With Fastenal experiencing shifting daily sales growth rates since its April 14 first-quarter results release, Holden Lewis, EVP and CFO, held an off-cycle investor call to provide further detail on the distributor’s outlook during COVID-19.
The mid-April 1Q report had regional vice presidents anticipating upward of -15% results and the company tracking down 10% to 11% for April. In contrast, Fastenal’s daily growth rate report for April on yesterday's call (May 6) was up 6.7%, Lewis said. While safety products were up 120% versus April 2019, Lewis framed these results as a function of surge orders for expedited PPE in response to COVID-19. Excluding the safety category, Fastenal daily sales in April would have been down 16.4%, led by a 23% decline in fasteners, he said, adding that safety would also have been down if the company excluded surge orders.
Raw numbers showed both manufacturing and construction customer sales down nearly 16%, with sales to state and local governments and healthcare customers surging up 184% in April.
A Quick Pivot
Beyond the numbers, Lewis highlighted the work of Fastenal’s sales procurement product and quality control employees, who quickly pivoted, he said, to help customers manage under rapidly changing conditions. For example, the international procurement unit FASTCO [Fastenal Asia Sourcing & Trading Company] stopped a large food producer customer from procuring KN95 masks that did not meet the customer’s filtration threshold. Additionally, hundreds of Fastenal employees in less than a week assembled 170,000 “back-to-work kits” of masks, sanitizers and temperature gauges for a large OEM client.
“Our safety teams were able to pivot to critical-needs customers, getting product to over 450 medical, healthcare and hospital customers that had bought little-to-no product from Fastenal in the past,” Lewis said. “In fact, the surge orders that we experienced in April were a product of more than 11,000 accounts that had not bought safety products from Fastenal in 2019.”
Noting that “conditions remain really volatile,” Lewis called visibility into the back half of the year nonexistent. Fastenal does expect underlying business activity to improve in May over April, although, he added, “to what extent is not clear and we certainly do not anticipate a return to anywhere near the pre-COVID levels.”
The company expects surge orders to continue at a lesser pace, but to be heavily influenced by the nation’s COVID-19 policies and response going forward. For example, changing workplace practices around safety and social distancing as businesses reopen.
As reported in its 1Q call, Fastenal still expects onsite vending signings to be down as customers shift to immediate needs over long-term planning. A sharper shift in mix toward lower margin customers and products continued throughout April, Lewis said. “We believe these shifts are event driven and temporary but also more dramatic than we may have envisioned a few weeks ago,” he added.
Many safety products have been sourced and moved outside of Fastenal’s traditional supply chains, with bulk direct ships and underutilization of its manufacturing services weighing on gross margin. “On the other hand, the greater-than-expected volumes and solid labor management by field leadership should allow for better leverage of operating expenses than might've been expected at the time of our first quarter earnings call,” Lewis said.
Although profitability is still under pressure, the magnitude of impact on Fastenal’s second quarter operating margins “may not be as great as originally anticipated,” he added.
“Whether our sales grow or decline in the second half of the year depends on the state of the industrial economy and our expectations for the sorts of surge orders we saw in April,” Lewis said. “Unfortunately, we don't have visibility in to either item at this time.”
During Q&A after his prepared remarks, Lewis answered a range of follow-up questions, starting with where the surging safety sales are coming from. Top sales in the category, he reported, include a number of state and local governments, commercial businesses that Fastenal has never worked with before, as well as existing customers who have never purchased PPE before.
As of the April quarterly call, Fastenal had 120 closed locations. Since then, the number rose to a peak of 160 to 175, Lewis said. As the economy opens back up, it’s necessary to monitor not simply whether or not a location is open, but also the percentage that are operating below capacity and by how much, he added. “However May turns out in terms of the underlying economic activity, we would still expect it to be meaningfully below where we were just as recently as February,” Lewis said.
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