01—Abstract
Summary
Summary of the 10-K filed February 21, 2008. Cited figures are marked; the original filing is the authoritative source.
Fastenal Company (FAST), a North American wholesale distributor of industrial and construction supplies, closed fiscal 2007 with net sales of $2.06 billiona, up 14.0% from $1.81 billion in 2006.
Net earnings rose 16.9% to $232.6 millionb, or $1.55 per diluted share, and pretax margin expanded to 18.3% from 17.7%. Growth was driven by a combination of new store openings (161 in 2007, versus 245 in 2006) and same-store sales gains, with the company's store count reaching 2,160 across North America and select international markets. Daily sales growth decelerated through the year, from 12.6% in January to a low of 13.7% in Q3 before recovering to 16.8% in December, reflecting a softening industrial economy in 2007.
The most significant strategic development is the 'Pathway to Profit' initiative introduced in April 2007. Management is shifting its growth engine from store openings (historically 13% to 18% annually) to a 7% to 10% rate of new stores, redirecting the cost savings toward adding outside sales personnel to existing stores. The stated goal is to raise average monthly store sales from roughly $80,000 to $125,000c over five years and expand the pretax margin from about 18% to 23%.
Management also noted that the strategy has not yet been proven over the long term, and that the a la carte store expansion and the master stocking hub both carry execution risk. Financially, operating cash flow improved sharply to $227.9 milliond from $97.9 million, aided by slower inventory growth (up 10.7%, below sales growth of 14.0%). The company repurchased 2.086 million shares for $87.3 million and paid $66.2 million in dividends, with a semi-annual dividend of $0.25 declared for early 2008.
Key risks include sensitivity to economic downturns, rising steel and diesel fuel costs, and a pending putative class action alleging misclassification of Assistant General Managers under FLSA and California law, which management says it cannot yet estimate. The annual sales-to-accounts-receivable-and-inventory ratio was 2.8:1, below management's 3.0:1 target.
02—Key points
Key Highlights
- Net sales grew 14.0% to $2,061.8 million in 2007, though this was a slowdown from 18.8% growth in 2006 and reflects a weakening industrial economy.
- Net earnings increased 16.9% to $232.6 million ($1.55 per diluted share), with pretax margin improving to 18.3% from 17.7%.
- The 'Pathway to Profit' strategy slows store openings to 7%-10% annually and redirects investment to outside sales personnel, targeting $125,000 average monthly store sales and a 23% pretax margin within five years.
- Operating cash flow more than doubled to $227.9 million, driven by working capital discipline, with inventory growth (10.7%) held below sales growth.
- Capital returns totaled $153.5 million in 2007: $87.3 million in buybacks (2.086 million shares at about $41.86) and $66.2 million in dividends.
- Operating and administrative expenses rose to 32.6% of sales from 32.5%, reflecting outside sales hiring, stock option expense, and occupancy costs tied to store growth.
- A pending class action over Assistant General Manager overtime classification and California meal and rest break claims is in a preliminary stage, with no estimable loss range disclosed.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2007, Fastenal Co kept $0.11.
- Revenue$2.06B100.0%
- Cost of revenue−$1.01B49.2%
- Gross profit$1.05B50.8%
- Operating costs−$671.1M32.6%
- Operating income$376.4M18.3%
- Interest, other & tax−$143.8M7.0%
- Net income$232.6M11.3%
Where FY2007 revenue went
$2.06B- Cost of revenue: $1.01B, 49% of revenue
- SG&A: $671.2M, 33% of revenue
- Net income: $232.6M, 11% of revenue
- Interest, other & tax: $143.8M, 7.0% of revenue
Kept 11% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 21, 200805—Questions
Frequently Asked Questions
How much did Fastenal's revenue and earnings grow in 2007?
Net sales reached $2.06 billion, up 14.0% from $1.81 billion in 2006. Net earnings grew 16.9% to $232.6 million, and diluted EPS rose 17.4% to $1.55. Earnings grew faster than sales because of gross margin gains (50.8% versus 50.2%) and share repurchases that reduced the share count.
What is the 'Pathway to Profit' strategy and why does it matter to investors?
It is Fastenal's new long-term plan to shift growth from opening new stores to adding outside sales staff to existing, high-performing stores. Management intends to slow new store openings to 7%-10% per year from 13%-18% previously, reinvesting the savings in sales personnel. The targets are $125,000 in average monthly store sales and a 23% pretax margin over five years. Investors should note that management acknowledges the strategy is unproven long term and depends on successfully hiring and training sales staff.
How is the company's balance sheet and cash generation trending?
Cash flow from operations rose to $227.9 million from $97.9 million in 2006, largely because inventory and receivables grew more slowly than sales. Cash and equivalents increased to $57.2 million, and the company carries no borrowings under its $40 million line of credit. The sales-to-receivables-and-inventory ratio improved to 2.8:1 from 2.7:1 but remains below management's 3.0:1 target, so working capital efficiency is still a stated area of focus.
What are the main risks highlighted in the filing?
The filing emphasizes sensitivity to economic downturns affecting customer spending, rising steel and diesel fuel costs that can pressure margins, difficulty attracting and retaining qualified store and sales personnel, and competition from larger distributors in a consolidating industry. It also notes foreign currency exposure, primarily to the Canadian dollar, and the unproven nature of the a la carte store format and Pathway to Profit strategy. The company is also defending a putative class action over overtime classification of Assistant General Managers, whose outcome it cannot yet predict.
Is the company returning capital to shareholders?
Yes. In 2007 Fastenal repurchased about 2.09 million shares for $87.3 million and paid $66.2 million in dividends, or $0.44 per share for the year. The board approved an additional 3 million shares of buyback authority during 2007, leaving about 1 million shares remaining as of January 2008. A semi-annual dividend of $0.25 per share was declared in January 2008, which management expects to be comparable going forward.
06—Continue