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Fastenal (FAST) Q1 Earnings In Line, Gross Margin Soft

Fastenal Company FAST reported adjusted earnings of 44 cents per share in the first quarter of 2016, in line with the Zacks Consensus Estimate. Earnings rose 2.3% year over year.

Net sales of $986.7 million beat the Zacks Consensus Estimate of $984 million by 0.3% and increased 3.5% year over year. The net sales increase was driven by higher unit sales at older store locations during the quarter.

Net sales at the Canadian business increased about 7% in local currency during the quarter, better than a 4% increase in the previous quarter.

However, sales were hurt by price deflation of fastener products and unfavorable currency translation.The top line was also adversely impacted by lower sales to its customers in the oil & gas industry, a stronger U.S dollar and overall weakness in the industrial economy.

Fastenal’s total average daily sales increased 1.9% in the first quarter of 2016, much lower than an 8.8% increase in the prior-year quarter. However, it was better than a 2% decline reported in the fourth quarter. Foreign exchange dragged down daily sales growth rate in the quarter by 0.8%.

On a monthly basis, daily sales remained flat in March but increased 2.6% in February and 3.3% in January. The company had recorded daily sales growth of 5.6%, 8.6% and 12%, respectively, in the corresponding year-ago months.

This industrial and construction supplies wholesale distributor serves customers in the manufacturing and non-residential construction markets.

Daily sales to manufacturing customers (representing almost 50% of revenues) rose 0.9%, down from growth of 6.9% in the prior-year quarter, but better than 2.2% decline reported in the previous quarter.

The daily sales growth rate of fastener products (used mainly for industrial production and accounting for nearly 40% of the company’s business) declined 1.7% in the quarter, compared with a 5.5% increase in the year-ago quarter and a 6.2% decline recorded in the previous quarter.

Lower demand from the heavy machinery manufacturing customer base, mainly from those engaged in oil and gas business, hurt fastener sales due to lower production requirements.

Non-fastener product sales (used mainly for maintenance) increased 4.7%, compared to increase of 11.7% in the prior-year quarter and 1.2% in the last quarter. The non-fastener business also weakened over the last few months as improved vending trends were offset by overall weakness in the industrial environment.

In the non-residential construction market, daily sales to non-residential construction customers (representing 20% to 25% of revenues) declined 0.4% as against a 6.2% increase in the prior-year quarter. Volatility and softer energy prices hurt sales in this market. However, daily sales decline was narrower than 6.1% decline reported in the previous quarter.

Vending Trends Continue to Improve

As of Mar 31, 2016, Fastenal operated 56,889 vending machines, up 17.2% year over year. During the quarter, the company signed 4,647 machine contracts, up 15.7% from the last quarter. The daily sales growth rate to customers using vending machines was 3.6%, up from 0.7% in the previous quarter. Vending machines now account for 44.5% of the company’s sales, higher than 43.9% in the prior quarter.

After remaining soft in 2013, vending trends improved through 2014 and 2015, as management’s recent efforts on enhancing the quality of signings/installs paid off.

Gross Margin Down

Gross margin of 49.8% in the first quarter of 2016 declined 100 basis points (bps) year over year and 10 bps sequentially. Gross margin was below the company’s average of around 50% owing to an unfavorable customer mix and product mix.

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 non-fastener products. In fact, the company expects these trends to continue in the future as well.

Fastenal Company has a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the construction sector include Beacon Roofing Supply, Inc. BECN, Gibraltar Industries, Inc. ROCK and Headwaters Inc. HW. All three companies sport a Zacks Rank #1 (Strong Buy).

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