UPDATE: Fastenal 4Q Net Up 34%; More Use Of Vending Machines

Fastenal Co.'s (FAST) fourth-quarter profit rose 34%, as the distributor of industrial supplies continued to rapidly deploy factory-floor vending machines to sell items to customers.

Fastenal has about 7,500 vending machines in customers' shops, up from 1,925 machines at the end of 2010. Fastenal's base of installed machines grew by 32% from the third quarter to the fourth quarter. The machines, which are stocked with items ranging from first aid supplies to materials consumed during welding and metal cutting, accounted for 16% of the company's sales in 2011, double the percentage of sales from the machines in 2010.

The vending machines, which resemble those used to sell candy bars and potato chips, reduce the need for customers to visit Fastenal stores to replenish supplies. Connected through Internet software, they allow Fastenal and its customers to tightly monitor the sales of supplies and inventory levels.

"Vending is a more convenient way for our customers to buy products from Fastenal," said CEO Will Oberton during a conference call Wednesday with analysts. "If we can make things more convenient and more efficient, we believe we'll sell more products. That's why we're so heavily invested in this project."

The company is aiming to add 10,000 machines a year for the next several years. Oberton believes the vending machines will distinguish Fastenal in a field of tough competitors that includes W.W. Grainger Inc. (GWW), the world's largest distributor of industrial and maintenance supplies.

"Vending machines may be the biggest land-grab opportunity in industrial distribution in the past 20 years," said Ryan Merkel, a analyst for brokerage firm William Blair & Co., in a note Wednesday to investors. "We agree with Fastenal's strategy to plant as many vending flags as possible before the competition catches up."

The machines are reducing Fastenal's need to open new stores to expand sales. For years Fastenal's store count grew by about 14% annually. But in 2011, the company opened 122 stores, a 4.9% increase over 2010. The company expects to increase its store count by 4% to 6% in 2012.

Fastenal's gross margin, a key metric for company, came in at 51.2% for the fourth quarter, down from 52% a year earlier and below analysts' expectation. The decrease stemmed from an increase in large, national customers and the mix of products sold during the quarter. Nevertheless, the company's pretax operating margin from the quarter grew by 1 percentage point to 20.2%, indicating the company's ability to efficiently convert rising sales into improved profit.

Overall for the quarter ended Dec. 31, Fastenal reported a profit of $87.5 million, or 30 cents a share, up from $65.2 million, or 22 cents a share, a year earlier. Net sales increased 22% to $697.8 million. Analysts polled by Thomson Reuters had forecast earnings of 30 cents a share on revenue of $694 million.

For 2011, the Minnesota company earned $357.9 million, or $1.21 a share, up from $265.4 million, or 90 cents a share, in 2010. Sales grew 22% to $2.77 billion.

Fastenal's stock was recently down 3.5% at $45.15 a share.

-By Bob Tita, Dow Jones Newswires; 312-750-4129; robert.tita@dowjones.com

--Ben Fox Rubin contributed to this report.

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