Fastenal settled one investor question in the second quarter and sharpened another. The company is clearly growing faster than the industrial economy, and the gap looks structural. What it has not yet shown is that this growth converts into the mid-20% incremental margins investors were told to expect. That conversion question, not demand, now carries the stock.
The growth is real, and mostly Fastenal's own doing
Daily sales rose 14.7%, up from 12.4% in the first quarter. The backdrop barely moved. Management said the U.S. PMI averaged just above 53, versus about 52 last quarter. Industrial production was only slightly positive in April and May. Pricing added about 2.9 points and currency about 10 basis points. Most of the growth came from volume, new contracts and deeper customer penetration.
The site data makes the share-gain case hard to dismiss. Contract count rose more than 7%. Sites spending at least $50,000 a month grew 16.5% to 3,125. Revenue from those sites rose more than 26% to $1.38 billion. Average monthly spend per large site climbed to about $147,000 from $136,000. Total reported sites fell to 93,283 from 101,440. That reflects a deliberate shift toward larger, more productive accounts, not shrinking reach.
The breadth was also convincing. Heavy manufacturing daily sales rose about 18%. Non-residential construction grew about 17% for a second straight quarter, led by electrical, utility, infrastructure and data-center work. Direct materials grew 16.5%, slightly ahead of indirect at 14.1%. That points to customer production activity, not just maintenance spending.
June needs one caveat. Sales rose 20.5% that month, and incoming CEO Jeff Watts admitted the number "shocked us a little." Some of the strength came from one-off orders tied to newly signed business. He also argued that internal tools now let Fastenal turn on contracts faster. Both can be true. June overstates the run rate, but it also shows a commercial system that is speeding up.
The profit engine did not keep pace
Gross profit grew 12.8%, slower than sales. Gross margin fell about 75 basis points to 44.6%. Roughly 40 basis points came from negative price-cost. Large-customer mix, transportation costs and rebates made up the rest. Price-cost improved just 10 basis points from the first quarter.
SG&A discipline saved the operating line. Expenses fell to 23.5% of sales from 24.4%, and operating margin held at 21.0%, up about five basis points before rounding. So the large-account model passed one test. Lower product margins did not dilute overall profitability.
It failed the more demanding test. The incremental operating margin was 21.5% by CFO Max Tunnicliff's math. Departing CEO Dan Florness said 24% had looked achievable and blamed the gross-margin trend for the shortfall. Tunnicliff said he hopes 21.5% marks the low point. He would not promise price-cost neutrality in the second half. He called the process "chipping away." That phrase signals effort and limited visibility. New cost inflation keeps arriving while old costs are still being recovered.
Tunnicliff did offer one modeling anchor. In a normal year, gross margin slips 10 to 20 basis points from the second quarter to the third. He said this year should look fairly consistent with that pattern. Pricing in the second half should stay in the low to mid single digits.
Fuel cuts both ways. Higher diesel costs hit gross margin and SG&A. Florness argued the burden falls harder on rivals that ship small parcel. That makes Fastenal's trucking network a stronger selling point. Investors will want proof that the competitive gain exceeds the cost drag.
Digital and large accounts: strong evidence, softer targets
The technology numbers support the retention story. FMI sales rose 16.4% and reached 44.6% of revenue. Digital Footprint sales grew 16.2% to 61.6% of the total. Weighted device signings rose 8.3% per day.
Two targets moved down, though. Fastenal now expects Digital Footprint to reach 63% to 64% of 2026 sales, below the original 66%. It also trimmed its device-signing goal to 27,000 to 29,000 units from 28,000 to 30,000. Management blames a fast-growing denominator, since non-digital sales from new large accounts are rising too. That is plausible, because digital grew faster than the company. It is not full absolution. eBusiness growth of 12.6% lagged total sales, and penetration will now advance more slowly than planned.
The economics of the large-account model still look sound at the top level. SG&A grew only 10.9% against 14.7% sales growth, even with bonuses up sharply. Trailing return on invested capital rose about 180 basis points to 31.4%, the best in more than a decade.
Cash looks like timing, and the market wants more than growth
Operating cash flow fell 4.6% to $265.7 million, or 69.4% of net income. That compares with 84.4% a year ago and a five-year second-quarter average near 80%. Receivables rose 17.6%, faster than sales. The late-quarter surge and longer payment terms at big customers explain most of it. The offsets argue for timing, not decay. Inventory rose just 0.5%, payables rose 25.2%, and first-half cash conversion reached 89.1% of net income. Fastenal still plans about $320 million of 2026 capital spending. It returned $305 million, roughly 80% of net income, to shareholders.
The market's verdict was measured but negative. Shares were little changed right after the release. They then fell as much as 3.7% in premarket trading and were down roughly 3% in the afternoon session. The S&P 500 rose about 0.4% on soft inflation data, so the weakness was company-specific. The stock had gained roughly 16% this year before the report and trades near 42 times earnings. Analyst views split along familiar lines. Rothschild Redburn had started coverage a day earlier with a positive rating and a $55 target, citing the onsite and vending transition. Bernstein and Wolfe Research stayed negative after the print.
At that valuation, a revenue beat with an in-line $0.33 of EPS was not enough. The market was not rejecting the growth. It was repricing the wait for proof that growth becomes profit at the promised rate.
Investor takeaway
The share-gain thesis got stronger. Contracts, large sites, spend per site, digital mix and end-market breadth all improved at once, against a flat backdrop. The earnings-conversion thesis stayed conditional. Price-cost is still negative, gross margin is still falling, June included one-off orders, and management offered no timetable for mid-20% incrementals.
Jeff Watts takes over as CEO on July 16 with the same three priorities and a faster clock. He raised the idea of acquisitions to build overseas supply chains in a few years rather than a decade. That adds option value and a new execution question.
The burden of proof has shifted, not lifted. Fastenal must now show that a structurally faster revenue engine can fund structurally better earnings. Until price-cost turns neutral and incrementals recover, the market will likely pay little extra for revenue acceleration alone.