The 2020 Mid-Year Economic Update_long

Fastenal Gross Margin Disappoints Again in 3Q

CEO: Several factors including competitive pricing pressure drove the decline.
Angela

In Fastenal's second-quarter conference call, CEO Will Oberton highlighted a "disappointing trend" in the company's gross margin. Oberton repeated that sentiment during Fastenal's third-quarter call, saying he was "very disappointed" with the company's 51.7 percent gross margin, which declined from the second quarter to the third, according to a press release.

According to the release, 85 percent of the quarterly decline was transactional, and 40 percent of that transactional drop was due to product mix. Oberton said fasteners, which grew only 1 percent during the quarter, carry the highest margin of any product Fastenal sells. "On the other side of that, our non-fastener products grew about 12 percent roughly. And they're traditionally lower-margin product, so there's a mix issue going on there," he said.

"Another mix issue that we're facing right now is customer growth," Oberton said. "We're getting better-than-average growth or better growth out of our large customers and slower growth out of our small customers. And the larger customers, again, are the lower-margin customers."

Buyer behavior and competitive pressure also impacted margin in the third quarter, as customers pushed for lower prices. "The customers are pushing us very hard, and many of our competitors are responding to that just as Fastenal is," Oberton said.

Oberton refused to offer guidance on future gross margin during the call, but he said that if the economy doesn't turn around, competitive pressures from both its competitors and its customer base will remain the same. "So we don't … foresee a lot of change over the next three to four months."

Fastenal CFO Daniel Florness said Fastenal's vending program has helped to drive its high-margin private label brands. Oberton spoke with MDM about Fastenal's vending program in Fastenal’s Vending Evolution.

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