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Fastenal Company’s (FAST - Analyst Report) adjusted earnings of 41 cents per share in the second quarter of 2013 were in line with the Zacks Consensus Estimate. The earnings rose 7.9% year over year, on the back of year over year growth in revenue and margin.

Fastenal’s net sales of $847.6 million, lagged the Zacks Consensus Estimate of $857 million by 1.1%.  Net sales grew 5.3% year over year, due to an increase in unit sales and favorable impact of the FAST solution initiative, which offset the decline in fastener sales.

Fastenal serves customers in the manufacturing and non-residential construction markets. Sales were slow in both the markets.

Quarter Details

Fastenal’s daily sales growth rates came in at 4.8%, 5.3% and 6.0% for the months of April, May and June, respectively, significantly down from the daily growth rates of 17.3%, 13.1% and 14.0% in the corresponding prior-year months. The sequential change in daily sales for 6 months from January to June also fell short of historical averages. Foreign exchange dragged second quarter daily sales growth rates by 0.1%.

Daily sales to manufacturing customers (representing almost 50% of revenues) grew 5.9% in the second quarter compared with 15.8% growth in the prior-year quarter and 7.0% 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 uncertainty.

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 1.9% in the quarter from 8.0% in the prior-year quarter. However, sales improved sequentially from 1.7% growth recorded in the previous quarter.

Sales of non-fastener products (used mainly for maintenance) increased 8.5% in the second quarter of 2013, down from 10.8% in the preceding quarter. The decline was less dramatic than fasteners due to strength in FAST Solutions, which was partially offset by a weak industrial environment.

In the non-residential construction market, daily sales to non-residential construction customers (representing 20% to 25% of revenues) grew 0.7% in the second quarter of 2013, down from 12.7% in the second quarter of 2012 and 2.9% recorded in the first quarter of 2013. Management blamed the weakness in the overall non-residential construction market and the uncertainty in U.S economic policy for the decline in this business.

Vending Machine Activity Gaining Traction

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. Despite overall weak sales, the company is seeing some progress around its vending program.

In the second quarter, the company installed 4,102 new machines, down 5.7% sequentially. As of Jun 30, 2013, the company operated 29,549 FAST Solutions vending machines. The vending machines now account for over 30% of the company’s sales. During the quarter, the company signed 5,272 vending machine contracts, down 8.0% sequentially.

Margins

In second quarter 2013, gross margin improved 60 basis points from the prior-year quarter to 52.2% attributable to improved transactional margins. The company believes that its normal gross margin range is 51% to 53%. However, the company witnessed 10 basis points sequential decline in gross margin due to weakness in faster products and construction business.

Store Count

Fastenal had 2,677 stores at the end of second quarter of 2013, up from 2,660 stores in the sequentially preceding quarter. During the second quarter of 2013, the company opened 22 new stores, up 100% sequentially.

Fastenal carries a Zacks Rank #4 (Sell).

With the overall housing market improving steadily, other companies in the broader housing sector are also performing well. These include Builders FirstSource, Inc. (BLDR - Snapshot Report), Lennar Corporation (LEN - Analyst Report) and The Home Depot, Inc. (HD - Analyst Report). All the companies carry a Zacks Rank #2 (Buy).

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