Jack Keough: Fastenal Positioning Itself For 2015

In releasing its third quarter numbers, giant MRO distributor Fastenal offered a number of signs that it is positioning itself well for a good 2015.

Fastenal says its vending machine business has shown “very steady progress,” its fastener business grew 10 percent, stores opened for five years or more have experienced a 10 percent growth for five consecutive months, and an increase in salespeople had led to more “selling energy” for the company.

“The fact that we have right-sized, we have corrected the headcount in our store and so we’re positioned really well going into 2015,” Fastenal CFO Dan Florness said in an earnings call with financial analysts. “Our trends year-to-date, our daily gains in overall business, in the fastener and non-fastener business are quite strong as we approach 2015.”

The number of additional employees has adversely affected the company’s gross margins-at least in the short term. Those margins and the company’s expectations that sales might be slower in the fourth quarter for some of its end user businesses — including construction — caused the stock to drop sharply after the earnings release. And although the fastener business did increase, it was still lower compared to the company’s overall growth.

But the company sees many positive signs.

In addition to the company’s U.S. and Canadian business, international business in Europe and Asia grew 50 percent in the third quarter compared to the same quarter last year.

CEO Will Oberton says that vendor machine signings have been steady all year but the company was especially pleased with the growth in sales from customers that already have machines installed. Sales to those customers grew 21.9 percent, representing 37.8 percent of its business.

“So (we see) very good progress, growing as a percentage of our business and vending in general, the overall business concept has a long pathway," Oberton said. "We continue to see other ways we can use the technology. We continue to lower our cost of the product and lower our cost to serve the customer. We believe it’s a very long-term business for us.".

The company elaborated on that point in a statement accompanying the third quarter earnings release: “We believe industrial vending will be an important chapter in the Fastenal story; we also believe it has the potential to be transformative to industrial distribution, and that we have a 'first mover' advantage. Given this, we have been investing aggressively to maximize the advantage.”

Fastenal added nearly 5,000 Fast Solutions industrial vending machines in Q3, an increase of 11.8 percent.

Oberton singled out growth in safety products through vending. “We continue to see very good growth in the safety product line,” he said.

The company also addressed the decision announced earlier this year regarding the closing of some 45 stores by the end of 2014.

“Out of the 40 some stores we had identified I think there were eight that were more than 10 miles from another store, and when I looked at all the data we assumed less than 10 percent of the sales from all the stores we were closing would have some risk of being lost,” Florness said. The company says that these stores were profitable but believed there was a “better approach to growing our business profitability.”

During its first 10 years of becoming a public company, Fastenal opened stores at an annual rate of 30 percent. During the next 10 years, stores opened at the rate of 10 to 15 percent annually and since 2007 the rate has been about one percent. This year the company expect to open 25-30 stores, or about one percent.

“Our sales to customers engaged in heavy machinery manufacturing (primarily serving the mining, military, agricultural, and construction end markets) — which represents approximately one-fifth of our business — had a very weak 2013, but stabilized late in the year and has improved in the first nine months of 2014,” the company said.

Florness pointed out that Fastenal — ranked No. 12 on ID’s 2014 Big 50 list of industrial distributors — has seen five consecutive months in which sales increased more than 10 percent. In 2013, the company recorded 10 percent growth in only five months, and they were not consecutive. He also noted that the company’s sales are up sharply from January to September of this year compared to the same period in 2012 and 2013.

For the quarter, Fastenal recorded revenues of $980.8 million, surpassing Wall Street forecasts of $978.9 million.

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