Fastenal Company reported adjusted earnings of 37 cents per share in the first quarter of 2013, up 8.8% year over year on the back of top-line growth. The company’s earnings were in line with the Zacks Consensus Estimate.
Fastenal reported net sales of $806.3 million, up 4.9% year over year, driven by increase in unit sales and favorable impact from FAST solution initiative, which offset the decline in fastener sales. However, net sales lagged the Zacks Consensus Estimate of $823 million.
Fastenal serves customers in the manufacturing and non-residential construction markets. Sales were slow in both the markets.
Fastenal’s daily sales growth rates came in at 6.7%, 8.2% and 5.1% for the months of January, February and March, respectively, significantly down from the daily growth rates of 21.3%, 20.0% and 19.3% in the corresponding prior-year months. The sequential change in daily sales for 12 months from January to December also fell short of historical averages. Foreign exchange dragged first quarter daily sales growth rates by 0.1%.
Daily sales to manufacturing customers (representing almost 50% of revenues) grew 7.0% in the first quarter, much below 20.3% in the prior-year quarter and 9.7% in the preceding quarter. Daily sales growth rates to manufacturing customers have declined sharply due to lower sales of its fasteners product line, which are being 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 downfall in daily sales growth rates of fastener products (used mainly for industrial production) to 1.7% in the quarter. This was also lower than 2.6% growth recorded in the previous quarter.
Sales of non-fastener products (used mainly for maintenance) was 10.8% in the first quarter of 2013, down from 13.6% in the preceding quarter; the decline being less dramatic than fasteners due to strength in the FAST Solutions, which was partially offset by weak industrial environment.
In the non-residential construction market, daily sales to non-residential construction customers (representing 20% to 25% of revenues) grew 2.9% in first quarter of 2013, down from 17.1% in the first quarter of 2012 and 4.2% recorded in the fourth quarter of 2012. 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 is 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 first quarter, the company installed 4,352 new machines, up 20.6% sequentially. As of Mar 31, 2013, the company operated 25,447 FAST Solutions vending machines. The vending machines now account for over 25% of the company’s sales. During the quarter, the company signed 5,728 vending machine contracts, up 2.5% sequentially.
In 2013, the company aims to sign 2,500 machines per month or 30,000 per year.
In first quarter 2013, gross margin improved 70 basis points from the prior-year quarter to 52.6% attributable to improved transactional margins. The company believes that its normal gross margin range is 51% to 53%.
The company recorded operating and administrative expense of $247.3 million, up 6.1% year over year mainly due to higher incentives to employees.
Fastenal had 2,660 stores at the end of first quarter of 2013, up from 2,652 stores in the sequentially preceding quarter. During the first quarter of 2013, the company opened 11 new stores, up 0.4% sequentially.
Fastenal carries a Zacks Rank #3 (Hold).
With the overall housing market improving steadily, other companies in the sector are also performing well. These include Ryland Group Inc. , KB Home and Lumber Liquidators Holdings, Inc. . While Ryland and Lumber carry a Zacks Rank #1 (Strong Buy), KB Home carries a Zacks Rank #2 (Buy).