Winona-based Fastenal's focus on placing sales sites in factories translates to earnings growth

A strong manufacturing economy and growth from Fastenal's strategic initiatives to increase industrial vending and on-location sales gave the Winona, Minn., company a huge boost in the fourth quarter.

The distributor of fasteners and industrial supplies earned $168.8 million, or 59 cents a share, up 11 percent. Revenue was $1.2 billion, up 13 percent.

Excluding discrete tax benefits and the effect of tax reform, net earnings were 60 cents a share, up from 45 cents.

Revenue for the fiscal year also was up 13 percent to $5 billion. Earnings were $751.9 million, or $2.62 a share, up 30 percent compared to 2017.

CEO Dan Florness shared a letter from one of Fastenal's customers to illustrate why the company is concentrating on factory vending and its Onsite sales operations, which are at the customers' business sites.

The original equipment manufacturer was already a customer, but after opening an Onsite location, Fastenal was able to provide a higher level of service and bring more supply-chain knowledge to its operations.

Onsite and commercial vending are key drivers for Fastenal, with 67 Onsite locations added in the fourth quarter and 336 for the year. Fastenal had hoped to add 360 to 385 Onsite locations in 2018; it added 270 in 2017.

Sales growth through both the Onsite locations and vending machines exceeded 20 percent.

For 2019, Fastenal said it expects to sign 375 to 400 new Onsite locations and an additional 21,000 to 23,000 vending devices.

Gross margin for the quarter and the year declined due to inflation, higher freight costs and the impact of customer and product mix, but analysts covering the company were expecting a bigger dip.

"It was encouraging to see operating margins come in ahead of our expectations despite weaker gross profit margins compared with the year ago period," wrote Jeff Windau, senior equity analyst with Edward Jones. "We believe the company will continue to work on offsetting some of the pressures by increasing the prices it charges customers and improving operational efficiencies."

Florness told analysts on a conference call that Fastenal has felt the impact of tariffs and inflation but their experience dealing with both issues and good customer communication and the ability to help customers find better cost options helped them mitigate those impacts.