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Fastenal Company (FAST - Analyst Report) recently announced that it is likely to miss fourth quarter 2013 average analyst earnings estimate of 36 cents, due to sluggish sales, higher employee cost and weak margins. However, earnings are expected to surpass the year-ago figure of 33 cents.

The national distributor of industrial/construction supplies has been struggling with its top line due to lower sales of its fasteners product line which is being hurt by end-market slowdown and broader economic uncertainty. Daily sales growth was 5.7% in September, 7.7% in October, and 8.2% in November, compared to a respective 12.9%, 6.8% and 8.2% in the corresponding prior year months. Weak sales were due to sluggishness in the heavy manufacturing business.

Management has been slowing down store growth in favor of increasing headcount to drive near-term sales growth. However, such initiatives increase employee costs and hurt margins. In fact, gross margin is also below company’s expectation due to weakness in fastener products, a competitive marketplace, reduced supplier incentives and lower utilization of trucking networks.  

In addition, the company’s focus on increasing store headcount and field leadership adversely impacted gross profit.

However, the company is positive about the upcoming quarters and expects increased headcount in stores to generate solid sales. In fact, the company is trading off short term earnings for better selling component.

Fastenal carries a Zacks Rank #4 (Sell). We would also like to see substantial sales recovery before becoming more positive on the stock.

Better-ranked stocks in the building products/ building construction sector include Lumber Liquidators Holdings, Inc. (LL - Snapshot Report), Builders FirstSource, Inc. (BLDR - Snapshot Report) and The Home Depot, Inc. (HD - Analyst Report). While Lumber and Builders FirstSource carry a Zacks Rank #1 (Strong Buy), The Home Depot holds a Zacks Rank #2 (Buy).

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