Fastenal Pricing Spine-o-meter: 2 of 5 Vertebrae

Fastenal , a multinational distributor of industrial and construction products, had a strong 2022. Revenue increased 16% over last year to $6.98 billion while EBIT rose to $1.4 billion.

Their earnings call held on 19 January ’23 attributed their positive performance to their strategic decisions and efforts to shift from branch locations to onsite locations, use of FMI technology, and e-commerce.?

Financial statements indicate that gross margins remained nearly unchanged but slightly down while top-line revenue grew.?

What drove the slight margin degradation and should investors be concerned??Comments by CFO Holden Lewis during the earnings call provide insight.

Holden Lewis indicated a shift in mix sold as a driver to margin changes citing “broader product margin pressure in our non-fastener and non-safety products” than in their fastener offerings.?

Holden Lewis also indicated that discount management might need to be improved stating “(In) these categories (non-fastener and non-safety) …?the spend tends to be more unplanned, which when combined with slower demand and a better stock marketplace resulted in broader discounting. We believe this relates more to our actions than the state of the market and have plans to address it in the first quarter of 2023.”

And in that last sentence, we have an indication that pricing and price management are important to Fastenal’s performance, and therefore of increasing importance to Fastenal’s management.

Holden Lewis continued stating “We do expect that at some point in 2023, there will be requests to adjust fastener pricing down based on the cost of steel … or the cost of transportation. But our goal would be to really time the cost and the price effectively so that price cost is neutral in 2023.”

To achieve that goal, price changes at Fastenal must be both timely and accurate.?Thus, the importance of price management to Fastenal’s performance is anticipated to grow. Are CFO Holden Lewis and CEO Daniel Florness in a position to execute??

Research into the quality of Fastenal’s pricing team indicated a challenging state of affairs.?We found a few dedicated pricing professionals at the analyst and manager levels but not at the director or vice president level.?We found pricing to be a part of many district managers’ and supply chain managers’ responsibilities, but this isn’t the same as having a strategic pricing capability.?Hence, it isn’t clear Fastenal has the full skill sets internally to execute against that goal.

Given the importance management places on pricing and the capability the organization has in pricing at Fastenal as indicated in financial reports, management comments, and our pricing team research, and given their performance, we have come to the following conclusion as of February ‘23.

Fastenal Pricing Spine-o-meter:?2 out of 5 vertebrae.

FAST (Fastenal Co.) rose from 47.9 on the day prior to their earnings call to 50.3 one week later. 2022 revenue of $6.98 B with a 20.8% operating margin and P/E ratio near 27.

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