WINONA, Minn., April 11 /PRNewswire-FirstCall/ -- The Fastenal
Company of Winona, MN (NASDAQ:FAST) reported the results of the
quarter ended March 31, 2008. Unless otherwise noted, dollar
amounts are in thousands. Net sales for the three-month period
ended March 31, 2008 totaled $566,210, an increase of 15.8% over
net sales of $489,157 in the first quarter of 2007. Net earnings
increased from $54,033 in the first quarter of 2007 to $68,094 in
the first quarter of 2008, an increase of 26.0%. Basic and diluted
earnings per share increased from $.36 to $.46 for the comparable
periods. During the first quarter of 2008, Fastenal opened 53 new
stores (Fastenal opened 73 new sites in the first quarter of 2007).
These 53 new stores represent an increase of 2.5% since December
31, 2007. (We had 2,160 stores on December 31, 2007.) There were
12,535 total employees as of March 31, 2008, an increase of 4.3%
from December 31, 2007 and 15.3% from March 31, 2007. SALES GROWTH:
Note - Daily sales are defined as the sales for the month divided
by the number of business days in the month. Stores opened greater
than five years - The impact of the economy, over time, is best
reflected in the growth performance of our stores opened greater
than five years (store sites opened as follows: 2008 group - opened
2003 and earlier, 2007 group - opened 2002 and earlier, and 2006
group - opened 2001 and earlier). This store group is more cyclical
due to the increased market share they enjoy in their local
markets. During each of the twelve months in 2006 and 2007, and the
first three months of 2008, the stores opened greater than five
years had daily sales growth rates of (compared to the comparable
month in the preceding year): Jan. Feb. Mar. Apr. May June July
Aug. Sept. Oct. Nov. Dec. 2006 13.9% 11.9% 10.8% 9.1% 9.6% 10.7%
9.9% 11.2% 8.1% 8.5% 8.0% 9.6% 2007 4.8% 3.8% 7.8% 4.5% 5.4% 6.2%
6.1% 5.3% 6.3% 6.3% 7.9% 9.6% 2008 8.9% 8.8% 9.9% Stores opened
greater than two years - Our stores opened greater than two years
(store sites opened as follows: 2008 group - opened 2006 and
earlier, 2007 group - opened 2005 and earlier, and 2006 group -
opened 2004 and earlier) represent a consistent same-store view of
our business. During each of the twelve months in 2006 and 2007,
and the first three months of 2008, the stores opened greater than
two years had daily sales growth rates of (compared to the
comparable month in the preceding year): Jan. Feb. Mar. Apr. May
June July Aug. Sept. Oct. Nov. Dec. 2006 17.8% 15.0% 14.6% 12.3%
12.5% 14.0% 12.8% 13.9% 9.2% 9.0% 9.4% 10.9% 2007 7.3% 6.0% 9.4%
5.5% 6.7% 7.2% 6.5% 5.9% 6.8% 7.6% 8.8% 10.9% 2008 12.0% 11.1%
12.5% All company sales - During each of the twelve months in 2006
and 2007, and the first three months of 2008, all the selling
locations combined had daily sales growth rates of (compared to the
comparable month in the preceding year): Jan. Feb. Mar. Apr. May
June 2006 23.9% 21.3% 21.1% 19.1% 19.2% 20.6% 2007 12.6% 11.8%
15.5% 12.0% 13.2% 14.8% 2008 15.6% 15.0% 16.9% July Aug. Sept. Oct.
