Industrial slowdown doesn’t look frightening

Worried about a recession? Let industrial distributor Fastenal Co offer some perspective.
The Winona, Minnesota-based company specialises in supplying factory-floor odds and ends to manufacturers and construction companies, and its earnings can often be a harbinger of the results its customers will report later this month. Fastenal said that demand was generally healthy but that there were certain signs of “softening” in May and June. Investors, who are on the lookout for any signs of deterioration in the economy, responded by sending Fastenal shares down about 5%.
But let’s unpack what this “softening” actually looks like: Average daily sales of Fastenal products increased 17.6% in May compared with those in the month a year earlier and rose 16% in June. That is a deceleration relative to the 20.3% pace in April, but a slowdown in this case still means double-digit sales gains. “That softening was not particularly deep, and if the level of economic activity that we experienced exiting the second quarter were sustained, we feel good about the rest of the year,” Fastenal Chief Financial Officer Holden Lewis said on a call to discuss the company’s second-quarter results. “Nor was the softening that we experienced particularly broad. We experienced it largely in areas that directly touch consumers as well as construction while our core capital-goods and commodity-related markets remain strong with healthy backlogs.”
Fastenal’s continued growth is all the more impressive considering that sales didn’t take much of a hit during the pandemic, thanks to its ability to procure face masks and cleaning supplies. Revenue isn’t drying up; the momentum has simply shifted to different markets.
Taking a step back from the sales outlook, plenty of comments in Fastenal’s earnings report would have been cheered if they had been made under a slightly different context — say, amid the supply chain and labour frustrations that prevailed in the industrial economy just a few months ago or on a day when the consumer price index didn’t show a fresh four-decade high in inflation. Costs for fuel, transportation, plastics and metals are still elevated but stabilising, and the company’s ability to source products is becoming “less chaotic,” Fastenal said. The company didn’t raise prices broadly in the second quarter, but previous efforts helped keep its gross margin flat in the second quarter despite the cost inflation.
Although Fastenal said it would respond to additional cost pressures as needed, it has no specific plans for another significant price escalation, and absent a material shift in inflation, it’s likely done with more aggressive maneuvers, Lewis said. In other words, at least as far as Fastenal prices are concerned, it appears that inflation has peaked.
Fastenal has struggled to hire amid a competitive labour market, Covid disruptions and unique pressures on the college student talent pool that’s typically been a key recruitment pipeline for part-time workers. While those challenges haven’t disappeared, they’re ameliorating: Job applications in each of the past three months have been about 10% below the pace of 2019, a significant improvement from 2021, when interest in joining the Fastenal workforce was down about 36% from pre-Covid levels.

—Bloomberg