01—Abstract
Summary
Summary of the 10-K filed February 26, 2003. Cited figures are marked; the original filing is the authoritative source.
Fastenal Company (FAST) reported fiscal 2002 results that showed modest top-line and bottom-line growth in a difficult industrial economy.
Net sales rose 10.7% to $905.4 milliona from $818.3 million, and net earnings increased 7.7% to $75.5 million, or $1.00 per share. Results were helped by a $5.9 million pre-tax gain on the sale of the Do-It-Yourself (DIY) business to The Hillman Group, and were partly offset by roughly $4 million of unexpected general self-insured claim reserve adjustments recorded in the fourth quarter. Gross margin compressed to 49.5% from 50.4% in 2001, and operating and administrative expenses rose to 37.0% of sales from 36.7%, so earnings grew more slowly than sales.
Sales growth decelerated through the second half of the year, with daily sales growth slowing in July and rebounding into November before slipping in December. The key strategic development is the Customer Service Project (CSP), a re-merchandising initiative that stocks a broader inventory in stores in an open-floor, self-service format. By year-end 155 stores operated under CSP, and management plans to convert about 80 stores per month and open all new stores in CSP format in 2003.
CSP drove a 42.3% increase in inventory to $217.3 millionb, which reduced operating cash flow to just $17.8 million from $91.7 million in 2001. The company continues to expand, opening 144 stores in 2002 to reach 1,169 locations across the U.S., Canada, Puerto Rico, Mexico and Singapore, and it targets 14% to 16% annual store growth. The balance sheet remains conservative, with no outstanding bank debt, a $15 million line of credit unused, and stockholders' equity of $499.9 million.
The company also raised its annual dividend to $0.06c per share. For investors, the central questions are whether CSP will lift same-store sales and returns enough to justify its inventory and capital investment, and whether margins can stabilize as the new format matures. The 2002 filing shows a company with strong growth momentum and a healthy balance sheet, but with near-term cash flow pressure and margin headwinds from the CSP rollout, which management characterizes as an investment in future growth.
02—Key points
Key Highlights
- Net sales rose 10.7% to $905.4 million in 2002, driven by new store openings and growth in newer product lines, though pricing was slightly deflationary.
- Net earnings grew 7.7% to $75.5 million ($1.00 per diluted share), including a $5.9 million pre-tax gain on the DIY Business sale and a $0.7 million extraordinary gain.
- Gross margin declined to 49.5% from 50.4% due to product mix, and operating expenses rose to 37.0% of sales, partly from a roughly $4 million self-insurance reserve adjustment.
- The Customer Service Project (CSP) was active in 155 stores by year-end, with plans to convert about 80 stores per month and open all new stores in CSP format in 2003.
- Inventory rose 42.3% to $217.3 million, and operating cash flow fell to $17.8 million from $91.7 million, reflecting the CSP investment.
- The company opened 144 stores in 2002, ending the year with 1,169 locations, and sees room for 2,000 to 2,200 stores in the U.S. and Canada.
- The balance sheet is strong, with $499.9 million in equity, no bank debt outstanding, and a dividend increased to $0.06 per share for 2003.
03—Questions
Frequently Asked Questions
How did Fastenal perform financially in 2002?
Fastenal grew net sales 10.7% to $905.4 million and net earnings 7.7% to $75.5 million, or $1.00 per share. Earnings growth lagged sales growth because gross margin fell to 49.5% and operating expenses rose as a share of sales. The results included a $5.9 million gain from selling the DIY Business and a $0.7 million extraordinary gain.
What is the Customer Service Project (CSP) and why does it matter?
CSP is a store re-merchandising program that stocks a broader inventory with open-floor, self-service displays and updated signage and fixtures. Management believes it will improve customer service and sales productivity. It is costly, raising inventory by roughly $55,000 per converted store, and it reduced 2002 operating cash flow. Its success will be a key driver of future results.
Why did operating cash flow decline so sharply in 2002?
Operating cash flow fell to $17.8 million from $91.7 million in 2001, mainly because inventory increased $71.7 million as the company stocked CSP stores and built distribution center inventory. Net earnings were stable, so the drop reflects working capital investment rather than weaker profitability.
What was the impact of the DIY Business acquisition and sale?
Fastenal bought the Do-It-Yourself packaged fastener business from Textron in August 2001 and sold it to The Hillman Group in October 2002. The business contributed about $17.0 million of 2002 sales at a 30% to 32% gross margin, which was below Fastenal's core margin. The sale produced a $5.9 million pre-tax gain, and management said the learning was applied to the CSP store format.
Is Fastenal's growth expected to continue, and what are the main risks?
Management expects to continue opening stores at 14% to 16% per year and to expand into Canada, Puerto Rico, Mexico and Singapore. Risks include economic slowdowns that could reduce sales at older stores, pricing deflation, difficulty attracting qualified staff, execution risk in the CSP rollout, and rising costs for insurance, fuel and occupancy. The company does not guarantee that new stores will be profitable.
04—Continue