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Morningstar | Fastenal Is Still Generating Solid Sales Growth Despite Softer End Market Demand

Since opening its first fasteners store in 1967, Fastenal has built one of the largest industrial distribution businesses in the United States. For many years, Fastenal’s growth story was driven by its store count, which now stands at approximately 2,200. While this expansive footprint is still an important component of Fastenal’s business model, other strategies--including expanding its product portfolio, its vending and inventory management services, and most recently, its on-site program--have become increasingly important growth drivers.The benefits of Fastenal’s vending, inventory management, and on-site services are twofold: Not only do these services drive incremental revenue, they also embed Fastenal in its customers’ procurement processes, which supports higher retention rates and pricing power. We believe Fastenal has a first-mover advantage in both vending and on-site services, introducing the former in 2008 and the latter in 1992 (although the on-site strategy did not become a focused strategy until the past couple of years), and we see long growth runways for both offerings. In addition to growth through its vending and on-site initiatives, Fastenal is well positioned to benefit from customer consolidation trends. In recent years, customers have been consolidating their maintenance, repair, and operations, or MRO, spending with large distributors to leverage their purchasing power and increase operational efficiency. With its national scale, broad product portfolio, and inventory management services, we believe Fastenal can capitalize on this trend and take market share from smaller and less capable distributors.Because Fastenal’s sales mix is increasingly skewing more toward large national accounts, on-site programs, and more price-competitive MRO products, the company’s gross margins are likely to come under pressure. However, the combination of higher sales volume and containment of selling, general, and administrative costs provides Fastenal the opportunity to realize strong operating leverage and expand operating margins. Management's long-term operating margin goal is 22%, or about a 200-basis-point improvement from current margins.