EUR 850.00 For Business Accounts Only

Morningstar | Fastenal Reports Solid 2Q Sales Growth Despite Slower End Markets, but Margins Slump on Higher Costs

Fastenal's stock sold off on July 11 after the wide-moat industrial distributor reported second-quarter results that came up short of consensus estimates. While sales increased 8% year over year to $1.37 billion, about 1% shy of consensus, second-quarter sales growth marked the slowest year-over-year growth since the first quarter of 2017 and decelerated from the over 12% daily sales growth reported last quarter. Still, Fastenal's 8% sales growth was significantly better than the 2% organic sales growth fellow industrial distributor MSC Industrial Supply reported the previous day, which tells us that Fastenal's growth strategy is still performing well.

The second quarter proved to be especially challenging for the firm's gross profit margin, which contracted 180 basis points year over year to 46.9%. CEO Dan Florness did not mince words during the earnings call, saying "we did not execute on gross margin." Weaker growth among higher-margin non-national account customers and a widening price/cost deficit were to blame for Fastenal's lower gross margin. Management is raising prices to help mitigate the issue, and CFO Holden Lewis said that third-quarter gross margin could come in above 47%.

While the firm was able to leverage its operating and administrative expenses line item (26.8% of sales compared with 27.5% during the year-ago quarter), it wasn't enough to offset the gross margin decline, and the firm's operating margin contracted 110 basis points to 20.1%. Fastenal's $0.36 second-quarter EPS was $0.01 better than last year's adjusted number but missed consensus by a penny.

Our growth outlook for Fastenal has grown incrementally more cautious. As such, we cut our five-year compound annual sales growth rate 100 basis points to about 8%, which caused our fair value estimate to decline 3% to $30 per share. However, over the next five years, we still expect Fastenal to report the strongest sales growth among the industrial distributors we cover.

Our above-average industry growth projections for Fastenal are based on our belief that the firm's vending and on-site initiatives will continue to be successful endeavors and help it gain market share. Fastenal's count of installed vending machines and on-site locations remained on a growth trajectory during the second quarter.

The company signed 5,439 vending machines and ended the quarter with 85,871 installed, up 13% year over year and up 3% sequentially. Still, Fastenal will need to pick up the pace of vending signings over the rest of 2019 to achieve management's goal of 23,000 to 25,000 signings this year (current pace is approximately 22,000 units).

Fastenal signed 94 on-site contracts and ended the quarter with 1,026 active on-site locations, up 35% year over year and up almost 9% higher sequentially. If Fastenal can continue this pace, the firm will achieve its full-year goal of signing 375 to 400 new on-site locations (current pace is 398 locations).

During the second quarter, daily sales of fasteners grew 6% while nonfastener products grew 10%. Daily sales within manufacturing end markets were up 9% and construction-related daily sales were up 7%.