Nov. Dec. 2006 19.7% 20.7% 16.1% 15.9% 16.3% 17.7% 2007 13.9% 13.4%
13.7% 14.7% 15.2% 16.8% The strong growth in the January 2006 to
March 2006 time frame generally represents a continuation of the
strong environments experienced in 2004 and 2005. The first two
months of the second quarter of 2006 experienced weaker sales
growth than we expected. The April 2006 growth was negatively
impacted by Easter (which occurred in March during 2005), but was
still weaker than we expected. The June to August 2006 time frame
represents stronger sales activity than the preceding two to three
month period. The daily sales growth amount in September 2006
appears weaker due to the difficult comparison with Hurricane
Katrina's added sales in September 2005 (approximately $4,000
impact); however, the increase in our daily sales number from
August 2006 to September 2006, of 4.1%, is consistent with
historical norms. The final three months of 2006 continued in the
same variable fashion as the previous six months. The October
growth number was negatively impacted by the difficult comparison
with Hurricane Katrina's added sales in October 2005 (approximately
$1,500 impact). The months of November and December 2006, like the
months of April and May 2006, were weaker than expected. The first
five months of 2007 continued the trend of a weak economic
environment as experienced during 2006 (as described above). The
month of March 2007 improved relative to January and February 2007.
The month of June 2007 improved relative to April and May 2007. The
June improvement was meaningful as it came in a month with fairly
challenging comparisons from 2006. Unfortunately, the strength in
June moderated in the third quarter. This pulled our daily sales
growth rate from the 14.8% in June to 13.5% in the third quarter of
2007. This moderation reflected a continuation of the weaker
economic environment experienced in four of the first five months
of the year. The final three months of 2007 continued in the same
variable fashion as the previous nine months but showed consistent
improvement from the third quarter daily sales growth rate of
13.7%. This improvement remained in the first three months of 2008.
We believe the improvement in the final months of 2007 and the
first three months of 2008 were driven, in part, by our 'pathway to
profit' initiative described below. PATHWAY TO PROFIT: During April
2007 we disclosed our intention to alter the growth drivers of our
business. For most of the last decade, we have used store openings
as the primary growth driver of our business (opening approximately
14% new stores each year). As announced in April 2007, we intend to
add outside sales personnel into existing stores at a faster rate
than historical patterns. We intend to fund this sales force
expansion with the occupancy savings generated by opening stores at
the rate of 7% to 10% per year (we opened approximately 8.1% new
stores in 2007 or 161 stores) versus the historical rate of
approximately 14%. Our goal is four-fold: (1) to continue growing
our business at a similar rate with the new outside sales
investment model, (2) to grow the sales of our average store to
$125 thousand per month five years from 2007, or 2012, (3) to
enhance the profitability of the overall business by capturing the
natural expense leverage that has historically occurred in our
existing stores as their sales grow, and (4) to improve the
performance of our business due to the more efficient use of
working capital (primarily inventory) as our average store size
increases. Store Count and Full-Time Equivalent (FTE) Headcount
Growth - In response to the 'pathway to profit', we have increased
our year-over-year store count and FTE head count as follows: March
December September June March 2008 2007 2007 2007 2007 Store count
6.8% 8.1% 9.7% 12.5% 13.4% Store personnel - FTE 18.5% 18.8% 18.4%
13.7% 13.0% Distribution and 10.9% 7.7% 12.8% 9.2% 8.9%
manufacturing personnel- FTE Administrative and sales (5.9)% 1.5%
2.1% 4.4% 15.2% support personnel- FTE Total - FTE 13.5% 14.1%
15.0% 11.5% 12.5% Store Size and Profitability - Approximately 90%
and 91% of our sales in the first quarter of 2008 and 2007,
respectively, were generated by our stores included in the table
set forth below. Our remaining sales related to (1) our in-plant
locations, (2) our direct Fastenal Cold Heading business, or (3)
our direct import business. Our average store, excluding the
business not sold through a store, had sales of $71,600 per month
in the first quarter of 2007. This average grew to $76,800 per
month in the first quarter of 2008. The average age, number of
stores and pre-tax margin data by store size for the first quarter
of 2008 and 2007, respectively, was as follows: Three months ended
March 31, 2008 Average Number Pre-Tax Age of Percentage Margin
Sales per Month (Years) Stores of Stores Percentage $0 to 30,000
2.6 384 17.3% (20.2)% $30,001 to 60,000 5.2 718 32.4% 10.3% $60,001
to 100,000 7.8 555 25.1% 20.9% $100,001 to $150,000 10.1 342 15.5%
25.4% Over $150,000 13.3 214 9.7% 27.4% Total 2,213 100.0% Three
months ended March 31, 2007 Average Number Pre-Tax Age of
Percentage Margin Sales per Month (Years) Stores of Stores
Percentage $0 to 30,000 1.9 428 20.6% (22.0)% $30,001 to 60,000 5.0
