Fastenal Company (FAST) Earnings

Management highlights

### Overall Quarterly Performance - Q2 2026 delivered strong, high-quality results with 14.7% daily sales growth (up from 12.4% in Q1 2026), 5 basis point operating margin improvement, a decade-plus high return on invested capital (ROIC), and strong cash generation. Outperformance is driven by market share gains, not just improving market conditions. - Growth is broad-based across all customer types and end markets, with every geographic and end-market segment posting double-digit growth in Q2 2026, the first such broad double-digit growth environment in several years. ### Strategic Pillar Execution - **Increasing sales effectiveness**: Share gains are driven by the ongoing key account strategy, with sustained new contract wins. Total contract count grew over 7% year-over-year; the number of customer sites spending $50,000 or more per month grew 16.5% year-over-year, with revenues from these sites growing over 26%. - **Enhancing services via technology**: Digital sales grew 16.2% year-over-year (outpacing total company growth), and now represent 61.6% of total sales (up 60 basis points year-over-year). FMI (Fastenal Managed Inventory) device signings grew 8.3% year-over-year, with 109 weighted devices signed per day (just under 7,000 total for the quarter), and FMI sales now represent 44.6% of total sales (up 60 basis points year-over-year). - **Expanding addressable market**: Growth is driven by new customer site wins and deeper penetration across all end markets, with an increasing focus on accelerating expansion into global markets outside North America. ### Margin & Financial Performance - Gross margin contracted 75 basis points year-over-year, with a 40 basis point net headwind from price-cost, a 10 basis point improvement from Q1. The intentional shift toward larger key accounts, which carry lower gross margins, also pressured gross margin percentage, but these customers drive higher volume, fixed cost leverage, and are accretive to operating margin. - SG&A came in at 23.5% of sales, down 90 basis points year-over-year, driven by disciplined cost control and strong operating leverage from high sales growth that offset gross margin headwinds. - Trailing 12-month ROIC increased 180 basis points year-over-year, reaching the low 30% range, matching the high ROIC Fastenal posted at its initial public offering. ### Cash Flow & Capital Allocation - Operating cash flow was $266 million (70% of net income); the lower conversion rate was driven by higher accounts receivable from strong 20% year-over-year June sales, partially offset by ongoing inventory efficiency gains. - Net capital spending totaled ~$60 million in Q2, with full-year 2026 net capex expected to hold at ~$320 million (3.5% of projected 2026 revenue), focused on expanding distribution hub capacity, automation, IT infrastructure, and FMI devices. The company remains committed to returning excess cash to shareholders while maintaining a conservative balance sheet: $305 million was returned to shareholders in Q2, mostly via dividends with modest share repurchases, representing ~80% of net income. ### Organizational Update - This was outgoing CEO Dan Florness' final earnings call after 30 years with the company. Incoming leadership will maintain Fastenal's existing core strategy and cultural foundations (decentralized decision making, P&L accountability, promotion from within) while accelerating growth execution via new productivity tools.

Guidance

- Digital sales as a percentage of total sales is now expected to reach 63-64% in 2026, a modest downward revision from the original target of 66%. The revision reflects faster-than-expected growth in non-digital sales from new large customer site wins, not a slowdown in digital adoption efforts. - Full year 2026 net capital expenditures are maintained at ~$320 million, in line with prior expectations. - Management reaffirms the long-term expectation that incremental margins should reach the mid-20s when the company is growing at the current double-digit pace. Management expects incremental margins to improve from the Q2 2026 level of ~21.5% (which management expects to be the low point for the year) as the company continues to chip away at the negative net price-cost gap, but does not expect a full jump to the mid-20s by Q3 2026. For modeling purposes, low 20s incremental margins are a reasonable baseline for full-year 2026, with improvement as the year progresses. - Gross margin is expected to remain broadly consistent with recent historical sequential trends, with a typical 10-20 basis point sequential decline from Q2 to Q3, similar to the pattern of the past 10 years as the intentional shift toward lower-margin large key accounts continues. - Pricing in the second half of 2026 is expected to remain in the low single digits, with a possibility of reaching mid-singles, as the company continues to gradually implement pricing actions to offset ongoing cost inflation, with a customer-centric approach that avoids pushing through abrupt large price increases to key accounts.

