(Bloomberg Opinion) -- As a distributor of factory-floor basics, Fastenal Co.’s earnings are typically a reasonable guide of what's to come when its manufacturing customers report results a few weeks later, and that should hold even in the coronavirus era. But listening to the company’s conference call on Tuesday to discuss its first-quarter results, I was struck by a different kind of roadmap: In step-by-step fashion, CEO Dan Florness laid out Fastenal's response to the coronavirus crisis, offering a case study on best practices when preparing for the disruptions of a pandemic.
Fastenal is little known outside of industrial circles, but it's essentially in the business of supply-chain management, and it acted on the warning signs of the coronavirus crisis much faster than the federal government. That's partly a reflection of the nature of Fastenal's supply chain, which is weighted heavily toward Asia, the first frontier of the outbreak. Way back in January, as the spread of the virus forced China into lockdown, Fastenal began monitoring certain product lines to ensure a reliable flow of goods for its customers, Florness said Tuesday as he kicked off the earnings conversation. This is around the time that an array of top government officials began warning of the risks the coronavirus posed to the U.S., even as President Donald Trump publicly downplayed the threat and the prospect of upheaval to Americans’ daily lives, according to a detailed report from the New York Times.
The initial focus of the administration's coronavirus task force (formally announced on Jan. 29) was on keeping infected Chinese people out of the U.S., not on testing or supplies, the Washington Post reported. Procurement has since become the government's biggest problem. The federal stockpile of key medical equipment is woefully inadequate to address a pandemic on the scale of the coronavirus and governors across the country have been forced to compete against each other on the open market for masks and ventilators. Fastenal, by contrast, has recent experience when it comes to a nimble rethinking of supply chains, thanks in part to Trump's trade wars. “Quite frankly, after the tariffs became a thing, we began to beat the bushes for additional suppliers outside of China,” CFO Holden Lewis said in a phone interview Tuesday. “I'd love to tell you we moved at lightning pace specifically related to the coronavirus, but we already had the platform in place that allowed us to react to this in the way that we have." The company’s Asian procurement and quality-control infrastructure has been in place for years.
Fastenal sounded internal alarms on Feb. 6 for all of its employees to prepare to marshal resources and vet backup suppliers for certain janitorial and protective-gear products it sells. “It's an unforeseen problem," Trump said of the virus on March 6 as he signed an initial spending bill that included just $3.1 billion to stockpile medical supplies. "Came out of nowhere.” Federal agencies largely waited until mid-March to begin placing bulk orders of N95 respirator masks, mechanical ventilators and other equipment needed by front-line health-care workers, according to a review of purchasing contracts by the Associated Press. By that point, Fastenal had moved to limit the sales of certain key cleaning and health-care products to critical industries to help ensure that the goods made it to the workers that needed them the most. While the government has sporadically invoked the Defense Production Act to spur companies into ramping up the production of ventilators and masks, a concrete plan regarding the distribution of this vital equipment among the states was late in development and is still lacking.
Fastenal's efforts to procure alternative sources of personal protective equipment and funnel goods to those most in need has meant that its supply chain is "pretty filled,” CFO Lewis said on the earnings call Tuesday. "Right now we still have product that we’re going to be working through delivering throughout most of April." Ultimately, these efforts may even help the company bring in new business, CEO Florness said. There are multiple examples of customers reaching out to the Fastenal’s sales team, saying “’I get what your supply-chain resources are about more than ever from what I’ve seen firsthand over the last three weeks,’” he said. Imagine what the world would be like right now if governors were praising the Trump administration's supply-chain resources rather than desperately pleading for needed goods and evaluating sending in the state national guard to protect shipments of masks from seizure by the federal government.
This is not the only front on which Fastenal has been ahead of the curve. Like many other companies, it didn’t wait for federal government orders to implement social-distancing measures. On March 6, Fastenal canceled an annual sales event that was meant to take place in mid-April. Doing so deprived it of one of its biggest opportunities to ink new contracts for its onsite supply-chain services and vending machines — and it’s one reason why 2020 growth prospects are “murky,” Florness said. But it was the "prudent” thing to do, he said. The weekend of March 14, the company closed off public access to its retail locations. That Monday, March 16, the Trump administration announced national guidelines to slow the spread of the coronavirus, including avoiding gatherings of more than 10 people. Fastenal has also expanded paid time-off for both full- and part-time employees to deal with coronavirus disruptions.
All of this hasn't saved Fastenal from the coronavirus. While sales of safety products jumped 31% in March, revenue from Fastenal’s traditional fasteners business plunged 10.1% as factories, amusement parks, retail outlets and schools shuttered. On average, daily sales across the company increased 0.2% in March, a marked drop from the 4.7% pace in February. And because safety products are typically lower-margin, that contributed to the 110 basis-point drop in the first quarter in the percentage of sales Fastenal converts into gross profit. Still, the coronavirus crisis is different than the 2009 recession because at least demand is increasing for some products. April sales are down about 10.5% to date, which is relatively mild in the scheme of things and encouraging ahead of results due later this month from companies such as 3M Co. and Honeywell International Inc. While headcount may decline, Fastenal indicated that at this point, any cuts are unlikely to be of the magnitude they were back in 2009. The margin dislocation also will likely fix itself once demand for fasteners bounces back and the need for protective gear eases.
Fastenal may be leaving some money on the table when it comes to safety and cleaning products, but it put in strict pricing guidelines early on in the process "because we're more interested in getting through this and getting society through it and getting back to whatever the new normal is,” Florness said. In more ways than one, this is a company that got pandemic planning right.
Most of the company's business comes through onsite or delivery services that remain operational for those customers serving critical industries, but profit margins tend to be higher for products purchased through its retail locations, so the closure cost the company on that front.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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