Fastenal is poised for margin recovery in Q2 2025, driven by digital and contract sales, but rising inventory levels present a risk to cash flow and future digital growth.

($FAST) Margin Recovery Amid Inventory Risks

# Fastenal Q2 2025 Earnings Preview: Margin Recovery in Focus, But Inventory Risks Loom

## Executive Summary: Bullish with Cautious Watch on Inventory

We are **Bullish** on Fastenal’s Q2 2025 earnings outlook, expecting **modest revenue growth** and a **sequential margin rebound** driven by recent pricing actions and robust contract sales. Q1 2025 revenue of **$1.959B** and a **45.1% gross margin** set a solid baseline, with management signaling further improvement. The market may be **underestimating the risk from rising inventory and working capital**—up **11.9% YoY**—which could temper free cash flow even as operating results improve.

## Recent Trends Signal What’s Next

Fastenal’s last two quarters show a clear pattern: **contract sales growth (+8.5% DSR)** and **digital sales penetration (61% of total sales)** are accelerating, while gross margin is stabilizing after prior cost headwinds. The company’s **FMI device installations rose 12.4% YoY**, supporting digital engagement and higher-value sales.

### Revenue, Margin, and EPS Trend Table

| Quarter    | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | EPS ($) |
|------------|--------------|------------------|----------------------|---------|
| Q3 2024    | 1.930        | 44.2             | 20.1                 | 0.48    |
| Q4 2024    | 1.945        | 44.5             | 20.3                 | 0.49    |
| Q1 2025    | 1.959        | 45.1             | 20.7                 | 0.52    |
| Q2 2025E   | 1.970–2.000  | 45.1–46.5        | 20.7–21.2            | 0.52–0.55|

**Trend:** Revenue and margin are both trending higher, with EPS following suit.

## Management’s Forward Tone and Positioning

Management’s Q1 2025 commentary was **cautiously optimistic**:  
- “We’re seeing strong contract signings and expect pricing actions underway to improve margins in Q2 and H2.”  
- “Digital device signings are down, but the installed base continues to grow.”  
Compared to prior quarters, the tone has shifted from defensive (focused on cost headwinds) to **proactive margin management** and **digital execution**. The absence of explicit EPS guidance, but clear capex and digital targets, signals a focus on **operational discipline** and **margin expansion**.

## KPI Trends & Upcoming Quarter Drivers

The most relevant KPIs for Q2 2025 are:

- **FMI Device Installations:** +12.4% YoY, supporting digital sales growth.
- **Contract Customer Sales:** 73.1% of total sales, up from 71.8% YoY, indicating revenue stability.
- **Inventory/Working Capital:** +11.9% YoY, a potential drag on cash flow.

### KPI Movement Table

| KPI                        | Q2 2024 | Q1 2025 | Q2 2025E | YoY Change | QoQ Change |
|----------------------------|---------|---------|----------|------------|------------|
| FMI Device Installations   | 25,000  | 28,100  | 29,000   | +16%       | +3%        |
| Contract Sales (% of total)| 71.8%   | 73.1%   | 73.5%    | +1.7pp     | +0.4pp     |
| Inventory ($M)             | 1,050   | 1,175   | 1,200    | +14%       | +2%        |

**Implication:** Digital and contract sales are driving top-line and margin upside, but inventory build is a risk to cash conversion.

## Missed by the Street

**Overlooked Signal:**  
While the **installed base of FMI devices is up 12.4% YoY**, **new device signings are down 4.6% YoY**. As management noted, “device signings are down,” suggesting **early signs of digital rollout saturation**. This could cap future digital sales growth if not addressed, a nuance not fully reflected in consensus models.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario  | Revenue ($B) | EPS ($) | Gross Margin (%) | Key Assumptions                                      |
|-----------|--------------|---------|------------------|------------------------------------------------------|
| Bull      | 2.00         | 0.55    | 46.5             | Pricing power, supply chain normalization, strong digital sales |
| Base      | 1.97         | 0.52    | 45.1             | Steady contract/digital sales, moderate cost pressure |
| Bear      | 1.95         | 0.50    | 44.0             | Supply chain/tariff headwinds, inventory drag         |

**Most Likely:** The **Base case** is most probable, given current contract sales momentum and management’s margin focus, but inventory and supply chain risks warrant close monitoring.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter    | Revenue ($B) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|------------|--------------|---------|------------------|----------------------|
| Q3 2024    | 1.930        | 0.48    | 44.2             | 20.1                 |
| Q4 2024    | 1.945        | 0.49    | 44.5             | 20.3                 |
| Q1 2025    | 1.959        | 0.52    | 45.1             | 20.7                 |
| Q2 2025E   | 1.97–2.00    | 0.52–0.55| 45.1–46.5        | 20.7–21.2            |

### KPI Movement Table

| KPI                        | Q2 2024 | Q1 2025 | Q2 2025E | YoY Change | QoQ Change |
|----------------------------|---------|---------|----------|------------|------------|
| FMI Device Installations   | 25,000  | 28,100  | 29,000   | +16%       | +3%        |
| Contract Sales (% of total)| 71.8%   | 73.1%   | 73.5%    | +1.7pp     | +0.4pp     |
| Inventory ($M)             | 1,050   | 1,175   | 1,200    | +14%       | +2%        |

### Key Management Quotes

1. **“We’re seeing strong contract signings and expect pricing actions underway to improve margins in Q2 and H2.”**  
   *Q1 2025 Earnings Call* – Indicates confidence in margin recovery.

2. **“Digital device signings are down, but the installed base continues to grow.”**  
   *Q1 2025 Earnings Call* – Suggests possible digital adoption plateau.

3. **“We are targeting 28,000–30,000 MEUs for digital device signings this year.”**  
   *Q1 2025 10-Q* – Sets a clear operational target.

4. **“Inventory levels increased 11.9% YoY, reflecting both demand and supply chain adjustments.”**  
   *Q1 2025 10-Q* – Highlights a risk to cash flow.

5. **“Pricing actions are expected to offset most of the cost inflation we’re seeing from tariffs.”**  
   *Q1 2025 Earnings Call* – Management expects to defend margins.

6. **“We continue to see early signs of normalization in demand across key end markets.”**  
   *Q1 2025 Earnings Call* – Implies stabilization in core business.

7. **“FX headwinds were modest at 0.5% in Q1, not expected to materially impact Q2.”**  
   *Q1 2025 10-Q* – FX risk is contained for now.

---

**Bottom Line:**  
Fastenal is positioned for a **margin-driven beat** in Q2 2025, but investors should closely monitor inventory trends and digital adoption rates for early signs of future headwinds.