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Fastenal Drives Vending Process, Margins Remain a Concern

FAST DPZ MCD PZZA

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On Nov 28, we issued an updated research report on Fastenal Company (FAST - Free Report) – a national wholesale distributor of industrial and construction supplies, mainly serving the manufacturing and non-residential construction markets.

Fastenal reported lower-than-expected results in the third quarter of 2016, missing estimates for both earnings and sales. Adjusted earnings of 44 cents per share in the third quarter missed the Zacks Consensus Estimate of 45 cents by 2.2%.  Earnings also declined 6.4% year over year due to higher expenses and weak margins.

Net sales of $1,013.1 million lagged the Zacks Consensus Estimate of $1,014 million by 0.1%. Sales, however, increased 1.8% year over year. Fastenal’s sales, in the past few quarters, have been affected by price deflation of fastener products, currency headwinds and lack of new products and services. The top line has been impacted by lower sales to manufacturing and construction customers due to overall weakness in the industrial economy.

Weak Margins

Lack of inflation, unfavorable product mix, strong emphasis on growing average store sales, pricing and competitive pressure have been hurting the gross margin for quite sometime now. In fact, gross margin of 49.3% in the third quarter of 2016, 49.5% in the second quarter of 2016, 49.8% in the first quarter of 2016 and 49.9% in the fourth quarter of 2015 was below the company’s long-term average of around 50%.

The customer mix shifted toward the large-account end-market, which produces low-margin gross profit but stronger operating income. The product mix shifted from high-margin fastener products to lower margin non-fastener products. In fact, the company does not see any improvement in gross margin rates through the rest of 2016 as well.

FAST Solutions Profitable

Fastenal has adopted FAST Solutions, an industrial vending process that has the potential to revolutionize the industrial distribution system and boost profits. The company has installed vending machines at customer locations which also provide information on the products.

Industrial vending is one of the primary growth drivers for Fastenal and has the potential to significantly increase sales and profits. As of Sep 30, 2016, Fastenal operated 60,400 vending machines, up 12.8% year over year. During the quarter, the company signed 4,783 machine contracts, up 2% from the earlier-year quarter. Vending machines now account for 45% of the company’s sales, higher than 44.6% in the prior quarter.

Fastenal currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

Better-ranked stocks in the Retail-Wholesale sector include Domino's Pizza, Inc. (DPZ - Free Report) , McDonald's Corp. (MCD - Free Report) and Papa John's International Inc. (PZZA - Free Report) .

Domino's Pizza sports a Zacks Rank #1 (Strong Buy) and is expected to witness a 22.1% increase in full-year 2016 earnings. You can see the complete list of today’s Zacks #1 Rank stocks here.

McDonald's carries a Zacks Rank #2 (Buy) and is likely to see a 14.2% rise in full-year 2016 earnings.

Papa John's – a Zacks Rank #2 stock – is expected to witness a 19.9% increase in full-year 2016 earnings.

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