You know things might not be going particularly well when you’ve had three CEOs in the space of nine months, and that’s exactly what’s happened at nuts and bolts maker Fastenal which named current CFO Daniel Florness to the top spot on Tuesday.
The move came after the company reported meager top and bottom line results for Q3 this week.
It’s not very difficult to understand why the company's business has come under pressure. The slump in crude prices has put an enormous strain on its energy-related operations. Here’s some color from Credit Suisse who notes that in September, Fastenal saw its first Y/Y sales decline since 2009:
Not surprising, FAST indicated the industrial outlook has deteriorated in particular during the month of September. In fact, September, was the first month since 2009 in which FAST experienced y/y declines. Along with the stronger dollar, FAST noted continued oil and gas headwinds, and heavy manufacturing. By geography, Texas took a step down and FAST noted slowing growth in Canada. Of FAST's top 100 customers, 44 saw top line declines. Of the 44, 32 were negative by more than 10% and 17 were negative by more than 25%. FAST does not expect to see any improvement for the next several quarters and believes the industrial environment is in a recession.
Now hilariously, Credit Suisse somehow managed to take that strikingly bad assessment and turn it into this title: “SteadFAST In the Face of Adversity.” But hey, it’s the sellside so it’s not like they were going to tell you to sell it.
Anyway, what struck us was the rhetoric on the call, especially the retort from new CEO Daniel Florness when William Blair analyst Ryan Merkel (no relation to any “pure hearted” German “lion mothers”) made the mistake of calling the current environment “non-recessionary”:
Merkel: Then just lastly, Fastenal growing zero percent here in September and in a non-recessionary environment, it’s pretty surprising, I think, for a lot of us. But if we just step back and we think about quantifying some of the headwinds, and I don’t want to put words in your mouth but it seems to me, oil and gas customers are probably down, what, 30% this year. It might be a 3% headwind to sales. And then what about exports? I’ve got to think that’s an even bigger impact, but you tell me - and we’ve also got FX as a one-point headwind.
Florness: Yeah, a couple things. First off, the premise of the question, I would argue that anybody selling into the industrial market is not selling into a non-recessionary environment. We are--
Merkel: I agree. I agree with you there.
Florness: The industrial environment is in a recession - I don’t care what anybody says, because nobody knows that market better than we do. You know, we touch 250,000 active customers a month.
Right now in the third quarter, 44 of our top 100 customers are negative. We have not lost any business with that group. They are negative in their spend. In some cases, they are negative because their business is very negative and they are somewhat negative with us.
Of that 44 that were negative, 32 of them were negative more than 10%. Of that 44 that’s negative, 17 of them were negative more than 25%. That’s a sign of a recessionary environment.
So, two very simple, yet very critical takeaways:
- the industrial sector is in a recession,
- whatever you do, do not suggest to Dan Florness that Fastenal's lackluster performance is related to anything other than the pitiable condition of the US economy