664 32.0% 10.9% $60,001 to 100,000 7.5 493 23.8% 20.7% $100,001 to
$150,000 9.6 307 14.8% 23.8% Over $150,000 13.6 181 8.7% 25.7%
Total 2,073 100.0% Note - Amounts may not foot due to rounding
difference. As we indicated in April 2007, our goal over the next
five years is to increase the sales of our average store to
approximately $125,000 per month by 2012. This will shift the store
mix emphasis from the first three categories ($0 to $30,000,
$30,001 to $60,000, and $60,001 to $100,000) to the last three
categories ($60,001 to 100,000, $100,001 to $150,000, and over
$150,000), and we believe will allow us to leverage our fixed cost
and increase our overall productivity. Note - Dollar amounts in
this section were presented in whole dollars, not thousands. IMPACT
OF FUEL PRICES: Rising fuel prices negatively impacted the year
ended December 31, 2007 and the first quarter of 2008. During the
first quarter of 2007, our total vehicle fuel costs averaged
approximately $2.1 million per month. During the first quarter of
2008, our total vehicle fuel costs averaged approximately $2.9
million per month. The increase resulted from variations in fuel
costs, the freight initiative discussed below, increases in product
sales, and the increase in the number of vehicles necessary to
support additional sales personnel and to support additional store
locations. These fuel costs include the fuel utilized in our
distribution vehicles (semi-tractors, straight trucks, and sprinter
trucks) which is recorded in cost of goods and the fuel utilized in
our store delivery vehicles which is included in operating and
administrative expenses (the split is approximately 50:50 between
distribution and store use). In 2005, we introduced our new freight
model as a means to continue to improve our operating performance.
The freight model represents a focused effort to haul a higher
percentage of our products utilizing the Fastenal trucking network
(which operates at a substantial savings to external service
providers because of our ability to leverage our existing routes)
and to charge freight more consistently in our various operating
units. This initiative positively impacted the latter two-thirds of
2005, all of 2006, all of 2007, and the first three months of 2008
despite the changes in average per gallon fuel costs shown in the
following table: 2007 - Quarter 2008 - Quarter 1st 2nd 3rd 4th 1st
2nd 3rd 4th Diesel fuel $2.59 2.85 2.94 3.25 $3.47 Unleaded
gasoline $2.31 2.96 2.86 2.92 $3.07 The price of a gallon of diesel
fuel and unleaded gasoline increased by 34.0% and 32.9%,
respectively, from the first quarter of 2007 to first quarter of
2008. Given the nature of our distribution business, these
fluctuations in fuel prices can have a meaningful impact on our
results. This impact is also covered later in our discussion about
gross margin and operating and administrative expenses. STATEMENT
OF EARNINGS INFORMATION (percentage of net sales): Three Months
Ended March 31 2008 2007 Net sales 100.0% 100.0% Gross profit
margin 52.4% 51.0% Operating and administrative expenses 32.9%
32.9% Loss on sale of property and equipment 0.0% 0.0% Operating
income 19.4% 18.1% Interest income (expense), net 0.0% 0.0%
Earnings before income taxes 19.4% 18.1% Note - Amounts may not
foot due to rounding difference. Gross profit margins for the first
quarter of 2008 increased over the same period in 2007. The
improvement was driven by several factors: (1) a focused effort to
challenge our sales force to increase the gross margin on business
with a lower than acceptable margin, (2) a focused effort to stay
ahead of inflationary increases in product cost, (3) improvements
in our direct sourcing operations and (4) continued focus on our
freight initiative (discussed earlier). The rising fuel costs
discussed earlier had only a nominal negative impact on our gross
margin in the first quarter of 2008 because of item (4). This
impact could prove more challenging if fuel costs continue to
increase. Operating and administrative expenses grew at a rate
consistent with net sales in the first three months of 2008. As
noted in the 'pathway to profit' discussion earlier in this
release, we expect to see operating and administrative expenses
grow at a rate slower than sales growth due to the added leverage
that occurs as the size of our average store increases. On a
positive note, we were able to leverage our occupancy costs for the
first time since earlier in the decade. Occupancy expenses grew
approximately 10.9% in the first quarter of 2008. This leverage was
due to the decrease in store openings pursuant to our 'pathway to
profit' initiative. As we have noted in the past, almost 70% of our
operating and administrative expenses consist of payroll and
payroll related costs. Our employee head count (measured on a
full-time equivalent basis) increased 13.5% from March 2007 to
March 2008. However, our payroll costs increased approximately
16.9% and did not leverage. This de-leverage occurred because the
commission and bonus component of payroll grew approximately 20.5%
from the first quarter of 2007 to the first quarter of 2008 (this
was driven at the store and district level). Our employees are
rewarded for growth in gross profit dollars and pre-tax earnings.
