10-QPeriod: Q3 FY2019

FASTENAL CO Quarterly Report for Q3 Ended Sep 30, 2019

Filed October 16, 2019For Securities:FAST

Summary

Fastenal Company (FAST) reported third-quarter results ending September 29, 2019, demonstrating continued sales growth driven by both market demand and strategic initiatives, though facing some margin pressure. Net sales increased by 7.8% year-over-year for the quarter, indicating resilience in its industrial and construction supply distribution business. However, gross profit margin saw a slight decline due to a shift in product and customer mix, increased product costs outpacing price adjustments, and rising freight expenses. Despite these margin headwinds, the company reported an 8.0% increase in net earnings for the quarter, partly aided by discrete tax gains. Key growth drivers, such as industrial vending devices and Onsite customer locations, continue to expand, contributing to sales growth but also influencing the product and customer mix. Management remains focused on controlling operating expenses, which improved as a percentage of sales, and is investing in capital expenditures to support growth initiatives, particularly in vending and Onsite services. The company anticipates an ongoing focus on its growth drivers while navigating a potentially slowing economic environment, as indicated by a declining Purchasing Managers Index. Investors should note the strategic expansion of Onsite locations and industrial vending devices, which are key to Fastenal's long-term growth strategy. While these initiatives are driving top-line growth, the associated changes in product and customer mix, coupled with external cost pressures (tariffs, freight), are impacting gross margins. The company's ability to manage these pressures through pricing and operational efficiencies will be crucial for future profitability.

Financial Highlights

51 data points
Beta

Revenue

$1.38B

47.2% Gross Margin

Net Income

$213.50M

15.5% Net Margin

EPS (Diluted)

$0.18

Total Assets

$3.81B

Cash & Equivalents

$191.20M

Free Cash Flow

$196.10M

Financial Statements
Beta
Revenue$1.38B
Cost of Revenue$728.00M
Gross Profit$651.10M
SG&A Expenses$369.20M
Operating Income$281.90M
Interest Expense$3.60M
Net Income$213.50M
EPS (Basic)$0.18
EPS (Diluted)$0.18
Shares Outstanding (Basic)1.15B
Shares Outstanding (Diluted)1.15B

Key Highlights

  • 1Net sales for the third quarter of 2019 increased by 7.8% to $1.38 billion compared to the prior year period.
  • 2Net earnings for the quarter rose by 8.0% to $213.5 million, with diluted EPS growing to $0.37 from $0.34.
  • 3Gross profit margin decreased to 47.2% from 48.1% year-over-year due to product/customer mix shifts, lagged price increases on product costs, and increased freight expenses.
  • 4Operating and administrative expenses as a percentage of net sales improved to 26.8% from 27.6% year-over-year.
  • 5The company continues to expand its growth drivers, adding 84 new Onsite locations and 5,671 industrial vending devices in the quarter.
  • 6Inventory levels increased by 13.4% year-over-year, supporting higher sales and expansion of vending and Onsite initiatives.
  • 7Capital expenditures increased significantly, primarily for property and equipment to expand hub capacity, vending devices, and hub vehicles.

Frequently Asked Questions

Sales growth was driven by both an increase in underlying market demand, reflected in a PMI above 50 for the nine-month period, and the company's growth initiatives. Specifically, the expansion of industrial vending devices and Onsite customer locations, along with national account contracts, contributed significantly to the top-line increase.

The decline in gross profit margin was primarily attributed to three factors: (1) a shift in product and customer mix, with slower growth in higher-margin fasteners and faster growth in sales to larger customers who may receive better pricing; (2) product cost increases (due to inflation and tariffs) that outpaced price adjustments, creating a price/cost deficit; and (3) rising freight costs, particularly shipping fees and driver wages, which outstripped freight revenue.

The company improved its operating and administrative expenses as a percentage of net sales. This improvement was driven by relatively lower growth in employee-related, occupancy-related, and other operating expenses compared to net sales growth. Investments in IT and selling-related transportation were notable increases within 'other' expenses.

Management notes that economic activity appears to have slowed in the third quarter of 2019, as indicated by a PMI below 50. This slower economic activity is impacting industrial production and has led to slower growth in certain customer segments and a lengthening of the sales cycle for vending devices. Fastenal is positioning itself to navigate this environment by focusing on its growth drivers and managing expenses.