In its third-quarter call with investors, industrial and construction supplies distributor Fastenal (Nasdaq: FAST) said its biggest challenge in this period was gross margin. President and CEO Will Oberton said: "The margin was probably the only tough spot for us. … We knew going into the third quarter that it would be tough on margins, but we believe we hit bottom in August." (Read about Fastenal's third-quarter results.)
Deflation, which Oberton said cost Fastenal 100 basis points year-over-year. "It is really that last year was so good because things were moving up, and this year it was moving down so rapidly," he said. On the bright side, he noted that the CRU steel index for low carbon bottomed out in April and May. Stainless steel also bottomed out, and is now up 10%. "Deflation … is pretty much over as we see it," he said.\
Volume incentives/product rebates. "Our purchasing people did a really good job of renegotiating the deals going in, and I was confident that this wouldn't be a problem earlier in the year. But that was before I realized that our sales would be down as far as they were. So we worked hard to minimize the reduction in rebates, but it is still going to affect us. And a lot of that has to do with our decision to lower our inventories," Oberton said. He said that in late August, the distributor "made a decision to not chase the volume incentives," and decided to "not be aggressive." The decrease in incentives cost Fastenal "20 to 30 basis points more in margin."
And thirdly, market pressures. "Earlier in the year, we were seeing just crazy pricing, and it was mainly in the fastener areas, not so much in the non-fasteners, but prices that we just were not willing to go down to. In some cases we lowered our prices, but not as far as we were getting pushed to do," Oberton said. Fastenal blamed the decrease in prices on suppliers' and competitors' need to create cash from excess inventory.