The gross profit margin expansion discussed earlier drove this
reward faster than sales growth. The other component of operating
and administrative expenses that experienced meaningful de-leverage
was transportation cost. These costs grew approximately 27.3%,
primarily driven by the increase in fuel costs discussed earlier
and by the increase in the number of vehicles needed to support an
expanded sales force. The operating and administrative expenses for
the three months of 2008 include $673 of additional compensation
expense related to the adoption of new stock option accounting
rules. This expense relates to options granted in April 2007. We
anticipate these options, which vest in five to eight years, will
result in compensation expense of approximately $224 per month for
the next five years; and dropping slightly in the remaining period.
No other stock based compensation was outstanding during these
periods. Income taxes, as a percentage of earnings before income
taxes, were approximately 38.2% and 39.1% for the first quarter of
2008 and 2007, respectively. During the first quarter of 2007, we
implemented FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (FIN No. 48). As defined in FIN No. 48, we had a
discrete event during the first quarter of 2007 which resulted in
recognition of approximately $827 of additional tax. Absent this
event, our tax rate would have been 38.2% for the first quarter of
2007. This rate fluctuates over time based on the income tax rates
in the various jurisdictions in which we operate, and based on the
level of profits in those jurisdictions. WORKING CAPITAL: The
year-over-year dollar and percentage growth related to accounts
receivable and inventories were as follows: Twelve Month Twelve
Month Dollar Change Percentage Balance at Change Year-over- March
31, March 31, March 31, year change 2008 2007 2008 2007 2008 2007
Accounts receivable, net $273,360 238,657 $34,703 26,140 14.5%
12.3% Inventories $494,360 446,192 $48,168 75,097 10.8% 20.2% These
two assets were impacted by our initiatives to improve working
capital. These initiatives include (1) the establishment of a
centralized call center to facilitate accounts receivable
management (this facility became operational early in 2005) and (2)
the tight management of all inventory amounts not identified as
either expected store inventory, new expanded inventory, inventory
necessary for upcoming store openings, or inventory necessary for
our 'master stocking hub'. The accounts receivable increase of
12.3% from March 31, 2006 to March 31, 2007 represents a lag behind
the daily sales increase of 15.5% in March 2007. The accounts
receivable increase of 14.5% from March 31, 2007 to March 31, 2008
also represents a lag behind the 16.9% daily sales increase in
March 2008. We continue to be pleased with the improvement in
accounts receivable during 2007 and 2008, and with the related
reduction in bad debt expense when compared to historical amounts.
