Fastenal Company ( FAST - Analyst Report ) reported diluted earnings of 37 cents per share in the third quarter of 2012, up 12.1% year over year, attributable to double digit top-line growth. The company’s earnings were in line with the Zacks Consensus Estimate.

The company reported net sales (adjusted according to the number of working days) of $802.6 million in the third quarter of 2012, up 12.2% year over year. Total revenue, however, marginally missed the Zacks Consensus Estimate of $804 million.

Quarter Details

Daily sales growth rates stood at 12.1%, 12.0% and 12.9%, respectively, for the months of July, August and September, significantly down from the daily growth rates of 22.4%, 20.0% and 18.8% in the corresponding prior-year months.

The decline in daily sales growth rates was due to continued slowdown in the construction market and unfavorable currency translations. Unfavorable currency impact resulted in a 0.2% decline in daily sales in the quarter.

Fastenal operates in the manufacturing and non-residential construction markets. The company supplies two types of products to manufacturing customers, one for industrial production and the other for maintenance of the manufacturing business.

The products for industrial production become part of the finished goods manufactured by the customers. During third quarter 2012, the performance of industrial production goods was weaker than maintenance goods. Daily sales growth rate of manufacturing customers (representing almost 50% of revenues) declined to 14.0% in third quarter of 2012 from 18.3% in the prior-year quarter.

Sales growth of goods for industrial production dipped significantly, owing to a 940 basis point drop in daily sales growth rates of the fastener products to 6.0% in the quarter. This segment was affected by the downward movements of the Purchasing Manufacturers Index ('PMI') of 49.8, 49.6 and 51.5 for the months of July, August and September, respectively in 2012, from 51.4, 52.5 and 52.5 for the months of July, August and September, respectively in 2011.

The products for maintenance of the manufacturing business are used for maintaining the facility or the equipments used by the customers. Segment sales growth rate was 18.0% in the third quarter 2012, down 710 basis points sequentially.

In the non-residential construction market, daily sales to the non-residential construction customers (representing 20% to 25% of revenues) grew 8.2% in third quarter of 2012, down from 15.8% recorded in the year-ago period.

The company’s cost of sales for the quarter was $388.2 million, up 11% year over year. Gross profit for third quarter of 2012 was $414.4 million, up 10% from the prior year quarter. In third quarter of 2012, gross margin declined 30 basis points from prior year quarter to 51.6% due to unfavorable currency translations. The company believes its normal gross margin range is 51% to 53%.

On October 10, 2012, Fastenal declared a quarterly cash dividend of 21 cents per share on the company's common stock. The dividend is payable on November 26, 2012 to stockholders of record as of October 29, 2012.

Store Count

Fastenal had 2,650 stores at the end of third quarter of 2012, up from 2635 stores in the year-ago comparable quarter. Of the 2,650 stores, 20 new stores were opened and 6 stores were closed in the third quarter of 2012.

The sequential change in daily sales for the first half of 2012 was also below historical averages, highlighting the rising uncertainty in the growth outlook of Fastenal’s end markets. Moreover, Fastenal’s ‘pathway to profit’ strategy has failed to achieve its desired results. Other than that, the company’s strategy of new store openings significantly hurt near-term profitability due to the start-up costs involved in opening a new store.

We currently have an Underperform recommendation on Fastenal over the long term. The stock carries a Zacks #4 Rank that translates into a short-term Sell rating. On the other hand, Home Depot Inc., ( HD - Analyst Report ) , one of the largest home improvement retailers, carries a Zacks #2 Rank (a short-term Buy rating). We have a long-term Neutral recommendation on the stock.