Fastenal Misses on Q4 Earnings & Rev

Fastenal Company (NASD:FAST) announced dismal fourth-quarter and fiscal 2013 results. It missed the Zacks Consensus Estimate for both earnings and revenues as it continued to struggle with its top line.

Fastenal’s adjusted earnings of 33 cents per share in the fourth quarter of 2013 were flat year over year and missed the Zacks Consensus Estimate of 34 cents by a penny. In December, the company issued a press release stating that it is likely to miss fourth quarter 2013 average analyst earnings estimate though it expected to surpass the year-ago figure. The earnings miss could be attributed to lower-than-expected sales and weak margins.

Fastenal reported net sales of $813.8 million in the fourth quarter of 2013, up 7.5% year over year. Net sales also missed the Zacks Consensus Estimate of $816 million by a marginal 0.3% as the company continued to witness softness in fasteners and non-residential construction growth.

Top Line Woes Continue

Fastenal derives sales from the fastener product line and the other product line. Fastenal’s fastener product line comprises two kinds of products, threaded fasteners, and miscellaneous, industrial and construction supplies and hardware. Threaded fasteners include products like bolts, nuts, screws, studs and related washers while miscellaneous supplies and hardware include various pins and machinery keys, concrete anchors, metal framing systems, wire rope, strut, rivets and related accessories.

Fastenal mainly serves customers in the manufacturing and non-residential construction markets. In the manufacturing market, its customers include original equipment manufacturers (OEMs) and maintenance and repair operations (MRO) while in the non-residential construction market it serves general, electrical, plumbing, sheet metal and road contractors.

Fastenal’s total average daily sales growth rate in the fourth quarter of 2013 was 7.5%, down from 8.5% in the fourth quarter of 2012 due to price deflation in fastener products. Foreign exchange dragged down fourth-quarter daily sales growth rates by 0.4%.

The national distributor of industrial/construction supplies has been struggling with revenues due to lower sales of its fasteners product line, which is being hurt by end-market slowdown and broader economic uncertainty. Daily sales growth was 7.7% in October, 8.2% in November and 6.7% in December compared to a respective 6.8%, 8.2% and 6.7% in the corresponding prior year months.

Daily sales to manufacturing customers (representing almost 50% of revenues) grew 7.2% in the fourth quarter, much lower than the 9.7% growth in the prior-year quarter but better than 4.7% in the preceding quarter. Daily sales growth rates to manufacturing customers declined sharply due to lower sales of its fasteners product line, hurt by end-market slowdown and broader economic uncertainty.

Sales of products for industrial production dipped significantly, owing to a continuous decline in daily sales growth rates of fastener products (used mainly for industrial production) to 1.9% in the quarter from 2.6% in the prior-year quarter.

Sales of non-fastener products (used mainly for maintenance) increased 12.0% in the fourth quarter of 2013, down from 13.6% in the prior-year quarter. However, sales of these products improved from 8.9% growth seen in the preceding quarter.

In the non-residential construction market, daily sales to non-residential construction customers (representing 20% to 25% of revenues) grew 2.8% in the fourth quarter of 2013, down from 4.2% in the fourth quarter of 2012 and 3.9% from the previous quarter. Management blamed the uncertainty in economic policy and poor weather condition for the decline.

Soft Margins

Management has been slowing down store growth in favor of increasing headcount to drive near-term sales growth. However, such initiatives increase employee costs and hurt margins. The company’s focus on increasing store headcount and field leadership adversely impacted gross profit. In fourth-quarter 2013, gross margin declined 100 basis points (bps) from the prior-year quarter to 50.6%.

Gross margin also declined 110 bps sequentially. Fourth quarter gross margin missed the company’s long-term gross margin range of 51% to 53%.

The gross margin was below company’s expectation due to weakness in fastener products, a competitive marketplace, reduced supplier incentives and lower utilization of trucking networks.

Store Count

Fastenal had 2,687 stores at the end of the fourth quarter of 2013, up from 2,686 stores in the preceding quarter.

Share Repurchase

In the third quarter 2013, the company repurchased 0.2 million shares at an average cost of $45.40 per share. As of Dec 31, 2013, the company had authority to purchase up to 1,600,000 shares of common stock.

Fiscal 2013

Fastenal’s earnings of $1.51 per share in fiscal 2013 increased 6.3% year over year but missed the Zacks consensus estimate of $1.54 by 1.9%. The company reported net sales of $3.326 billion in fiscal 2013, up 6.1% year over year. The net sales missed the Zacks Consensus estimate of $3.327 billion.

Fastenal carries a Zacks Ranks #4 (Sell). Better-ranked stocks in the industrial goods sector include Builders FirstSource, Inc. (NASD:BLDR), The Home Depot, Inc. (NYSE:HD) and Lumber Liquidators Holdings, Inc. (NYSE:LL). These three companies carry a Zacks Rank #2 (Buy).

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