Here's a classic earnings story: a company reports revenue that beats expectations, but the stock tanks anyway. Welcome to Fastenal Company's (FAST) first-quarter report.

The industrial and construction supplies distributor posted net sales of $2.20 billion, up 12.4% from a year ago. That was just a hair above the $2.199 billion analysts were looking for. So far, so good. GAAP earnings per share came in at 30 cents, up from 26 cents and right in line with expectations. Net income rose 13.8% to $339.8 million. Operating income increased 13.6% to $447.6 million, and the operating margin actually expanded a bit to 20.3% from 20.1%.

But then you get to gross margin, and that's where the story turns. It declined to 44.6% from 45.1%. The company cited "unfavorable price and cost dynamics"—which is corporate-speak for costs going up faster than we can charge our customers. Transportation costs, rebate headwinds, and a shift in customer mix also played a role. Some benefits from the company's fastener expansion project and improved SG&A expenses (down to 24.3% of sales from 25.0%) helped, but not enough.

So what's driving those unfavorable dynamics? On the conference call, a company executive pointed a finger squarely at tariffs. The problem, they said, is that tariff-related costs are rising faster than Fastenal can raise its prices. This mismatch left margins about 40 basis points below the company's own internal targets. To make matters more complicated, the executive noted that cost discussions with both customers and suppliers are being delayed. Everyone is waiting to see if there will be any clarity on potential tariff refunds before they commit to new pricing. It's a waiting game that's squeezing margins in the meantime.

Beyond the tariff headache, the underlying business shows some strength. Sales growth got a boost from new contract wins and a modest improvement in industrial production. A favorable foreign exchange rate and about 350 basis points of pricing power also helped. Contract sales, which now make up 75.4% of revenue, grew 14.6%, continuing to outpace non-contract sales growth of 6.7%. By end market, non-residential construction was a standout with 17.2% growth, while heavy manufacturing grew 14.1%. Manufacturing overall represented 76.2% of total sales.

Digital initiatives remain a core part of the growth story. Signings for FASTBin and FASTVend devices rose 8.3% to 6,950 MEUs. Sales through what Fastenal calls its "Digital Footprint"—which includes e-commerce and vending—rose 13.6% to $1.37 billion, representing 61.5% of total sales. Customer engagement metrics improved, with the number of sites doing over $50,000 per month in sales rising to 2,909 from 2,502.

Financially, the company is in a solid position. Operating cash flow was $378.4 million, which is 111% of net income. Cash on hand totaled $308.6 million at the end of the quarter, and total debt declined to $125.0 million. Fastenal returned $295.7 million to shareholders through dividends and buybacks. Looking ahead, the company expects 2026 capital expenditures to be between $310 million and $330 million, driven by facility upgrades, logistics investments, and higher IT spending. It's also sticking to its target of signing 28,000 to 30,000 FASTBin and FASTVend devices.

Despite all that operational and financial strength, the market's focus zeroed in on the margin pressure. Fastenal shares were down 7.37% at $45.54. It's a reminder that in earnings season, sometimes beating the top line isn't enough if investors see costs running ahead of your ability to recoup them.