Fastenal Company FAST is scheduled to report second-quarter 2018 results on Jul 11, before the opening bell.

In the last reported quarter, the company’s earnings were in line with the Zacks Consensus Estimate. In fact, it surpassed expectations in only one of the trailing four quarters, with the average being 1%.

Fastenal is expected to benefit from its core product offerings like Onsite Locations/vending machines/managed inventory. Meanwhile, continued construction tailwinds are also expected to act as a major growth catalyst.

However, higher product and freight expenses, along with changes in product and customer mix raise concerns.

Fastenal Company Price and EPS Surprise | Fastenal Company Quote

Let’s take a look at the factors, which might affect the company’s results in the second quarter.

Vending Machines to Drive Growth: Fastenal’s sales in the last few quarters have been driven by an increased installation of industrial vending machines. Sales through vending machines grew at or near a double-digit pace in each of the trailing four quarters of 2017. Then again, as of Mar 31, 2018, Fastenal operated 73,561 vending machines, up 14.2% from the year-ago quarter. During the first quarter, the company signed 5,679 machine contracts, up 4.5% year over year.

Onsite Locations to Boost Sales: A consistent increase in the number of on-site locations is likely to strengthen Fastenal’s market share and boost quarterly numbers. Sales growth through Onsite was 22% in 2017. During the first quarter of 2018, Fastenal signed 100 new Onsite locations, up 56.3% from 64 signings a year ago. As of Mar 31, 2018, the company had 678 active sites, up 55.1% from the prior-year quarter. The trend is expected to continue in the second quarter of 2018 as well. Fastenal aims to achieve 360-385 onsite signings in 2018, reflecting an increase from 270 signings in 2017.

Mansco Acquisition: Fastenal’s acquisition of some assets of industrial and fastener supply distributor — Manufacturer’s Supply Company (Mansco) — in March 2017 fortified its presence in the markets, in which it did not significantly contribute in the past.

Backed by sustained strength in most of its end markets, as well as strong momentum in vending machine installations and onsite locations, the company is expected to report impressive top- and bottom-line growth in the second quarter. The Zacks Consensus Estimate for revenues is pegged at $1.26 billion, implying 12% year over year growth.

However, we are apprehensive about Fastenal’s changes in product and customer mix that have been hurting the gross margin for quite some time. Freight and product cost inflation also added to the woes. Overall, the consensus estimate for earnings is pegged at 66 cents, reflecting an improvement of 26.9% on a year-over-year basis.