Hardware

Fastenal beats Q3 earnings thanks to safety product sales

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October 14, 2020

Fastenal Co., a provider of wholesale distribution of industrial and construction supplies and industrial supply vending services, beat earnings expectations in the third quarter ended Sept. 30, 2020, compared to the third quarter of 2019, driven primarily by higher unit sales of safety products, where volume moderated relative to the pandemic-driven level of "surge" sales in the second quarter of 2020, but remained elevated relative to the third quarter of 2019.

Net earnings for the quarter were $221.5 million, a 3.7% gain over the $213.5 million for the prior year, according to the earnings report. Diluted net earnings per share were 38 cents compared to 37 cents for last year's third quarter, a 3.4% increase. The EPS beat expectations by 0.01 cents, according to Seeking Alpha.

Revenue increased by 2.5% over last year's $1.38 billion for Q3 to $1.41 billion, beating expectations by $8.5 million, according to Seeking Alpha. Shares traded at $45.36 on Tuesday compared to a $49.86 52-week high.

The reopening of the economy has been accompanied by greater demand for personal protection equipment, hand sanitizers and related products, which more than offset continued softness in underlying business activity owing to a generally weak industrial marketplace for products unrelated to mitigating the effects of COVID-19. The impact of product pricing on net sales was immaterial, as price levels were broadly comparable to those of the third quarter of 2019.

Activity levels throughout the period remained below those that existed prior to the onset of the pandemic and the related mitigation efforts. Based on trends in vending dispenses and hub picks during the period, however, there was gradual sequential improvement in general business activity each month of the quarter. This was apparent not only in sales trends, but also in improving signings and activity levels, according to the earnings report.

Daily sales of fastener products declined 6.9% compared to the third quarter of 2019, and represented 30.5% of net sales in the third quarter of 2020; fasteners represented 26.0% and 33.7% of net sales in the second quarter of 2020 and the third quarter of 2019, respectively.

The daily sales decline of fasteners reflects the continued softness of the manufacturing and construction markets, but is improved on the 16.4% daily sales decline of fasteners experienced in the second quarter of 2020 compared to the second quarter of 2019.

Daily sales of safety products grew 34.4% over the third quarter of 2019, and represented 23.8% of net sales in the third quarter of 2020; safety products represented 34.0% and 18.2% of net sales in the second quarter of 2020 and the third quarter of 2019, respectively.

"U.S. industrial production swung to a decline of 1.1% in October and November," Holden Lewis, executive vice president and CFO, said during an earnings call. "Manufacturing was up 5.1%. Heavy equipment lagged at 1.4% growth with weakness as well in oil and gas, metals and transportation."

The daily sales growth of safety products decelerated from the 116.3% increase in the second quarter of 2020 as a result of a reduction in "surge" type purchasing. However, the company continues to see strong growth with state and local government and healthcare customers in addition to experiencing elevated day-to-day consumption of safety products from manufacturing and construction customers as they operate with enhanced safety protocols for employees.

Gross profit as a percentage of net sales declined 190 basis points to 45.3% in the third quarter of 2020 from 47.2% in the third quarter of 2019. The most significant factor behind the decline in overall gross profit percentage in the period was the impact of lower product margins specifically for a narrow subset of COVID-specific safety products, such as masks and face shields, where an improved supply of product has pressured product margins.

As business conditions began to normalize in the third quarter of 2020, the shift in product mix toward higher-margin fasteners was more pronounced than the shift in customer mix toward lower-margin national accounts and onsite customers, resulting in a narrowing in the mix impact on gross margins in the third quarter of 2020.

Operating income, as a percentage of net sales, increased to 20.5% in the third quarter of 2020 from 20.4% in the third quarter of 2019. The 190 basis point decline, in gross profit percentage experienced in the third quarter of 2020, was slightly more than offset by operating and administrative expenses, including a gain on sales of property and equipment, which as a percentage of sales declined 200 basis points from 26.8% in the third quarter of 2019 to 24.8% in the third quarter of 2020. The primary reasons for this improvement was the ability to leverage employee and general corporate expenses in light of higher sales.

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