Fastenal Company’s (FAST) adjusted earnings of 44 cents per share in the second quarter of 2014 were in line with the Zacks Consensus Estimate. Earnings grew 7.3% year over year as strong top-line performance was offset by weak margins.
Fastenal reported net sales of $949.9 million in the second quarter, up 12.1% year over year as underlying markets improved, vending revamped, sales improvement efforts showed results and comparisons eased.
Net sales, however, marginally missed the Zacks Consensus Estimate of $951 million, possibly due to a slight slowdown in daily sales growth rates in June.
Overall, Top Line Growing
Fastenal’s total average daily sales growth rate in the reported quarter was 12.1%, up from 5.3% in the prior-year quarter, owing to increase in sales volume. However, foreign exchange dragged down first-quarter daily sales growth rates by 0.4%.
Daily sales growth was 10.0% in April, 13.5% in May and 12.7% in June, much higher than a respective 4.8%, 5.3% and 6.0% in the corresponding prior-year months. The sequential growth in daily sales for six months from January to June was also better than the historical average (1998–2013 period, excluding 2008 and 2009).
After struggling for several quarters, Fastenal’s top line turned around in the first quarter of 2014 and continued into the second. End-market slowdown and broader economic uncertainty were lowering fastener sales which is turn weighed down Fastenal’s top line. In order to accelerate sales growth, Fastenal took the strategic decision to increase sales personnel at the stores.
The added selling energy largely boosted sales this year. Importantly, easy comparisons from a relatively weaker 2013 also boosted sales growth rates in 2014. Moreover, vending trends have improved in both the quarters of 2014 and the construction business is showing signs of improvement.
Daily sales to manufacturing customers (representing almost 50% of revenues) grew 11.2% in the second quarter, higher than 5.9% in the prior-year quarter. Daily sales growth rates to manufacturing customers improved as fasteners as well as non-fastener sales improved in the quarter.
The daily sales growth rates of fastener products (used mainly for industrial production and accounting for over 40% of the company’s business) were 5.5% in the quarter, better than 1.9% in the prior-year quarter due to easier comparisons.
Non-fastener product sales (used mainly for maintenance) increased 17.1% in the second quarter of 2014, up from 8.5% in the prior-year quarter and 14.2% in the prior quarter. The non-fastener business improved due to the pick up in the industrial vending business.
In the non-residential construction market, daily sales to non-residential construction customers (representing 20% to 25% of revenues) grew 7.5% in the second quarter of 2014, up from 0.7% in the prior-year quarter and also 2.9% in the previous quarter due to improvement in construction trends.
Vending Trends Continue to Improve
As of Jun 30, 2014, the company operated 43,761 vending machines (irrespective of the type of machine), up 7.3% sequentially and 20.1% year over year. During the quarter, the company signed 4,137 machine contracts, up 2.8% sequentially. Daily sales growth to customers using vending machines was 20.9% in the second quarter, up from 19.7% in the first quarter and 18.9% in the prior-year quarter. The vending machines now account for 37.0% of the company’s sales, lower than 37.8% last quarter.
Vending trends have started improving after remaining soft in the past 2–3 quarters as management’s recent effort to improve the quality of signings/installs seems to be working. Even though percentage of vending customers declined sequentially in the quarter, signings and the number of customers using vending improved.
Margins Were Weak
In the first quarter, gross margin declined 140 basis points (bps) year over year to 50.8% due to an unfavorable product mix (resulted from weakness in fastener products which generate higher margins) and changes in end market mix. Moreover, gross margins declined 40 bps sequentially and also fell short of the company’s long-term guidance range of 51% to 53% as the company’s focus shifted toward improving revenues.
In fact, management warned that near term gross margins could remain at the lower end of the long-term range and maybe even below due to company’s emphasis on improving sales.
The company recorded operating and administrative expense of $276.0 million in the second quarter, up 10.1% year over year due to higher payroll, labor expenses and selling transportation costs. In order to accelerate sales growth, Fastenal took the strategic decision to increase sales personnel at its stores. Higher store headcount and field leadership as well as higher investments behind vending increased operating costs, thus pulling down margins.
Pre-tax profit was 21.8% of revenues in the quarter, down 90 bps year over year, due to weak gross margin and higher operating costs.
Store Count
Fastenal had 2,684 stores at the end of the second quarter of 2014, compared with 2,683 stores at the end of the first quarter.
Other Stocks to Consider
Fastenal carries a Zacks Rank #2 (Buy). Other stocks in the building products/ construction materials sector include Vulcan Materials Co. (VMC), United Rentals Inc. (URI) and Martin Marietta Materials Inc. (MLM). While Vulcan Materials sports a Zacks Rank #1 (Strong Buy), United Rentals and Martin Marietta have the same Zacks Rank as Fastenal.
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