Fastenal Company Reports 2008 First Quarter Earnings
WINONA, Minn., April 11, 2008 /PRNewswire-FirstCall via COMTEX News Network/ -- 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.
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.
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 regarding certain Fastenal Company statistics for the current quarter is available on the Fastenal Company World Wide Web site at 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
SOURCE The Fastenal Company
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