[FAST – Fastenal] Notes from CFO Convo; [ASHG – Ash Grove] Constructive Cement Pricing, Stock Is Cheap

[FAST – Fastenal]

Fastenal’s dense branch network affords scale advantages in distribution and service relative to Grainger, which has 2.5x Fastenal’s sales but only ~1/10 its branches and ~1/7 its field employees.  Local market density is especially important because fasteners, which comprise nearly 40% of the company’s sales and a greater proportion of gross profits, is a “high weight to value” product that can’t be economically shipped over long distances. Management thinks that store density allows the company to distribute 10%-15% cheaper than peers.  Per its 2014 Shareholder Letter:

“While others embraced e-commerce as their primary distribution model, adapting their businesses to direct-ship orders via remote warehouses, we’ve never stopped working to develop our local store network, bringing our people and products closer and closer to our customers. This approach has served us well for many years, and we believe it gives us an important structural advantage moving forward.”

And while fasteners are a simple product, there are shitloads of SKUs with disparate geometries across a wide range of products – from office desks to Caterpillar tractors – and ensuring efficient levels of inventory across hundreds of thousands customers is a complex logistical task.  So, it seems I got it wrong in my last post when I claimed that “…threaded fasteners – undifferentiated, necessary, high-volume, and recurring components that constitute a third of FAST’s sales and are its highest margin products – seem particularly susceptible [to Amazon].”

As previously noted, Grainger has aggressively slashed its prices over the last year.  Amazon, too, has slid its tentacles under the tent and even approached 2 of Fastenal’s top 30 customers.  But so far the impact from both competitive threats has been minimal.  Around 55% of Fastenal’s revenue comes from onsite locations and vending machines that cater to large national accounts while another 20% are heavy fastener consumers…so, 75% of the company’s business requires either dedicated feet-on-the-ground servicing or local density and would be tough for even mighty Amazon to displace.  And even a decent chunk of the remaining 25%, relatively lower gross margin stuff, has some service component to it (a Fastenal guy is in the customer store room, reloading bins and whatnot).

While the number of free-standing branches (“public stores”) has shrunk by 6%, onsite locations have grown by 46%, such that the total number of “in-market units” [a term that management has adopted, reflecting the fact that onsites are really just branches inside of customer locations and what really matters in terms of scale economies is the number of nodes within a market area] is about flat.  Most of FAST’s vending machine and onsite customers, 3/4 of whom are national accounts (multi-site contracts), began as branch customers who shifted an increasing mix of their orders to the company over time.