Fastenal’s reported first quarter 2025 earnings with revenues above slightly above expectations, growing 3.4% year-over-year to $1.96 billion, and meeting earnings per share expectations.
In addition, Fastenal experienced increases from large customer signings, growth in the number of customer sites spending $10K or more per month and growth in the average monthly sales per customer. Overall, the results showed resilience amid challenging market conditions, as Fastenal continues to manage costs.
First Quarter Guidance, OK for Fastenal, Unclear for Most
Guidance from companies this quarter is expected to be cloudy, however, Fastenal did offer that they expect continued growth, with pricing actions in April anticipated to contribute a 3-4% increase in the second quarter. The company projects EPS growth in subsequent quarters and aims to expand its digital sales footprint to 66-68% by October. Notably, Fastenal has maintained dividend payments for 33 consecutive years, with a current dividend yield of 2.27%, demonstrating its commitment to shareholder returns.
Highlighted risks include
- Trade policy uncertainties and potential tariffs on Chinese imports which could impact costs.
- Sluggish end market demand and plateauing customer sentiment will pose challenges.
- Supply chain disruptions may affect inventory and product availability.
Tariffs = Unpredictability
Not at all surprisingly, the first question during Q&A concerned tariffs, specifically, pricing flexibility. CEO Dan Florness’ response centered around alternative sourcing options to mitigate tariff impacts and strengthening supply chain solutions and customer relationships. Given that Fastenal sources directly with manufacturers, rather than through master distributors, they have visibility and granularity into the market, and therefore a competitive advantage in terms of market knowledge.
Fastenal developed a pricing review tool in 2018 in response to the previous round of tariffs that they use to communicate to customers, granting that this rounds order of magnitude (170% duty, with 145 new) is something no one has navigated before. Fastenal’s broad sourcing supply chain and transparency places them in an advantageous position to successfully navigate challenges.
A quick back of the envelope calculation shows that roughly 30% of a fastener’s bill of materials comes from raw materials; tariff would be applied to 40% of the COGS of a fastener, and the rest of the cost is associated with transporting/ processing and logistics to the shelf. Fasteners are steel derivatives and therefore covered under Section 302 which is 70% steel imports (and only 45% of which is incremental) – making them exempt from the 145% increase in China. Private label products, however, would be subject to the higher incremental tariffs, so the impacts of price increases for the private label products are greater.
Fastenal Margins Concern Growing
Margin is a concern, and tariff impacts are expected to hit relatively fast and companies strategies will be to pull in margin ahead of costing – as tariffs move through P&L faster than say inflation. In fact, during 1Q25, gross profit as a percentage of net sales decreased to 45.1%, impacted by:
- Customer and product mix, which diluted margin, driven by stronger growth with large customers and non-fastener products, all of which have lower profit margins.
- Higher fleet and transport costs driven by inflation in vehicle costs as Fastenal cycles through the fleet and is replacing more vehicles, which were heavily used in pandemic recovery
- The negative effects on gross profit percentage were partly offset by increases in supplier incentives due to expanding spend with key suppliers.
Margin will be impacted by uncertainty, with the most impacted are Fastenal’s discount private label product offering, which is about 12-13% of sales. However, on a volume basis, Fastenal continues to make share gains and sales outpace industrial production for manufacturing, which is not a bad position to be in.
Another dynamic could be customers switching from private label towards branded products due to higher price increases in private label. While private label has higher gross margins, and switching would be a drag on margin, a margin drag could also come from an inability to pass through China tariffs on private label. On the other hand, there could be a potential revenue uplift as branded products cost more.
Fastenal’s Growing Inventory
Interestingly, Fastenal reported that inventory increased nearly 12% year-over-year, driven by:
- Additions to support projected growth and to a lesser extent, the anticipated impact of tariffs
- Growth in sales with certain customers and the addition of stock to ensure Fastenal can support their future growth.
- To support fastener expansion and optimal package quantity initiatives, to improve service to in-market locations and generate efficiencies in hubs.
Fastenal probably has enough inventory to get it through most of the second quarter without having to adjust prices.
Fastenal’s End Market Profile
Fastenal’s end market mix is weighted towards manufacturing, with 43% Heavy Manufacturing and 32% All Other Manufacturing, followed by 8.5% Commercial Construction, 5.2% Reseller, 5.2% Transportation & Warehousing, 3.8% Government/Education and 2.3% other end market segments. If the investments in US manufacturing materialize, Fastenal is in a good position to benefit.
Digitization Growing
Fastenal’s digital sales continue to expand with eBusiness sales growing nearly 13%, to $607.6m, or 30.7% of sales and total digital footprint sales (including eBusiness) grew 8.3% to $1,208 million, representing 61% of total sales. Note, Digital Footprint is a combination of sales through FMI (FASTStock, FASTBin, and FASTVend) plus that portion of eBusiness sales (which includes eProcurement activities, which are integrated transactions, including electronic data interchange (EDI), and eCommerce (transactional website sales)) that does not represent billings of FMI services.
Kevin’s Key Takeaways
Fastenal performed well, however, there are growing risks. First and foremost, a rough patch for the overall market especially if industrial end markets continue to soften with no recovery in 2025; if market share gains sputter and fail to translate to above-market growth, and if Fastenal is unable to offset gross margin contraction with automation and other productivity investments. Upsides could include a faster-than-expected cyclical recovery with significant investments in manufacturing especially, and Fastenal expanding into adjacent product categories, accelerating growth.
The CMG team shared additional commentary on Fastenal’s March 2025 Investor Day that are below for your review
Fastenal Investor Day Insights – Opinion – Industrial Supply Trends
Part 2 – Fastenal Investor Day Insights – Opinion – Industrial Supply Trends
If you have thoughts or comments on Fastenal to share, please feel free to reach out to our team. There is much to learn as an Industrial Distribution Channel leader from the Fastenal story that may apply to your unique distribution business.
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