How did Fastenal perform financially in 1998?

Fastenal grew net sales 26.4% to $503.1 million and net earnings 29.7% to $52.95 million, or $1.40 per share. Earnings grew faster than sales because operating and administrative expenses fell as a share of sales, from 35.6% to 35.2%, while gross margin held at 52.5%.

Why did Fastenal slow its store openings, and what does that mean for growth?

Management slowed openings because of weaker manufacturing activity, Asian import deflation in fasteners, and weak farm equipment demand. New stores generally lose money in their first year, so slowing openings helps near-term earnings. The company says it will open more stores quickly if markets recover, and it expects growth in 1999 to come mainly from selling its newer product lines to existing customers.

Is Fastenal's balance sheet healthy?

Yes. The company had no long-term debt at year-end 1998, and its $25 million credit line had only $55,000 outstanding. Equity was $217.6 million, working capital was $142.5 million, and operating cash flow rose to $43.3 million. Planned 1999 capital spending is about $22.7 million, mostly for computer equipment.

What are the main risks for investors?

The main risks are an extended industrial slowdown that hits sales at existing stores, deflation in standard fasteners, and dependence on the success of newer product lines. Execution risk also comes from the Year 2000 readiness work and the 1999 conversion to new POS and enterprise systems. Management says the Year 2000 remediation is not expected to be materially adverse, but it cannot guarantee that third parties will be ready.

How has Fastenal's stock performed, and what does it pay in dividends?

The stock traded on Nasdaq under FAST. It peaked at $56-7/8 in Q2 1998 and fell to a low of $20-1/2 in Q4 1998. The 1998 dividend was $0.02 per share, and the board declared $0.04 per share for 1999, which management expects to be a reasonable indication of future payouts. The company had about 2,672 record holders as of February 1999.

FAST 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 15, 1999. Cited figures are marked; the original filing is the authoritative source.

Fastenal Company (FAST) closed 1998 with record results despite a deteriorating industrial economy.

Net sales rose 26.4% to $503.1 million^a from $398.0 million, and net earnings rose 29.7% to $52.95 million, or $1.40 per share. Growth was driven by new store openings (766 stores at year-end, up from 644), growth in existing stores, and the seven newer product lines, which made up 30.1% of sales in the fourth quarter. Operating leverage was the main driver of earnings growth: operating and administrative expenses fell to 35.2% of sales from 35.6%, and gross margin held at 52.5%.

The outlook is more cautious. Management said the 1998 slowdown in manufacturing, the Asian crisis, deflation in standard fasteners, and weak farm equipment demand would likely persist into 1999. As a result, the company has slowed new store openings and plans to grow by selling more products to existing customers.

Capital expenditures are planned at about $22.7 million^b, mostly for computer equipment, and the company will move to operating leases for vehicles. The balance sheet is strong, with no long-term debt, $142.5 million of working capital, and $217.6 million of equity. The dividend was raised to $0.04 per share for 1999 from $0.02.

Investors should weigh the strong profitability and balance sheet against slowing growth and risks from the Year 2000 transition and the new POS and enterprise systems. Those systems carry about $16 million^c of expected cost, and the company identifies execution risk in both. Stock prices fell sharply during 1998, from a high of $56-7/8 to a low of $20-1/2 in the fourth quarter.

02—Key points

Key Highlights

Net sales grew 26.4% to $503.1 million in 1998, while net earnings grew 29.7% to $52.95 million ($1.40 per share).
The store network expanded to 766 sites, up from 644 in 1997, across 48 states, Puerto Rico, and Canada, though the company decided to slow new store openings because of market weakness.
Gross margin was stable at 52.5%, and operating and administrative expenses fell to 35.2% of sales from 35.6%, which drove the faster earnings growth.
The seven newer product lines (FastTool, SharpCut, PowerFlow, EquipRite, CleanChoice, PowerPhase, FastArc) grew to about 30% of sales in Q4 1998, reducing dependence on threaded fasteners, which fell to 55% of sales from 61%.
The balance sheet is strong: no long-term debt, $142.5 million in working capital, $217.6 million in stockholders' equity, and cash flow from operations up to $43.3 million from $14.7 million.
Management expects continued slowness in 1999 and plans to focus on growth through customer service and selling more products to existing customers. The 1999 dividend was raised to $0.04 per share from $0.02.
Year 2000 and system conversion costs total about $16 million for the new POS and enterprise systems. The company also faces execution risk from its planned 1999 system conversions.

03—Questions

Frequently Asked Questions

How did Fastenal perform financially in 1998?
Fastenal grew net sales 26.4% to $503.1 million and net earnings 29.7% to $52.95 million, or $1.40 per share. Earnings grew faster than sales because operating and administrative expenses fell as a share of sales, from 35.6% to 35.2%, while gross margin held at 52.5%.
Why did Fastenal slow its store openings, and what does that mean for growth?
Management slowed openings because of weaker manufacturing activity, Asian import deflation in fasteners, and weak farm equipment demand. New stores generally lose money in their first year, so slowing openings helps near-term earnings. The company says it will open more stores quickly if markets recover, and it expects growth in 1999 to come mainly from selling its newer product lines to existing customers.
Is Fastenal's balance sheet healthy?
Yes. The company had no long-term debt at year-end 1998, and its $25 million credit line had only $55,000 outstanding. Equity was $217.6 million, working capital was $142.5 million, and operating cash flow rose to $43.3 million. Planned 1999 capital spending is about $22.7 million, mostly for computer equipment.
What are the main risks for investors?
The main risks are an extended industrial slowdown that hits sales at existing stores, deflation in standard fasteners, and dependence on the success of newer product lines. Execution risk also comes from the Year 2000 readiness work and the 1999 conversion to new POS and enterprise systems. Management says the Year 2000 remediation is not expected to be materially adverse, but it cannot guarantee that third parties will be ready.
How has Fastenal's stock performed, and what does it pay in dividends?
The stock traded on Nasdaq under FAST. It peaked at $56-7/8 in Q2 1998 and fell to a low of $20-1/2 in Q4 1998. The 1998 dividend was $0.02 per share, and the board declared $0.04 per share for 1999, which management expects to be a reasonable indication of future payouts. The company had about 2,672 record holders as of February 1999.

04—Continue

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