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Fastenal Surges on Strong August Sales

Zacks Equity Research

Shares of Fastenal Company (FAST) surged around 6% on Sep 5, after it released solid sales results for the month of August. August sales recovered from a slower July and were a relief from the sluggish sales being reported by Fastenal for the past 4-5 quarters.

Fastenal’s net sales rose 2.5% year over year to $297.7 million in August. Currency was a 0.3% headwind. Daily sales growth rates came in at 7.2% for the month, significantly higher than 2.9% in July and 6% in June.

Fastenal serves customers in the manufacturing and non-residential construction markets. Both the markets reported improving August sales.

Daily sales to manufacturing customers (representing almost 50% of revenues) grew 6.1%, much higher than 2.1% reported in July and also above 5.9% reported in the second quarter.

Daily sales to non-residential construction customers (representing 20% to 25% of revenues) jumped 7.3%, a significant improvement from a decline of 0.1% seen in July and a growth of 0.7% in the second quarter. Easy prior-year comparisons played a role in driving the improvement.

The company has been witnessing a consistent decline in daily sales growth rates for the past few quarters. The declining daily sales rates are due to lower sales of its fasteners product line which were being hurt by end-market slowdown and broader economic uncertainty. Moreover, the construction business has also been soft since the past two quarters.

In order to improve its top line, management announced some interesting strategies during the second-quarter conference call, held in early July. Management is deliberately slowing down focus on vending.

Management has eased pressure on stores to sign up vending machines as a vending contract takes about 5-6 months to generate revenues. Instead, stores are being encouraged to focus on improving near-term sales.

In order to accelerate sales growth, Fastenal also took the strategic decision to increase sales personnel at its stores. It plans to add 100-150 employees per month for the next six months. This strategy aims to free sales managers to focus more on selling which could drive near-term sales growth. We believe these initiatives to drive near-term sales have started to pay off as reflected in improving sales trends for the month of August.

In addition, Fastenal has plans to reinvigorate the high-margin fastener business and also improve sales performance at under-performing stores. The company also plans to expand its store-based inventory for fasteners, construction and safety products.

Moreover, Fastenal hopes to gain from a new pricing system for stores and improved operational efficiency across its distribution network (by adding significant automation). Management expects these strategies to drive sales growth back to the historical high-teens range by the first quarter of 2014.

Fastenal carries a Zacks Rank #3 (Hold). Other companies in the sector that are doing well include Liquidators Holdings, Inc. (LL), Builders FirstSource, Inc. (BLDR) and The Home Depot, Inc. (HD). While Lumber carries a Zacks Rank #1 (Strong Buy), The Home Depot and Builders FirstSource carry a Zacks Rank #2 (Buy).

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