Why did Fastenal's earnings fall in 2001 despite sales growth?

Net sales rose 8.3%, but earnings fell 13.2% because of slower underlying sales growth, a lower gross margin from product mix changes (50.4% vs. 51.4%), higher payroll and occupancy costs, and expenses tied to opening 128 new stores. Depreciation also rose with new management information systems.

How healthy is Fastenal's balance sheet?

Very healthy. At year-end 2001, the company held $47.3 million in cash and $30.6 million in marketable securities, with trade receivables of $101.4 million and inventory of $152.7 million. Its only long-term debt was a $6.5 million industrial revenue bond, and its $15 million line of credit was undrawn. Equity was $424.9 million.

What is the growth strategy and how long until new stores pay off?

Fastenal plans to keep opening stores at 10% to 15% per year, mainly stand-alone stores in the U.S. and Canada, with expansion into Puerto Rico, Mexico and Singapore. New stores typically take nine to 12 months to reach their first profitable month, and sales build slowly through repeated customer calls. Management says the company could support roughly 2,000 to 2,200 stores.

Is the dividend safe, and what does management expect for 2002?

The board declared a $0.10 annual dividend for 2002, up from $0.09, and management expects to continue paying comparable cash dividends. Management also describes 2002 as expected to be a much better year, though it gives no quantitative guidance, and the filing notes forward-looking statements are subject to economic and operational risks.

What are the main risks highlighted in the filing?

Key risks include economic downturns affecting existing store sales and new store openings, the ability to attract and retain qualified store staff, product expansion and integration risks, foreign currency and trade shifts that affect overseas sourcing, changes in product quality or traceability regulation, and disruption from the new management information system. Price deflation also hurt sales in 2001, and sales to large manufacturing customers fell more than 30% in some cases.

FAST 10-K FY2001 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 4, 2002. Cited figures are marked; the original filing is the authoritative source.

Fastenal Company (FAST), a Nasdaq-listed industrial and construction supplies distributor, reported a challenging 2001 in its 10-K filed March 4, 2002.

Net sales rose 8.3% to $818.3 million^a (including an August 2001 acquisition of Textron's DIY fastener business, which contributed $8.5 million), but net earnings fell 13.2% to $70.1 million and diluted EPS dropped to $1.85 from $2.13. Growth slowed sharply through the year: daily sales growth on the existing base bottomed at negative 0.3% in November, and sales to some large manufacturing customers fell more than 30%. Management attributed the earnings decline to slower sales, gross margin compression from product mix (gross margin fell to 50.4% from 51.4%), higher operating and administrative expenses (36.7% of sales vs. 34.2%), and the costs of opening 128 new stores, which lifted the store count to 1,025.

The balance sheet remained strong. Stockholders' equity grew 18.3% to $424.9 million^b, the company carried no funded debt apart from a $6.5 million industrial revenue bond, and operating cash flow improved sharply to $91.7 million as working capital needs eased. Management expects roughly $30 million in 2002 capital expenditures and plans to keep expanding in the U.S., Canada, Puerto Rico, Mexico and Singapore, targeting 2,000 to 2,200 total stores over time.

The dividend was raised to $0.10^c per share for 2002 (from $0.09), and the company says it expects to continue paying comparable cash dividends. For investors, the key takeaways are a company still growing its store network at 10 to 15% per year, with strong returns on capital and a clean balance sheet, but facing a cyclical slowdown in industrial demand that compressed margins and earnings in 2001.

The filing's near-term outlook hinges on whether store-level sales recover, since management says new stores take nine to 12 months to reach their first profitable month and that near-term profitability is pressured by openings. The Company also noted it had no legal proceedings and no changes in accountants.

02—Key points

Key Highlights

Net sales grew 8.3% to $818.3 million in 2001, but growth decelerated sharply during the year, with same-store daily sales growth bottoming at -0.3% in November.
Net earnings declined 13.2% to $70.1 million; diluted EPS fell to $1.85 from $2.13 as gross margin dropped to 50.4% and operating expenses rose to 36.7% of sales.
Opened a record 128 stores in 2001 (four countries), ending the year with 1,025 stores; management targets 10% to 15% annual store growth and a long-term potential of 2,000 to 2,200 stores.
Acquired certain assets of Textron's DIY fastener business in August 2001 for retail packaged products; the business contributed $8.5 million of sales at roughly break-even.
Balance sheet remains strong: stockholders' equity rose 18.3% to $424.9 million, with cash and marketable securities of about $78 million and only a $6.5 million industrial revenue bond as debt.
Operating cash flow more than doubled to $91.7 million as receivables and inventory growth slowed; 2002 capital expenditures are planned at about $30 million.
Annual dividend increased to $0.10 per share for 2002 from $0.09 in 2001; the company has 37.9 million shares outstanding and a market value of non-affiliate stock of about $2.07 billion.

03—Questions

Frequently Asked Questions

Why did Fastenal's earnings fall in 2001 despite sales growth?
Net sales rose 8.3%, but earnings fell 13.2% because of slower underlying sales growth, a lower gross margin from product mix changes (50.4% vs. 51.4%), higher payroll and occupancy costs, and expenses tied to opening 128 new stores. Depreciation also rose with new management information systems.
How healthy is Fastenal's balance sheet?
Very healthy. At year-end 2001, the company held $47.3 million in cash and $30.6 million in marketable securities, with trade receivables of $101.4 million and inventory of $152.7 million. Its only long-term debt was a $6.5 million industrial revenue bond, and its $15 million line of credit was undrawn. Equity was $424.9 million.
What is the growth strategy and how long until new stores pay off?
Fastenal plans to keep opening stores at 10% to 15% per year, mainly stand-alone stores in the U.S. and Canada, with expansion into Puerto Rico, Mexico and Singapore. New stores typically take nine to 12 months to reach their first profitable month, and sales build slowly through repeated customer calls. Management says the company could support roughly 2,000 to 2,200 stores.
Is the dividend safe, and what does management expect for 2002?
The board declared a $0.10 annual dividend for 2002, up from $0.09, and management expects to continue paying comparable cash dividends. Management also describes 2002 as expected to be a much better year, though it gives no quantitative guidance, and the filing notes forward-looking statements are subject to economic and operational risks.
What are the main risks highlighted in the filing?
Key risks include economic downturns affecting existing store sales and new store openings, the ability to attract and retain qualified store staff, product expansion and integration risks, foreign currency and trade shifts that affect overseas sourcing, changes in product quality or traceability regulation, and disruption from the new management information system. Price deflation also hurt sales in 2001, and sales to large manufacturing customers fell more than 30% in some cases.

04—Continue

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