Fastenal Co., a wholesale distributor of products ranging from construction fasteners to water pumps to 3D printers, reported a nearly 8% increase in third-quarter net sales driven “most notably” by its internet-connected vending machines and its Onsite sales and service operations.

Daniel Florness, CEO, Fastenal Co.

The Winona, Minnesota-based company doesn’t break out sales from its vending devices or ecommerce sites, including its flagship Fastenal.com, but ecommerce grew approximately 28% year over year in the third quarter ended Sept. 30, CEO Daniel Florness said last week.

“Ecommerce was up about 28%,” much of it in sales to Fastenal’s larger customers, he said on a conference call with stock analysts, according to a transcript from Seeking Alpha. He indicated that, because of the increase in ecommerce, Fastenal “expanded in a declining economy.” Fastenal’s ecommerce properties also include Fastenal Canada and Fastenal Clothing & Accessories at FastenalGear.com. In addition to construction and industrial products like fasteners and tools, it also lists on Fastenal.com late-model pickup trucks for small businesses and corporate fleets.

Fastenal’s growth drivers

Total net sales for the third quarter increased to $1.38 billion, which Fastenal attributed in large part to “our growth drivers,” most notably its internet-connected industrial vending machines and its Onsite locations where the company provides parts and services through a dedicated Fastenal team placed at or near customers’ facilities. The vending machines, which dispense items ranging from safety glasses to bolts and power tools and record transactions through the internet, may be included either with or separately from Onsite locations.

Fastenal increased its number of installed vending machines by 12.2% year over year by the end of the third quarter to 88,327, but that left it running below earlier projections for the full year. “We believe slower economic activity has lengthened the sales cycle for vending” machines, Fastenal said. “As a result, we currently expect to sign approximately 22,000 vending devices in 2019, slightly below our previous goal of 23,000 to 25,000 units.” (Fastenal counts separately another 15,000 vending devices it deploys as part of its lease locker program.)

While driving up sales, however, the vending machines and Onsite locations were the primary cause of a dip in gross profit margin during the third quarter as well as for the first nine months. “These two channels have a lower gross margin, due to customer and product mix, when compared to the company average,” Fastenal says. It adds that gross margins were also hit by inflation in suppliers’ prices and by increases in the cost of freight.

Spending more on IT—like chatbots                

Fastenal is spending more on IT operations, increasing it this year by as much as 15%, chief financial officer Holden Lewis said on the conference call. “That’s not necessarily an area that we’re looking to restrict our spend,” he said.

“We invest where we get a return,” Florness added.

John Soderberg, executive vice president, IT, Fastenal Co.

Florness noted that the company’s IT department, which is headed by John Soderberg, executive vice

president of IT, in recent years “has done a wonderful job better connecting our IT group with our business.” For example, he added, Fastenal recently rolled out its first chatbot, which is designed to answer many of the questions customers have about the company’s safety products. Safety products, he noted, account for more than half of the revenue from vending machine sales.

For the third quarter ended Sept. 30, Fastenal reported:

• Net revenue increased 7.8% year over year to $1.38 billion;
• Non-fastener products led sales with 8% growth, while fastener sales increased 3%;
• National account sales increased 10.2%, with growth recorded at 62 of the company’s 100 top accounts, as non-national account sales grew less than 1%;
• The company opened two branches and closed 22, resulting in a total of 2,146 branches at the end of the quarter;
• Gross profit increased 5.7% year over year to 615.8 million, resulting in a gross margin of 47.2 %, down from 48.1%;
• Net earnings increased by 8.0% to $213.5 million.

For the nine months ended Sept. 30, Fastenal reported:

• Net sales increased by 8.7% to $4.06 billion;
• Gross profit increased by 5.8% to $1.92 billion, resulting in a gross margin of 47.3%, down from 48.5%;
• Net earnings increased by 5.0% to $612.2 million.