Business Context and Reporting Period
Company: Fastenal Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2003
Business Overview: Fastenal distributes industrial fasteners and related products. The company operates a branch-based business model and recently completed the sale of its Do-It-Yourself (DIY) business in October 2002. As of September 30, 2003, the company operated 1,269 stores.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2002 | Three Months Ended Sep 30, 2003 | Three Months Ended Sep 30, 2002 |
|---|---|---|---|---|
| Net Sales | $743,285 | $686,152 | $258,330 | $238,086 |
| Gross Profit | $366,578 | $339,131 | $126,507 | $117,069 |
| Gross Margin % | 49.3% | 49.4% | 49.0% | 49.2% |
| Operating Income | $103,229 | $92,285 | $37,387 | $30,518 |
| Net Earnings | $64,230 | $58,653 | $23,262 | $19,117 |
| Diluted EPS | $0.85 | $0.77 | $0.31 | $0.25 |
| Operating Cash Flow | $61,883 | $28,065 | N/A | N/A |
| Cash & Equivalents (End of Period) | $55,127 | $25,485 | N/A | N/A |
| Debt (Line of Credit Used) | $0 | N/A | N/A | N/A |
Note: All dollar amounts in thousands except per share data.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 8.3% for the nine months and 8.5% for the quarter compared to the prior year. Excluding the disposed DIY business, organic sales growth was 11.0% (nine months) and 11.2% (quarter).
- Profitability: Net earnings increased 9.5% for the nine months and 21.7% for the quarter. Earnings per share grew 10.4% and 24.0% respectively.
- Cash Flow Improvement: Net cash provided by operating activities more than doubled to $61.9 million from $28.1 million in the prior year, primarily due to reduced inventory growth.
- Inventory Management: Inventory levels decreased beginning in June 2003, reversing the growth trend seen in 2002. This was driven by reductions at distribution centers.
- Store Expansion: The company opened 106 new stores and closed 6 during the first nine months of 2003, reaching a total of 1,269 locations.
Guidance, Outlook, and Risks
- Store Openings: Management expects to open approximately 150 to 185 new stores in 2003 (a 12% to 16% increase over year-end 2002). New stores typically take 10 to 12 months to achieve profitability.
- Customer Service Project (CSP): The company is converting stores to a self-service format with broader inventory. As of September 30, 2003, 701 stores (515 existing, 186 new) were operating under this format. Conversion is expected to continue at 40 to 50 stores per month through late 2003 and into 2004.
- Liquidity: The company has a $15 million line of credit with no outstanding balance as of September 30, 2003. Expansion plans are funded by operating cash flow and existing cash reserves.
- Risks: Key risks include fluctuations in the industrial economy, changes in product mix affecting margins, fuel and utility cost increases, and potential disruptions from the CSP implementation or new management information systems.
Investor Verification Checklist
- Organic Growth Rate: Verify the 11% organic sales growth excluding the disposed DIY business to assess core operational performance.
- Inventory Turnover: Confirm the sustainability of the inventory reduction trend and its impact on future cash flow.
- CSP Impact: Monitor the financial impact of the Customer Service Project, specifically regarding increased inventory levels per store and associated carrying costs.
- New Store Economics: Track the timeline for new stores to reach profitability, as initial years incur significant expenses.
- Margin Pressure: Review the impact of large account sales and product mix changes on the slight decline in gross margins (49.3% vs 49.4% prior year).