The inventory increase from March 31, 2006 to March 31, 2007 of
20.2% is greater than the rate of sales growth of 13.3% from the
first quarter of 2006 to the first quarter of 2007. The inventory
increase from March 31, 2007 to March 31, 2008 of 10.8% is less
than the rate of sales growth of 15.8% from the first quarter of
2007 to the first quarter of 2008. This improvement relates to our
conscious decision to limit the growth of inventory in the future,
to halt growth or decrease inventory in the short-term, to stock
additional products in our Indianapolis, Indiana distribution
center, and then to resize the existing store and distribution
center inventory through a process we call inventory
re-distribution. As we indicated in earlier communications, our
short-term goals center on our ability to move the ratio of annual
sales to accounts receivable and inventory (Annual Sales: AR&I)
back to better than a 3.0:1 ratio (on December 31, 2007, 2006, and
2005, we had a ratio of 2.8:1, 2.7:1 and 2.8:1, respectively).
Historically, we have been able to achieve a 20% after tax return
on total assets (our historical internal goal) when our Annual
Sales: AR&I ratio is at or above 3.0:1. During 2006, the
incremental investments did not allow us to improve our ratio
(these investments include certain store upgrades and the
implementation of our 'master stocking hub' model). In 2007, we
made considerable improvement as detailed above. We need to
continue executing better on the inventory portion of these working
capital initiatives in 2008. Please refer to our discussion on
'pathway to profit' earlier. FISCAL 2008 REPORTING: As indicated in
our 2007 Annual Report, we intend to focus our 2008 commentary away
from the four initiatives discussed in earlier communications (new
freight model, working capital model, expanded store model called
CSP2, and 'master stocking hub' distribution model); instead we
will focus our commentary on the 'pathway to profit'. Some key
aspects we intend to disclose center on the full-time equivalent
statistics shown above, as well as information on the productivity
of our outside sales personnel; the latter being information we
intend to start disclosing after the second quarter when we are one
year into the 'pathway to profit' which began in the spring of
2007. ANNUAL MEETING OF SHAREHOLDERS PRESENTATION: On April 15,
2008, we will be holding our Annual Meeting of Shareholders at our
offices at 2001 Theurer Boulevard, Winona, Minnesota. The meeting
will also be available via webcast from 10:00AM Central time until
the conclusion of the meeting. To access the webcast, please go to
the Fastenal Company Investor Relations Website at
investor.fastenal.com . ADDITIONAL INFORMATION: Additional
information regarding certain Fastenal Company statistics for the
current quarter is available on the Fastenal Company World Wide Web
site at http://www.fastenal.com/. The Company discloses sales and
store information on a monthly basis. This information is posted at
http://www.fastenal.com/ on the third business day following the
end of the first two months of a quarter and simultaneous with the
earnings release following the third month of a quarter. This press
release contains statements that are not historical in nature and
that are intended to be, and are hereby identified as, "forward
looking statements" as defined in the Private Securities Litigation
Reform Act of 1995, including statements regarding (1) working
capital goals and expected returns on total assets when working
capital is appropriately managed, (2) the outcome of our new long
term growth strategy 'pathway to profit', including planned
decreases in the rate of new store openings, planned additions to
our outside sales personnel, the expected funding of such additions
out of cost savings resulting from the slowing of the rate of new
store openings, the growth in average store sales expected to
result from this strategy, and out ability to capture leverage
expected to result from this strategy (including expected working
capital efficiencies), and (3) the expected amount of future
compensation expense resulting from stock options. A change in the
economy, from that currently being experienced, could cause the
store openings to change from that expected, and could impact the
rate at which additional outside sales personnel are added, our
ability to grow average store sales and our ability to capture
leverage. A change from that projected in the number of markets
able to support future store sites, the success of the additional
outside sales personnel, and our ability to attract and retain
qualified sales personnel could impact sales and the rate of store
