33.6% gross margin over the last four years. That means for every $100 in revenue, roughly $33.63 was left to spend on selling, marketing, R&D, and general administrative overhead.

Distribution Solutions’s gross profit margin came in at 34.3% this quarter, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Distribution Solutions was profitable over the last four years but held back by its large cost base. Its average operating margin of 5.2% was weak for an industrials business. This result is surprising given its high gross margin as a starting point.

On the plus side, Distribution Solutions’s operating margin rose by 3.2 percentage points over the last four years, as its sales growth gave it operating leverage.

In Q1, Distribution Solutions generated an operating profit margin of 4.2%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Distribution Solutions’s EPS grew at an astounding 24.9% compounded annual growth rate over the last two years, higher than its 17.8% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand during this time.

In Q1, Distribution Solutions reported EPS at $0.31, up from $0.25 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Distribution Solutions’s full-year EPS of $1.50 to grow 15.3%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Distribution Solutions broke even from a free cash flow perspective over the last four years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, an encouraging sign is that Distribution Solutions’s margin expanded by 3.9 percentage points during that time. We have no doubt shareholders would like to continue seeing its cash conversion rise as it gives the company more optionality.

Distribution Solutions burned through $10.41 million of cash in Q1, equivalent to a negative 2.2% margin. The company’s cash burn increased meaningfully year on year while its cash conversion fell 2.9 percentage points. This relationship shows Distribution Solutions’s management team spent more cash this quarter but was less efficient at generating sales with that cash.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Distribution Solutions historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.1%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

Distribution Solutions reported $65.44 million of cash and $865.8 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $160.7 million of EBITDA over the last 12 months, we view Distribution Solutions’s 5.0× net-debt-to-EBITDA ratio as safe. We also see its $29.1 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results. Its revenue missed significantly and its EBITDA fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 8.7% to $23.81 immediately following the results.

Updated: June 23, 2025 at 11:27 PM EDT

Are you wondering whether to buy Distribution Solutions or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

There is a lot to like about Distribution Solutions. For starters, its revenue growth was exceptional over the last three years. And while its low free cash flow margins give it little breathing room, its astounding EPS growth over the last two years shows its profits are trickling down to shareholders. On top of that, Distribution Solutions’s projected EPS for the next year implies the company will continue generating shareholder value.

Distribution Solutions’s P/E ratio based on the next 12 months is 15.6x. Looking at the industrials landscape today, Distribution Solutions’s fundamentals really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $37.50 on the company (compared to the current share price of $27.07), implying they see 38.5% upside in buying Distribution Solutions in the short term.