Industrial and construction supplies distributor Fastenal reported its 2023 second quarter financial results on June 13, showing a considerable deceleration in year-over-year sales and profit growth.

As one of the first publicly-traded industrial distributors to report its earnings each quarter, Fastenal’s financials are often viewed as a bellwether for the overall U.S. industrial economy.

Winona, Minnesota-based Fastenal posted 2Q total sales of $1.88 billion, up 5.9% year-over-year and up from $1.86B in 2Q. It was a sharp slowdown from 1Q’s 9.1% year-over-year sales growth seen and 9.6% sequential growth.

Fastenal’s 2Q daily sales growth was likewise 5.9%, comprised of 7.8% growth in April, 5.2% growth in May and 4.7% growth in June.

“Softer manufacturing activity contributed to daily sales growth decelerating to 5.9%,” Fastenal CEO Dan Florness said in the company’s 2Q earnings presentation. “We did not leverage in the period, due both to cyclical factors and our not adjusting variable costs quickly enough to keep pace with the slower rate of sales.”

The company’s 2Q gross margin of 45.5% fell 110 basis points from a year earlier and 20 bps from 1Q. Fastenal’s 2Q operating profit of $395 million was up 3.0% year-over-year and topped 1Q’s $392 million, while 2Q operating margin of 21.0% fell 60 bps year-over-year and 20 bps sequentially.

The company noted 2Q gross margins were negatively impacted by strong growth from Onsite and non-fastener products — which tend to have a lower gross margin than the business as a whole — and higher organizational/overhead costs, partially offset by favorable freight expenses.

Fastenal’s 2Q23 net profit of $298 million was up 3.8% year-over-year and topped 1Q’s $295 million.

The company said the higher unit sales it experienced during 2Q were primarily driven by growth at its Onsite locations — particularly those opened in the last two years — which more than offset lower revenues in construction and reseller end markets powered by the company’s branch network. Meanwhile, foreign exchange negatively impacted 2Q sales by about 40 bps.

Pricing Impact

Fastenal said the impact of product pricing on net sales in 2Q23 was 190 to 220 bps vs. a year earlier. That continues a downward pricing impact trend that followed an impact of 290-320 pbs in 1Q; 350-380 bps in 4Q22; 550-580 bps in 3Q22; before a peak of 660 to 690 bps in 2Q22. That shows the impact of pricing on net sales in 2Q23 was less than one-third of what it was a year earlier.

Like it mentioned after 1Q23, Fastenal said the 2Q pricing impact on sales reflected the impact of general inflationary conditions in the marketplace over the past year and the carryover of targeted actions taken in1Q23 to address gross margin pressure for non-fastener and safety products.

Other notes from Fastenal’s 2Q23 earnings report:

By product line:

• Fastener daily sales growth was a flat 0.0% year-over-year in 2Q23, compared to 7.0% in 1Q and 9.1% in 4Q23. Fasteners represented 32.6% of the company’s 2Q23 total sales, down from 34.6% a year earlier.
  • June Fastener daily sales fell 0.6% year-over-year, identical to May
• Safety supplies sales grew 7.9% in 2Q23 year-over-year, compared to 5.7% in 1Q. Safety supplies represented 20.7% of the company’s 2Q23 total sales, up from 20.3% a year earlier.
  • June Safety supplies daily sales grew 6.8% year-over-year, identical to May
• All other product sales (including tools, JanSan and cutting tools) grew 9.8% in 2Q year-over-year, compared to 12.4% in 1Q. All other product sales represented 46.7% of the company’s 2Q23 total sales, up from 45.1% a year earlier.
  • June Other product daily sales grew 8.2% year-over-year, down from 9.0% in May

By customer end market:

• 2Q23 daily sales to manufacturing customers grew 10.4% year-over-year, compared to 14.4% in 1Q23. Manufacturing customers comprised 74.8% of the company’s 2Q23 total sales, up from 71.8% a year earlier.
• 2Q23 daily sales to non-residential construction customers fell 8.8% year-over-year, following a 2.4% decline in 1Q23 and a 0.6% decline in 4Q22. Non-res construction customers comprised 9.2% of the company’s 2Q23 total sales, down from 10.7% a year earlier.
• 2Q23 daily sales to all other customers fell 3.2% year-over-year, following a 4.4% decline in 1Q23. All other customers represented 16.0% of the company’s 2Q23 total sales, down from 17.5% a year earlier.

By customer category:

• National accounts customers saw 2Q23 sales grow by 10.4% year-over-year, compared to 13.6% in 1Q23 and 15.0% in 4Q22. They represented 59.3% of the company’s 2Q23 total sales, up from 57.3% a year earlier.
• Non-national accounts customers saw 2Q23 sales grow by 0.2% year-over-year, compared to 3.4% in 1Q23 and 5.6% in 4Q22. They represented 40.7% of the company’s 2Q23 total sales, down from 42.7% a year earlier.

Vending

• Fastenal signed 86 new Onsite locations during 2Q23 (89 in 1Q23), bringing its total number of active Onsite locations to 1,728 at the end of June. That figure is up 3.2% from 1Q23 and up 15.1% year-over-year.
• The company’s 2Q23 daily sales through Onsite locations grew at a high teens rate year-over-year, compared to approximately 20% in 1Q23
• Based on signings in the first half of 2023, Fastenal expects to sign approximately 350 new Onsite locations for the full year in 2023, down from its original goal of 375 to 400.
• Sales from Fastenal’s FMI Technology — comprised of FASTStock (scanned stocking locations), FASTBin (infrared, RFID and scaled bins) and FASTVend (vending devices) — totaled $758 million in 2Q23 (40.3% of total sales), up from $740 million in 1Q23 and up 18.4% year-over-year. 

eCommerce & Digital Footprint

• Fastenal said that daily sales through its eCommerce platform grew 44.7% year-over-year in 2Q23 and represented 23.3% of its total sales in the quarter.
• Fastenal said that its digital products and services — comprised of sales through FMI plus the portion of eCommerce sales that don’t represent billings of FMI services — or digital footprint, comprised 55.3% of total 2Q23 sales, up from 47.9% a year earlier.

Employee & Branch Count

• Fastenal ended 2Q23 with a total employee headcount of 22,913 — up 0.4% compared to 1Q23 and up 5.9% year-over-year. In-market total headcount of 13,668 at the end of 2Q23 was flat compared to 1Q23 and up 4.1% year-over-year.
• Fastenal ended 2Q23 with a total branch locations count of 1,635 — down 25 from 1Q23 and down 102 (5.9%) year-over-year). The company opened three new branches during 2Q23 and closed 28.
• Including active Onsites, Fastenal ended 2Q23 with a total in-market locations count of 3,363 — up 0.9% from 1Q23 and up 3.9% year-over-year. The company activated 89 new Onsite locations in 2Q23 and closed 35.