Shares of industrial and construction-supplies distributor Fastenal Company (FAST -2.18%) have soared more than 35% since the beginning of the year. The company's first-quarter 2019 earnings, released last week on April 11, provide some perspective around investors' enthusiasm for the industrial-behemoth's stock.
Below, we'll review condensed quarterly results and walk through success factors driving recent results. Note that all comparative numbers are presented against the prior-year quarter.
Fastenal results: The raw numbers
|Metric||Q1 2019||Q1 2018||Change (YOY)|
|Revenue||$1.31 billion||$1.19 billion||10%|
|Net income||$194.1 million||$174.3 million||11.4%|
|Diluted earnings per share||$0.68||$0.61||11.5%|
What happened with Fastenal this quarter?
- Fastenal's revenue increase was keyed by improvement in its closely watched internal metric of daily sales. Daily sales rose 12.2%, to $20.8 million. Management attributed the strength to higher industrial vending-machine sales, additional Onsite location implementations (i.e. dedicated inventory management at customer locations), and sales of construction supplies.
- To a lesser extent, management also pointed to the positive effect of higher prices, which the company recently instituted to absorb cost inflation due to tariff imports.
- Sales of fastener products expanded by 11.8% on a daily sales basis, while non-fastener product sales grew by 12.7% on a daily sales basis. Fastener products comprised 34.8% of the quarter's revenue, with the balance to non-fastener products.
- Gross margin decreased 100 basis points, to 47.7%, due to product mix, higher freight costs, general inflationary pressures on margin, and rebate adjustments on the company's customer inventory programs.
- Operating margin improved by 20 basis points, to 20%. Management attributed the increase to its ability to contain facility occupancy charges, as well as improved employee productivity -- even as employee expenses increased 7% against the prior-year quarter.
- Operating cash flow rose 28%, to roughly $205 million, due to higher earnings, as well as reduced drag from working capital needs versus the first quarter of 2018.
Fastenal has notched noteworthy results in recent quarters by focusing on the high industrial demand for on-premise supplies and inventory solutions. Management has prioritized increasing the presence of its industrial vending machines in manufacturing facilities and promoting Onsite locations in which Fastenal supplies both physical inventory and a team to manage the inventory process.
During the company's earnings conference call last week, CEO Dan Florness discussed Fastenal's aggressive current-year goals for both Onsite and vending-machine penetration:
[O]n Onsites, our goals are pretty simple this year. Let's sign 375 to 400. There's 52 weeks in the year. You've got to take out a couple of those weeks because it's the holidays and a lot happens in those weeks...On vending, our goal is to do 23,000 units to 25,000 units. So, there's 254 business days in the year. We need to sign roughly 100 every day to get to the high end of that number. If we sign 90 every day, we're at the low end of that number. We were just shy of 90 in the first quarter. But in the month of March, we rounded up to 100. We were at 99.6 [vending machines signed up] per day. So, we were off [to] a nice start.
The reasoning behind these lofty sales targets is fairly straightforward. In chasing brisk on-premise expansion, Fastenal gains immediate market share, but more crucially, each vending machine or Onsite installation also creates a conduit for long-term supplies and services revenue.
Through the first quarter, Fastenal signed 105 new Onsite locations, and active Onsite locations grew 39.4% year over year, to 945 in total. The company signed roughly 5,600 new industrial vending machines in the first quarter and its installed-machine count expanded by more than 13% year over year to approximately 83,400 vending devices. An ascending curve of on-premise device installations is fastening Fastenal's rising share-price trajectory.