Fastenal Earnings Call Insights: The Gross Margin and Vending Adoption

Fastenal Company (NASDAQ:FAST) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

The Gross Margin

Holden Lewis – BB&T Capital Markets: Wanted you to expand a little bit on the gross margin if you could, and it sounds like you’re kind of assuming that the momentum you experienced in November and perhaps December is getting carried forward. So, can you give us a sense of – I mean, November, December, we are already in between 52% and 53% range, kind of what drove the number perhaps up there. You said that you may need to improve it further. What do you expect to do in 2013 to achieve that, I don’t know if it’s pricing getting better or how you’re going to do that?

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Willard D. Oberton – President and CEO: Well, there are several things we’re working on Holden. One is pushing fasteners harder, hopefully get some help there. But another initiative that we’ve been working hard on for the last few quarters is we’ve developed some new pricing system for our stores, and although it’s early we’ve been seeing some positive results there, using better data on guiding the stores and where to price the product. So, we’re working hard on that. We really believe that we’re going to pick up some improved margins, I mentioned the vending we’re working very hard, we’ve actually installed a team within the vending group to work on underperforming machines. What we’ve identified in some of the vending areas is our – we put a lot of pressure for people to sign these sign machines and sometimes we give the product away, that sort of what it almost look like. So, we’re going in and we’re reconfiguring some of the machines that’s more profitable product. So, there is several initiatives that we’re working on, but as Dan said, from October to December we’ve seen a nice steady uptick, and typically December is the worst month of the year for margin, I don’t know why, but that’s the way it’s always. This year actually was the exception to that, so it’s all about focus, but the biggest piece would be the new system that we’re working on at the store.

Holden Lewis – BB&T Capital Markets: Could you just comment. As a follow-up on the pricing environment. I think alluded that you had some pressure in international market, but what do you see in terms of this core pricing in your domestic market and maybe also any discounting rates that you might be seeing in the market?

Willard D. Oberton – President and CEO: We haven’t seen a lot of change in the markets. To be honest with you, the steel pricing has been soft and that has not helped us at all. So, a part of the reason I believe our fastener sales are down because Asian steel prices have dropped, but otherwise there has not been a lot of activity. We’ve had some of our suppliers coming in pushing price increases. We’ve been pretty successful on holding those off. There’s not a lot of inflation, and there’s not a lot of — business is slow, so people are less likely to push pricing, very kind of uneventful pricing environment. We just believe we have some opportunity to move it on our own, and we’re not pushing a lot of price increase. We did do some selective price increases on some of the products, all non-fastener products. We didn’t push fasteners at all.

Vending Adoption

Adam Uhlman – Cleveland Research: I had a couple of vending-related questions. I guess, first on – what are we seeing today on the vending adoption across the store base and kind of what percentage of the stores have participated now, and maybe just your general thoughts on how that progresses through 2013.

Daniel L. Florness – EVP and CFO: Actually, right now, about 90% of our stores have at least one vending machine and just north of 80% of our stores have put out a vending machine in the current year. But what – reason we’re bullish on vending, is if you really get down to it and you look at where the machines are, it’s still in a subset of our stores. We have a lot of stores out there that have one machine or two machines, but it’s a subset that have really hit home with it. Will?

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Willard D. Oberton – President and CEO: One thing that we did Adam, because we’re aware of that, we have a lot of opportunities in these underperforming stores, is the new vending incentives that we’ve put into place. One of them is we introduced a new incentive to the managers that were – did well last year that hit a certain number last year, we are offering them an opportunity to make up the $3,500 to go down the street to a store that hasn’t done as well in their area and sell off to 10 machines. So, if they get 10 machines, they get – we send them a check for $3,500 and it wraps itself from 5 to 10. So, we think, is what we’ve identified is those managers are the best salespeople we have in our Company, the ones that are already doing it. So we’re leveraging that talent. We also have taken the 70 people that we have driving around in the vans, whether they’re vending vans, and we’ve changed their pay program. The stores in the top quartile of vending signings last year, they will only be paid 50% commission. They’ll cut their commission in half on our best stores. The bottom half of our stores; we will double their commission, no bottom half. So, 25% of the stores are going to get half commission, 50% are going to get double commission, because we know what happens is those salespeople are going to go where the rain is happening or where they can make money. And so, they are going where we don’t really need the help because those managers are so good. So we identified this opportunity; we’ve adjusted the programs, it was all rolled out in early May – or excuse me, in early December, and we’re excited to watch how it happens. We’ve already gotten some good stories back on the manager; we call it the mentoring program, on that program where we – manager has gone in and hit it in a couple of days.

Adam Uhlman – Cleveland Research: I guess just tying it all together, Dan, you had mentioned that you’re really bullish on the topline opportunity for the year and the momentum on vending would suggest really strong growth. If the economy doesn’t move from where we are at like now, any stab in the dark of what you think you could do in revenue growth?

Daniel L. Florness – EVP and CFO: We just, as historically and – don’t go there because we just hate to try to predict what the economy is going to do. What I can tell you is our sequential pattern I think tells the story and I think we have a lot of growth drivers. If I look – I always look at it and say, what are my plusses and what are my minuses from that historical benchmark period. One minus that you have to acknowledge is this; is the fact we’re opening fewer stores than we were a decade ago. For that one minus, I have a handful of plusses. We have a vending initiative. We have international expansion. We have metalworking initiative. We have government initiative. We actually have a stronger manufacturer initiative. We have an OEM fastener initiative. And you start adding all those pieces up and you see what some of our initiatives did to buck the trend, if you will, in the non-fastener part of our business in 2012, it really tells me that we have like 10 to 1 positive to negative in our growth driver. Obviously, the first one we are opening fewer stores and that was evident in the past timeframe when I’m using that benchmark, but I think all these other 10 more than offset it. So, we think there is odds of – beating that trend are greater than missing that trend line, and I think that speaks for itself on how that plays out for ’13 and then the wildcard is that little thing called the economy.

A Closer Look: Fastenal Company Earnings Cheat Sheet>>