How Fastenal Is Vending a Success Story

Industrial and construction materials supplier Fastenal (Nasdaq: FAST  ) has significantly upped its market presence lately with the expansion of its industrial vending machines -- dubbed a "one-stop shop" to replenish supplies.

Although a two-year-old concept, the whole idea seems to have significantly picked up speed over the past ten months, as these machines doubled their contribution to Fastenal's fiscal 2011 sales to 16% as compared to year before.

A really good idea
Why would you go to a store and stand in the queue just to buy nuts and bolts or cutting tools when you could have a mini-shop in your very own workplace? That's exactly the question Fastenal's been trying to raise through its vending machine concept.

These machines, which stock items ranging from metal cutters and grinding disks to first-aid kits and gloves, are becoming popular with diverse industrial customers including manufacturing plants, energy providers, and construction contractors.

Customers seem to have taken a liking to this idea as it saves time and money, making inventory replenishment much more convenient. Automatic billing saves administrative and processing time too, while inventory levels are monitored by Internet-based software, which alerts Fastenal when supplies reach a certain low level. The restocking is done through a local store.

By the end of 2011, a total of 7,500 machines had been installed at customer locations, up from 1,925 machines just a year earlier. In fact, Fastenal's base of installed machines increased by an impressive 32% in the recent fourth quarter as compared to the third.

A smart way to save costs
The vending machines are fast reducing Fastenal's need to open new stores to drive sales, thus saving on costs. In the recent past, the company has been increasing its store count by 14% each year. However, thanks to the vending machine expansions, the company need to add just 5% more, 122 new stores, in 2011. It is almost like Fastenal is opening small stores in client locations themselves.

As a matter of fact, analyst Ryan Merkel from William Blair & Co. believes the introduction of these vending machines could be the largest "land-grab opportunity" in distribution of industrial supplies in the past 20 years. The implementation of this strategy is certainly helping to keep Fastenal one step ahead of industry competitors such as W.W. Grainger (NYSE: GWW  ) , which posted revenue growth of only 3.8% over the past three years.

Fastenal's fast figures
The company plans to install 10,000 vending machines each year over the next few years, and it definitely seems capable of doing so. This debt-free company has an impressive unlevered free cash flow of $138 million in addition to their encouraging recent performance.

In every quarter of 2011, Fastenal saw over 20% revenue growth. The company's earnings per share also met Street expectations all throughout the year. And in the latest quarter, Fastenal's profits increased by 34%, to $87.5 million, compared to last year.

Future proof
Fastenal's management plans to promote these machines aggressively in the future using selling incentives and new software, which could be more cost effective for end users. Overall, I'm feeling good about Fastenal's future.

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Navjot Kaur does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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