Fastenal is a leading distributor of industrial supplies to service and repair contractors, original equipment manufacturers, and commercial construction companies. The company sells over 500,000 unique products across 10 categories, including: fasteners, power tools, safety and janitorial supplies, abrasives, metal cutters, and various raw materials. Founded in 1967 in Winona, Minnesota as a single supply store offering hundreds of individual types of screws, the company’s network today includes 2,000 branches in the U.S., Canada, and Mexico, 12 distribution centers, 6,000 employees and close to $2 billion in annual revenue. Though the average person probably doesn’t have much interaction with a Fastenal store directly, its products and impact are pervasive throughout American industry, from the industrial strength bolts that hold a piece of machinery together to the hydraulic lifts that a mechanic uses to service a vehicle. The company competes in the extremely large and fragmented industrial supplies space, estimated at over $140 billion, where it possesses only marginal share today.
Fastenal has been the fastest growing of its distributor peer group and currently possesses among the highest profit margins and return on capital metrics. These results are driven in part by the company’s strategy of opening new stores organically (instead of through acquisition), which reduces integration risk, employee turnover, and in our view provides more predictable revenue growth. In addition, given the company’s heritage, over 50% of the inventory mix remains fasteners, which are sourced directly from China and carry gross margins over 60%. The company generates significant cash flow and has minimal capital needs as new stores and delivery vehicles are typically leased and require only basic fixtures and equipment. As a result, the company carries no debt and re-invests the majority of its cash flow into new growth initiatives aimed at driving improved results. One such program has been a recent store redesign, whereby the company changed the look of the store from a warehouse feel with a counter upfront and a big back room to a more intuitive, retail layout. This change entailed bringing all inventory from the back of the store out into displays in the front. The result has been a dramatic increase in store productivity, both from a sales and labor savings standpoint, as customers are spending more on accessories when shopping for product and the company’s ‘‘will call’’ business has grown at the expense of pricier delivery options.