Fastenal to Ride on e-Commerce, End-Market Demand Hurts

Fastenal Company FAST is currently focusing on boosting customers’ engagement through virtual platforms to overcome coronavirus-related woes. Also, it has been banking on strong industrial vending business, Onsite locations and cost-saving efforts.

This apart, the company is well positioned in terms of liquidity to overcome any unforeseen situation in the near term.

However, negative customer/product mix, slower end-market activity throughout the business and supply chain constraints owing to the coronavirus outbreak have been concerns for this Zacks Rank #3 (Hold) company. Fastenal’s shares have gained 56.3% in the past six months, underperforming the industry’s 83.3% rally.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s check out the substantial factors likely to shape the company’s future performance.

Focus on E-commerce & Cost-Reduction Efforts

Fastenal has been emphasizing on virtual platforms to boost customers’ engagement. E-commerce sales grew 27% for the first quarter and 13.5% for second-quarter 2020, backed by promotion of its services/products. The growth is likely to continue, given changing customer dynamics.

Moreover, the company intends to reduce costs arising from tariffs and freight expenses. It has undertaken various cost-control measures like automating warehouses, increasing delivery efficiency through its trucking network and selling more private-level products with higher margins.

Additionally, the company has been focusing on protecting liquidity and closely managing cash flows. It ended the second quarter with $201.5 billion of cash, up from $161 million at first quarter-end. Also, it had substantially all its $700-million bank revolver available at second quarter-end.

Solid FAST Solutions a Boon

Amid the current market situation, wherein people are indulging in less human contact to avoid the virus, Fastenal’s Industrial vending business is a boon for the company. Through FAST Solutions, the company installs vending machines at the customer’s location and keeps then filled with the products they need. These machines help customers in controlling inventory and administrative costs, while reducing product consumption. Notably, the non-fastener product line has benefited significantly from its initiatives pertaining to industrial vending.

This revolutionary FAST Solutions has the potential to significantly increase its sales and profits in the future. As of Jun 30, 2020, Fastenal operated 92,615 vending machines, up 7.9% year over year.

Also, its Onsite locations — in which a mini-Fastenal shop is located in a customer’s plant — are helping it serve customers better. As of Jun 30, 2020, the company had 1,212 active sites, up 18.1% from the comparable year-ago period. The increased number of onsite locations is likely to expand Fastenal’s market share.

Top Line-Related Headwinds to Ail

Slower end-market activity and unfavorable customer/product mix are currently ailing the company, which shares space with Beacon Roofing Supply, Inc. BECN, GMS Inc. GMS and Builders FirstSource, Inc. BLDR in the same industry.

Over the past three years, customer mix has shifted toward the large-account end market, which produces low-margin gross profit but stronger operating income as it leverages its existing network of capabilities. The product mix has shifted from high-margin fastener products to lower-margin non-fastener products, which are putting pressure on its gross margin.

Also, slower end-market activity throughout the business has been a concern for the company. In August 2020, average daily sales or ADS grew just 2.5% compared with 2.6% growth registered in July and 6.3% in the year-ago period. In fact, Fastenal’s overall August sales of $465.2 million were down 2.2% year over year. (Read more: Fastenal's Average Daily Sales Up 2.5% in August)

This apart, coronavirus-induced higher shipping costs and supply chain disruptions have become other major concerns for the company. It expects these headwinds to prevail in the near term.

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