openings. Our ability to successfully change our sales process
could adversely impact our ability to grow average store sales. A
change in accounting for stock based compensation or the
assumptions used could change the amount of stock based
compensation recognized. A change in accounts receivable
collections, a change in the economy from that currently being
experienced, a change in buying patterns, or a change in vendor
production lead times could cause us to fail to attain our goals
regarding working capital (including inventory) and rates of return
on assets. A discussion of other risks and uncertainties is
included in the Company's 2007 annual report on Form 10-K under the
section captioned "Risk Factors" and the Company's 2007 annual
report to shareholders under the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of
Operations". FAST-E FASTENAL COMPANY AND SUBSIDIARIES Consolidated
Balance Sheets (Amounts in thousands except share information)
(Unaudited) March 31, December 31, Assets 2008 2007 Current assets:
Cash and cash equivalents $75,212 57,220 Marketable securities 207
159 Trade accounts receivable, net of allowance for doubtful
accounts of $2,229 and $2,265, respectively 273,360 236,331
Inventories 494,360 504,592 Deferred income tax assets 14,702
14,702 Other current assets 60,534 67,767 Total current assets
918,375 880,771 Marketable securities 1,924 1,950 Property and
equipment, less accumulated depreciation 298,553 276,627 Other
assets, less accumulated amortization 3,723 3,713 Total assets
$1,222,575 1,163,061 Liabilities and Stockholders' Equity Current
liabilities: Accounts payable $59,573 55,353 Accrued expenses
66,690 75,565 Income taxes payable 40,851 6,873 Total current
liabilities 167,114 137,791 Deferred income tax liabilities 15,109
15,109 Stockholders' equity: Preferred stock, 5,000,000 shares
authorized - - Common stock, 200,000,000 shares authorized,
149,120,712 shares issued and outstanding, respectively 1,491 1,491
Additional paid-in capital 900 227 Retained earnings 1,026,864
996,050 Accumulated other comprehensive income 11,097 12,393 Total
stockholders' equity 1,040,352 1,010,161 Total liabilities and
stockholders' equity $1,222,575 1,163,061 FASTENAL COMPANY AND
SUBSIDIARIES Consolidated Statements of Earnings (Amounts in
thousands except earnings per share) (Unaudited) Three months ended
March 31, 2008 2007 Net sales $566,210 489,157 Cost of sales
269,580 239,642 Gross profit 296,630 249,515 Operating and
administrative expenses 186,562 160,851 Loss on sale of property
and equipment 104 115 Operating income 109,964 88,549 Interest
income 221 222 Earnings before income taxes 110,185 88,771 Income
tax expense 42,091 34,738 Net earnings $68,094 54,033 Basic and
diluted net earnings per share $0.46 0.36 Basic weighted average
shares outstanding 149,121 151,179 Diluted weighted average shares
outstanding 149,121 151,179 FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Amounts in thousands)
(Unaudited) Three months ended March 31, 2008 2007 Cash flows from
operating activities: Net earnings $68,094 54,033 Adjustments to
reconcile net earnings to net cash provided by operating
activities: Depreciation of property and equipment 9,524 9,226 Loss
on sale of property and equipment 104 115 Bad debt expense 1,895
1,516 Stock based compensation 673 - Amortization of non-compete
agreement 17 17 Changes in operating assets and liabilities: Trade
accounts receivable (38,924) (30,641) Inventories 10,232 9,805
Other current assets 7,233 3,316 Accounts payable 4,220 3,443
Accrued expenses (8,875) 376 Income taxes payable 33,978 32,362
Other (1,435) 887 Net cash provided by operating activities 86,736
84,455 Cash flows from investing activities: Purchase of property
and equipment (32,641) (12,697) Proceeds from sale of property and
equipment 1,087 1,484 Net (increase) decrease in marketable
securities (22) 1,837 Increase in other assets (27) (106) Net cash
used in investing activities (31,603) (9,482) Cash flows from
financing activities: Purchase of common stock - (3,435) Payment of
dividends (37,280) (31,584) Net cash used in financing activities
(37,280) (35,019) Effect of exchange rate changes on cash 139 88
Net increase in cash and cash equivalents 17,992 40,042 Cash and
cash equivalents at beginning of period 57,220 19,346 Cash and cash
equivalents at end of period $75,212 59,388 Supplemental disclosure
of cash flow information: Cash paid during each period for: Income
taxes $8,113 2,376 DATASOURCE: The Fastenal Company CONTACT: Dan
Florness, EVP-CFO of The Fastenal Company, +1-507-453-8211 Web
site: http://www.fastenal.com/
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