Segment performance

Fastenal reports end-market segment performance as follows: 1) Heavy Manufacturing: Represented 44% of total sales, with 18% average daily sales growth, continuing an upward trend that began in 2025. 2) Construction: Grew approximately 17% year-over-year (the second consecutive quarter of 17% growth), representing a meaningful improvement from prior weaker trends. Within construction, the strongest demand came from electrical, utility, infrastructure, and data center-related activity. 3) Non-manufacturing: Contributed growth across transportation, warehousing, and industrial services as overall demand improved. By product category, both direct and indirect materials grew in the mid-teens, with direct materials slightly outpacing indirect materials.

Risks & headwinds

- Ongoing trade and tariff uncertainty remains, though its impact in Q2 was limited to cost planning and pricing discussions rather than reduced customer demand. - Cost inflation (including tariff-related inflation and fuel/transportation inflation driven by geopolitical conflict in the Middle East) remains unpredictable, creating ongoing pressure on gross margin that requires continued active pricing management. - The company continues to work through a net negative price-cost position (40 basis points headwind in Q2, improved from 50 basis points in Q1), and closing this gap to reach price-cost neutrality is expected to take multiple quarters of gradual progress, with continued new cost increases slowing the pace of improvement. - Expanding into new international markets outside North America requires significant financial capital investment over multiple years before reaching profitability, requiring sustained financial discipline in the core North American business to fund this expansion.

Analyst Q&A

• Q: With strong 14.7% sales growth, why was incremental contribution margin lower than the 25%+ target the team previously signaled, and what is the outlook for margins in the second half? /

  A: The primary drag on incremental margins was the 40 basis point net negative price-cost position left over from prior inflation periods, which shaved 3-4 percentage points off incremental margins. Strong year-over-year profit growth also led to higher bonus payouts, a temporary factor that will not permanently suppress incremental margins. Management expects to keep gradually chipping away at the negative price-cost gap through the second half, and will eventually return to the mid-20s incremental margin target, but does not expect to reach that level in 2026 Q3. 21.5% is likely the low point for incremental margins this year.

• Q: What strategic growth engines will you prioritize as you take over as CEO, and will the core strategy change? /

  A: There will be no change to Fastenal's core strategy or 3 existing strategic pillars, and no change to the company's long-standing culture of decentralized decision making, P&L accountability, and internal promotion. The main area of acceleration is increasing the speed of new business onboarding and global expansion outside North America, enabled by new AI-powered tools that cut quote turnaround time and speed up contract execution. The company will also consider acquisitions to speed up global supply chain buildout for international markets, rather than building new networks from scratch which would take much longer.

• Q: Do you plan to prioritize volume growth over price-cost neutrality in the current improving demand environment? /

  A: Fastenal balances both growth and incremental margin discipline, with no intentional tradeoff of long-term margin for volume. Management prioritizes growth because it makes addressing business problems easier, but incremental margins remain a core focus. The company will take attractive large volume opportunities even if they temporarily modestly pressure margins, but maintains long-term discipline to support sustained ROIC growth, which is required to fund future international expansion.

• Q: Headcount growth has been very constrained during the current period of double-digit sales growth—Is this the new normal, and what is driving this trend? /

  A: Headcount growth is not intentionally constrained; district leaders add headcount as needed to support new business, so the low single-digit FTE growth is a natural outcome of higher productivity. AI-powered quoting tools have meaningfully improved field productivity compared to even one year ago. In addition, Fastenal has built a larger pipeline of part-time talent that becomes fully productive immediately when moving to full-time roles, reducing the need to hire unproductive new external entrants, so less headcount is needed to support the same level of sales growth. It may be possible to sustain this dynamic for the near term.