10-KPeriod: FY2007

FASTENAL CO Annual Report, Year Ended Dec 31, 2007

Filed February 21, 2008For Securities:FAST

Summary

Fastenal Company's 2007 10-K highlights a year of significant expansion and strategic shifts in its business model. The company continued its growth trajectory, increasing its store count to 2,160 locations across North America and expanding its product lines beyond traditional fasteners to include tools, safety supplies, and janitorial items. This diversification and extensive store network aim to serve a broad base of industrial and construction customers, providing a degree of resilience against economic downturns. The report also introduces the 'Pathway to Profit' strategy, a key initiative for 2007 and beyond. This strategy involves moderating the pace of new store openings to reinvest in additional outside sales personnel, with the goal of increasing average store sales, improving operational leverage, and boosting pretax earnings and return on assets. While the company has a strong track record of profitable growth, investors should note the inherent risks associated with new store openings, economic sensitivity, and the execution of this new strategic direction.

Financial Highlights

25 data points
Beta

Revenue

$2.06B

50.8% Gross Margin

Net Income

$232.62M

11.3% Net Margin

Cash & Equivalents

$57.22M

Free Cash Flow

$172.14M

Financial Statements
Beta
Revenue$2.06B
Cost of Revenue$1.01B
Gross Profit$1.05B
SG&A Expenses$671.25M
Operating Income$376.43M
Net Income$232.62M

Key Highlights

  • 1Fastenal operated 2,160 store locations across 50 states, Puerto Rico, Canada, Mexico, Singapore, China, and the Netherlands as of December 31, 2007, demonstrating a broad geographic reach.
  • 2The company's product offering has diversified significantly since its inception, now including ten product lines such as tools, cutting tools, hydraulics, safety supplies, and janitorial items, in addition to its core fastener business.
  • 3Fastenal's 'Pathway to Profit' strategy, introduced in 2007, aims to slow the rate of new store openings (from 13-18% to 7-10% annually) and reallocate capital to expand outside sales personnel, targeting increased average store sales and improved profitability.
  • 4The company's growth strategy relies heavily on new store openings, with an estimated potential for at least 3,500 stores in North America, though success in new markets carries inherent risks.
  • 5Fastenal's business model is designed to mitigate economic downturns through a large and diverse customer base (approximately 314,000 active accounts) across various industries like construction and manufacturing.
  • 6The company emphasizes employee quality and development through its 'Fastenal School of Business' and internal promotion policies, believing this is critical to its competitive advantage.
  • 7A class-action lawsuit alleging misclassification of Assistant General Managers regarding overtime pay and meal/rest break violations was filed in October 2007, representing an ongoing legal risk for the company.

Frequently Asked Questions

Fastenal's primary growth strategy involves opening new store locations to expand its market reach and attract new customers. The 'Pathway to Profit' strategy, introduced in 2007, modifies this by slowing the pace of new store openings to reinvest in more outside sales personnel, aiming to increase sales at existing stores and improve overall profitability.

Fastenal believes its broad customer base, numbering approximately 314,000 active accounts across diverse markets like construction and manufacturing, provides a degree of protection against economic downturns. The wide range of industrial and construction supplies offered also helps serve varied customer needs.

Key risks include economic downturns affecting customer spending, the potential inaccuracy of market potential estimates for new stores, challenges in meeting new store opening goals, the unproven long-term success of store expansion strategies (like CSP2 and the 'a la carte' approach), fluctuations in gross margins due to product mix and order volume changes, increased risks in operating new stores in unfamiliar markets, rising energy and raw material costs, difficulties in attracting and retaining qualified personnel, and potential disruptions to the distribution network.

Fastenal is evolving its store model, moving from a 'one size fits all' approach for expanded stores (CSP2) to an 'a la carte' model that tailors inventory based on local customer demographics and sales force knowledge. The company has also significantly diversified its product lines beyond fasteners to include tools, safety supplies, janitorial items, and more, distributing them through the same established network.