Fastenal Company's ( FAST ) adjusted earnings of 45 cents per share in the third quarter of 2014 were in line with the Zacks Consensus Estimate. Earnings grew 12.5% year over year as strong top-line performance was offset by weak gross margins.
Based in Winona, MN, Fastenal reported net sales of $980.8 million in the third quarter, surpassing the Zacks Consensus Estimate of $979 million by 0.2%. Net sales were up 14.3% year over year, owing to higher sales volume. Net sales were driven by higher prices of non-fastener products, partially offset by lower prices of fastener products.
Fastenal's total average daily sales growth rate in the reported quarter was 14.3%, up from 5.3% in the prior-year quarter, owing to increase in sales volume. However, foreign exchange dragged third-quarter daily sales growth rate by 0.3%.
Daily sales growth was 14.7% in July, 15.0% in August and 12.9% in September, much higher than a respective 2.9%, 7.2% and 5.7% in the corresponding prior-year months.
After struggling for several quarters, Fastenal's top line turned around in the first quarter of 2014 and continued into the second and the third quarters. End-market slowdown and broader economic uncertainty were lowering fastener sales which, in 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 which largely aided sales this year. Importantly, easy comparisons from a relatively weaker 2013 also boosted sales growth rates in 2014. Moreover, vending trends have improved in all the three quarters of 2014 and the construction business is showing signs of improvement.
Daily sales to manufacturing customers (representing almost 50% of revenues) grew 13.7% in the third quarter, higher than 4.7% 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 9.9% in the quarter, better than 1.0% in the prior-year quarter due to easier comparisons.
Sales to customers engaged in light and medium-duty manufacturing are improving. The heavy manufacturing business (approximately one-fifth of the company's business) which suffered in 2013, consistently improved through the past three quarters of 2014.
Non-fastener product sales (used mainly for maintenance) increased 17.6% in the third quarter of 2014, up from 8.9% in the prior-year quarter and 17.1% in the last quarter. The non-fastener business picked up due to improvement 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 9.3% in the third quarter of 2014, up from 3.9% in the prior-year quarter and 7.5% in the previous quarter due to improvement in construction trends.
Vending Trends Continue to Improve
As of Sep 30, 2014, the company operated 45,596 vending machines (irrespective of the type of machine), up 4.2% sequentially and 16.4% year over year. During the quarter, the company signed 4,072 machine contracts, down 1.6% sequentially. Daily sales growth to customers using vending machines was 21.9% in the third quarter, up from 20.9% in the second quarter and 15.2% in the prior-year quarter. The vending machines now account for 37.8% of the company's sales, higher than 37.0% last quarter.
Vending trends have been improving through 2014 after remaining soft in 2013 as management's recent effort to improve the quality of signings/installs seems to be working.
In the third quarter, gross margin declined 90 basis points (bps) year over year to 50.8% due to an unfavorable product mix (lower sales in higher margin fastener products) and focus on improving average store sales. Gross margins remained flat sequentially and missed the company's long-term guidance range 51%-53% as its focus shifted toward improving revenues.
Management warned that near-term gross margins could remain at the lower end of the long-term range or even below, due to the company's emphasis on improving sales.
Fastenal expects to open 25-30 stores in total in 2014 at a rate of 1%, compared to the prior expectation of 30-40 stores at a rate of approximately 1-2%.
The company apprehends gross profit to be soft in the upcoming forth quarter on expectations of lower sales owing to the upcoming holiday season and the prevailing weakness in the construction business.
Fastenal carries a Zacks Rank #2 (Buy).
Investors interested in the same and related sector could also consider stocks like Armstrong World Industries, Inc. ( AWI ), The Home Depot, Inc. ( HD ) and Lowe's Companies Inc. ( LOW ), all of which have a similar Zacks Rank #2.
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