"Fastenal Reports 18% Revenue Growth in Q2 2023 Despite Inflation Impacting Margins"

Q2 Revenue Jumps 18% Year-Over-Year

Fastenal generated total net sales of $1.8 billion in Q2 2023, an 18.0% increase compared to $1.5 billion in Q2 2022. This growth was driven by a 14.4% increase in sales volume and a 3.2% boost from higher product pricing related to inflation.

By end market, manufacturing sales grew 26.2% to $1.1 billion while construction sales were up 10.0% to $364.5 million. The growth reflects continued broad-based demand across Fastenal's customer base, especially in manufacturing as industrial activity remains healthy despite economic uncertainty.

<img src="fastenal-products.jpg" alt="Fastenal industrial supplies">The company operates onsite locations at customer facilities, allowing it to quickly fulfill needs as they arise. This unique distribution model has fueled consistent daily sales growth [1]. Fastenal signed 174 new onsite locations in Q2, bringing its total active sites to 1,395.

In Q2 2023, average daily sales growth was 20.2% excluding the impact of foreign exchange rates. Fastenal's strong local presence and customer relationships continue to support above-market growth.

Inflation Erodes Margins Despite Price Increases

While Fastenal grew the top line at a healthy clip, Q2 profits were pressured by increased costs. Gross profit increased 14.4% to $912.3 million, but gross margin declined 180 basis points to 49.4%.

Rising product, transportation, and labor costs weighed on profitability. The company has worked to offset inflation via price increases, but there is a lag effect as pricing adjusts to cost changes.

Operating income grew just 1.2% to $287.7 million as operating margin contracted 280 basis points to 15.6%. Fastenal incurred higher fuel costs to keep products flowing efficiently through its distribution network amid global supply chain bottlenecks.

The company also invested in personnel, expanding its headcount by over 450 employees in Q2 to meet customer demand. These factors drove deleverage on the fixed cost base.

Overall, weakened margins caused diluted EPS to decline 2.6% to $0.42 even as pre-tax income grew modestly. Fastenal's profitability reflects broader inflationary challenges being faced by industrial distributors. Management expects gross margin pressure to persist in the second half of 2023.

Manufacturing and Construction Demand Drives Growth

Fastenal expects continued broad-based demand across its end markets in 2023, supporting its growth outlook. However, there are several key themes likely to shape results over the remainder of the year:

• Inflation - Elevated product and transportation costs will pressure margins until price increases fully offset the impact. Management expects inflation to persist, creating an earnings headwind.
• Manufacturing Strength - Fastenal is well positioned to benefit from reshoring and growth in North American manufacturing activity. Its onsite locations provide visible growth as production expands.
• Construction Demand - While moderating from peak levels, infrastructure investment and steady non-residential activity should support continued sales growth from construction customers.
• Higher Interest Rates - Fastenal's large cash balance will generate increased interest income as rates rise, providing some offset to inflationary headwinds.
• Operating Leverage - Investments in personnel, trucks, and branches weigh on operating margin currently but should drive sustainable growth over the long-term.

Fastenal's underlying business momentum remains positive despite some near-term hurdles from cost inflation and supply chain issues. The company's recent growth demonstrates the resiliency of its industrial distribution model through economic cycles.

Its strong balance sheet and cash generation capabilities provide stability amidst market turbulence.

Strong Cash Generation Funds Dividends and Buybacks

Despite lower earnings, Fastenal continued generating robust cash flows in Q2. Cash flow from operations reached $273.8 million in the quarter, up 4.4% versus $262.3 million in Q2 2022.

Cash conversion remained strong at 95% of net income, demonstrating the cash generative nature of Fastenal's asset-light distribution model.

This operating cash fueled further balance sheet improvement. Fastenal holds a net cash position, with cash and investments totaling $286 million as of June 30, 2023 compared to total debt of $100 million. The company has minimal capital expenditure requirements, allowing it to steadily build cash reserves.

During Q2, Fastenal returned $174 million to shareholders via dividends of $150 million and share repurchases of $24 million. The company recently raised its quarterly dividend payment by 20%, showing confidence in its cash generation.

Fastenal's balance sheet remains very healthy, providing stability amidst economic uncertainty.

Outlook: Persistent Inflation and Supply Chain Headwinds

Fastenal remains well-positioned to gain share in the fragmented industrial distribution market. Its unique customer-focused model has fueled decades of steady growth.

While inflationary pressures create near-term headwinds, the company appears capable of navigating a choppy economic environment. Fastenal's second quarter results provide a blueprint for delivering stable results amidst external volatility.

Q2 2023 Financial Results Summary

• Total sales grew 18.0% year-over-year to $1.8 billion
• Daily sales growth accelerated to 20.2% excluding foreign exchange
• Manufacturing and construction end markets fueled sales growth
• Gross margin contracted 180 bps to 49.4% on cost inflation
• EPS declined 2.6% to $0.42 as profits were squeezed
• Operating cash flow increased 4.4% to $273.8 million
• Fastenal maintains a strong balance sheet and liquidity
• Economic uncertainty persists, but underlying demand is healthy
• Strategic growth drivers firmly in place