Dive Brief:
- The initial demand surge for pandemic-related supplies such as masks and janitorial supplies has moderated, but demand still settled above normal levels in Q3, Fastenal executives reported Tuesday. Demand for safety products is about 20% higher than historic levels, according to UBS's reporting on the company.
- "Products like 3-Ply masks and disposable respirators are oversupplied and prices have declined," Fastenal CFO Holden Lewis said on the company's Tuesday earnings call. "We believe this will correct itself based on the sell-through of these products out of our inventory. However, this process may take until the second half of 2021."
- Gross margin on COVID-19 related supplies was down to mid- to high-single-digits in Q3. Gross profit as a percentage of net sales was down from 47.2% in Q3 2019 to 45.3% in the third quarter of 2020.
Dive Insight:
The swinging pendulum of demand may have seemed stuck to one side for the last several months as the prolonged pandemic resulted in an elevated need for N95 masks. But it is starting to fall and leading to inventory imbalances, according to Fastenal. In just six months, the company has gone from restricting certain SKUs to healthcare customers only.
In the early months of the pandemic, hospitals and other non-traditional customers for Fastenal came knocking, in need of masks and janitorial suppliers. The company deployed its 200-person sourcing team in China to find new suppliers. But as the pandemic stretched into the summer, distributors that traditionally serve those buyers increased their supply of these items.
"We made a big investment in products to support the marketplace in the early part of this year ... and I think there are folks in our organization that are looking at our [personal protective equiment] inventory and saying, 'geez, we have a bunch' and they're scared about it – nervous about it is probably a better word," Florness said.
Total inventory was down 1% YoY for Q3, and COVID-19 supplies inventory was down to $30 million from $50 million in Q2. Florness acknowledged that Fastenal may now be overstocked after making a great effort to source the goods, but he doesn't consider it a problem.
"Based on the sales in Q3, we do have months of supply," he said. "Frankly, in today's chaotic world, I consider that an asset, not a problem. And it will support us as we move through this. And I'm happy we have it. So if you need three-ply [masks], give us a call because the marketplace needs them and I'm glad we have them."
After June, manufacturing customers as a percentage of Fastenals' total sales began to improve — 3.8% lower in September 2020 than the previous year after dropping to 15.6% down YoY in April. It's a sign that business is slowly returning to somewhere near normal and Fastenal is taking a foot off the gas when it comes to sourcing both its core stock of fasteners and COVID-19 supplies. But Florness's comments reveal that a sizeable cache of masks and cleaning products isn't yet a liability, even if they remain a drag on margins.
Ironically, Get Us PPE's September shortage index shows 80% of facilities have no supply of some PPE — though that figure for respirators came down slightly from August to September, demonstrating the ongoing challenge of matching demand with supply. Schools, for example, are not traditional buyers of such equipment but are increasingly in the PPE sourcing mix as they open. Small and rural hospitals too are likely to be short on PPE.
"While large hospital systems continue to benefit from a recovering PPE supply chain, smaller, non-hospital facilities are still facing acute PPE shortages," reads the nonprofit's September report.
