) announced dismal third-quarter 2013 results, missing the Zacks
Consensus Estimate for both earnings and revenues as its struggle
with the top line continues.
Fastenal's adjusted earnings of 40 cents per share in the
third quarter of 2013, increased 8.1% year over year. Earnings of
this national distributor of industrial/construction supplies,
however, missed the Zacks Consensus Estimate of 41 cents by a
penny. We believe that weak sales and soft margins led to the
lackluster performance in the quarter.
Fastenal reported net sales of $858.4 million, up 7.0% year
over year. Net sales once again lagged the Zacks Consensus
Estimate of $865 million as the company continues to see softness
in fasteners and non-residential construction growth.
Fastenal serves customers in the manufacturing and
non-residential construction markets. Sales were slow in both the
Struggle with Top Line Continues
The company has been witnessing a consistent decline in daily
sales growth rates for the past few quarters. The declining daily
sales rates are due to lower sales of its fasteners product line
which were being hurt by end-market slowdown and broader economic
uncertainty. Moreover, the construction as well as vending
businesses have also been soft since the past two quarters.
Fastenal's total average daily sales growth rate remained flat
with the second quarter at 5.3%. Foreign exchange dragged down
third-quarter daily sales growth rates by 0.3%.
Fastenal's daily sales growth rates came in at 2.9%, 7.2% and
5.7% for the months of July, August and September, respectively,
significantly down from the daily growth rates of 12.1%, 12.0%
and 12.9% in the corresponding prior-year months. Though August
sales recovered from a slower July, the sequential improvement
was not repeated in September. The sequential change in daily
sales for nine months from January to September also fell short
of the historical averages.
Daily sales to manufacturing customers (representing almost
50% of revenues) grew 4.7% in the third quarter, much lower than
the 14.0% growth in the prior-year quarter and 5.9% in the
preceding quarter. Daily sales growth rates to manufacturing
customers declined sharply due to lower sales of its fasteners
product line, hurt by end-market slowdown and broader economic
The company supplies two types of products to manufacturing
customers, one for industrial production and the other for
maintenance of the manufacturing business.
Sales of products for industrial production dipped
significantly, owing to a continuous decline in daily sales
growth rates of fastener products (used mainly for industrial
production) to 1.0% in the quarter from 6.0% in the prior-year
Sales of non-fastener products (used mainly for maintenance)
increased 8.9% in the third quarter of 2013, down from 18.0% in
the prior-year quarter. However, sales of these products improved
slightly from the 8.5% growth seen in the sequentially-preceding
In the non-residential construction market, daily sales to
non-residential construction customers (representing 20% to 25%
of revenues) grew 3.9% in the third quarter of 2013, down from
8.2% in the third quarter of 2012. Management blamed the
government policy uncertainty and sequestration in the U.S. for
the decline. Poor weather conditions also hurt construction
sales. However, third-quarter sales improved from 0.7% growth
recorded in the second quarter of 2013, maybe due to some
recovery being seen in the non-residential construction
Vending Machine Activity
The company has adopted FAST Solutions, an industrial vending
process that has the potential to revolutionize the industrial
distribution system and increase profitability. The company
installs vending machines that aid in controlling inventory and
administrative costs while reducing product consumption.
In the third quarter, the company installed 2,699 new
machines, down 34.0% sequentially. As of Sep 30, 2013, the
company operated 32,248 FAST Solutions vending machines. The
vending machines now account for over 33% of the company's sales.
During the quarter, the company signed 4,372 vending machine
contracts, down 18.4% sequentially. The daily sales growth to
customers using vending machines was 15.2% in the third quarter,
down from 32.9% in the prior-year quarter and 18.9% in the second
quarter of 2013.
The overall vending trends have been softer since the past two
quarters due to management's new initiative to deliberately slow
down focus on vending. Management has eased pressure on stores to
sign up vending machines as a vending contract takes about 5-6
months to generate revenues. Instead, stores are being encouraged
to focus on improving near-term sales.
Margins Were Soft
In third-quarter 2013, gross margin improved only 10 basis
points (bps) from the prior-year quarter to 51.1% and declined
110 bps sequentially. An unfavorable product mix (due to weakness
in fastener products which generate higher margins) hurt gross
margins in the quarter. Moreover, a higher headcount boosted the
operating costs for the company, thus pulling down margins.
Fastenal has taken a strategic decision to increase sales
personnel at its stores. It is adding 100-150 store personnel per
month in order to free sales managers to focus more on selling
which could drive near-term sales growth.
The company recorded operating and administrative expense of
$254.9 million, up 6.8% year over year. Operating expense ratio
stood at 29.7%, almost flat year over year, largely due to
slowing sales growth.
Tre-tax profit was 22.0% of revenues in the quarter, up only
10 bps year over year, due to gross margin softness and higher
Other Stocks to Consider
Fastenal carries a Zacks Rank #3 (Hold). Some other building
products/retail companies that are currently doing well include
Liquidators Holdings, Inc.
The Home Depot, Inc.
Lowe's Companies Inc.
). While Liquidators Holdings carries a Zacks Rank #1 (Strong
Buy), The Home Depot and Lowe's carry a Zacks Rank #2 (Buy).
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