By: Jake Levinson
We’re expecting a lot of noise across the group this quarter, and our first print from FAST is a poster child. Notably, gross margins were 50 bps wide of consensus, raising concerns about the company’s ability to manage tariff pressures. Some of the miss may simply come down to FAST’s FIFO inventory accounting vs. LIFO/weighted average for peer MRO distros GWW/MSM, respectively. Distributors have a long history of being able to recoup inflation with price, though it typically takes a few quarters. Price up 120-170 bps this quarter speaks to that (up from 50-100 bps in 1H), and with supply chain constraints across industrials, customers likely have little choice but to take the increase. Though new China tariffs coming into effect on Jan 1 next year may mean FAST has another few tough margin quarters ahead of it (i.e. will take longer for price/cost to flip positive).
The bigger risk for FAST (and industrials in general) is around supply chains more broadly. FAST directly sources much of its fastener product (~1/3 of sales) from Asia along with other non-fastener products (e.g. private label brands). But more importantly, FAST’s customer base (e.g. CAT, DE) have similarly China-centric supply chains. Re-arranging these could prove very disruptive, especially with capacity utilization rates already at extremely tight levels. We’re seeing many companies in our proprietary data re-routing supply chains (e.g. through Mexico) in response to tariffs.
As for other details on the quarter…13% top-line growth was a bright spot and marks a 4th consecutive quarter in the low-teens range. Manufacturing accelerated through the quarter despite tougher comps, pointing to continued broad-based demand (particularly heavy machinery markets). Op margins up 30 bps despite gross margins down 100 bps is impressive, and FAST appears to be managing its costs more tightly than in past cycles. SG&A to sales of 27.6% marks the lowest 3Q level in the company’s history. However, skeptics will rightly question whether the margin improvement is sustainable without gross margin expansion. FAST has historically run a much tighter ship on costs vs. some of its peers, though likely still has some levers around discretionary spend (e.g. headcount adds). FAST is also better positioned to handle freight inflation than other industrials given it owns a trucking fleet (i.e. don’t have to pay spot rates). EPS was up 38%, or 15% ex tax reform tailwinds.