01—Abstract
Summary
Summary of the 10-K filed February 20, 2009. Cited figures are marked; the original filing is the authoritative source.
Fastenal (FAST) closed 2008 with record results despite a sharp late-year slowdown.
Net sales rose 13.5% to $2.34 billiona, and net earnings grew 20.2% to $279.7 million, or $1.88 per diluted share. Gross margin expanded to 52.8% from 50.8% in 2007, driven by pricing discipline, direct sourcing, and the freight initiative. Operating and administrative expenses grew 17.0%, faster than sales, reflecting payroll incentives, fuel-driven transportation costs, and a $10 million legal settlement.
Management hit its 2008 pathway-to-profit target of a one-point pretax margin improvement, but sales growth decelerated sharply from October, with December daily sales essentially flat year over year. The company is shifting its growth engine from store openings toward adding outside sales staff to existing stores. New store openings slowed to 161 in 2008 (about 7.5%b store count growth) versus a historical 13-18% pace, and the company is funding outside sales hiring with the savings.
Balance sheet strength is solid: cash and equivalents rose to $85.9 millionc, there is no debt drawn on the $40 million credit line, and operating cash flow was $259.9 million. Inventory grew 11.8% against 13.5% sales growth, and the company acknowledged it was higher than expected.
Dividends were raised substantially, with total 2008 payouts of $0.79d per share including a special dividend, and the board declared a $0.35 semi-annual dividend in January 2009. Investors should weigh the strong structural execution against the cyclical risk now visible in the fourth-quarter trend, which the filing itself flags as the weakest period in the company's history.
02—Key points
Key Highlights
- Net sales of $2,340.4 million, up 13.5%, while fourth-quarter sales growth slowed to near zero on a daily basis in December 2008.
- Net earnings of $279.7 million, up 20.2%, with diluted EPS of $1.88 versus $1.55 in 2007.
- Gross margin expanded to 52.8% from 50.8%, reflecting pricing, direct sourcing, and freight initiative gains.
- Operating and administrative expenses rose 17.0% to 33.6% of sales, including a $10 million class action settlement and higher fuel and payroll costs.
- Pathway to profit strategy slowed new store openings to 161 (about 7.5% growth) to fund outside sales hires; the company met its 2008 pretax margin improvement goal of 1 point.
- Operating cash flow of $259.9 million and no borrowings on the $40 million credit line; 2009 capex planned at about $65 million.
- Quarterly dividend raised to $0.35 per share for early 2009, with total 2008 dividends of $0.79 per share including a special payout.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Fastenal Co kept $0.12.
- Revenue$2.34B100.0%
- Cost of revenue−$1.10B47.2%
- Gross profit$1.24B52.8%
- Operating costs−$785.9M33.6%
- Operating income$450.2M19.2%
- Interest, other & tax−$170.5M7.3%
- Net income$279.7M12.0%
Where FY2008 revenue went
$2.34B- Cost of revenue: $1.10B, 47% of revenue
- SG&A: $785.7M, 34% of revenue
- Net income: $279.7M, 12% of revenue
- Interest, other & tax: $170.5M, 7.3% of revenue
Kept 12% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 20, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $2.34B$2.06B | +13.5% |
| Cost of Revenue | $1.10B$1.01B | +8.9% |
| Gross Profit | $1.24B$1.05B | +18.0% |
| SG&A Expenses | $785.69M$671.25M | +17.0% |
| Operating Income | $450.24M$376.43M | +19.6% |
| Net Income | $279.70M$232.62M | +20.2% |
| Shares Outstanding (Basic) | 1.19B— | — |
| Shares Outstanding (Diluted) | 1.19B— | — |
05—Questions
Frequently Asked Questions
How did Fastenal perform in 2008 and what drove earnings growth?
Net sales grew 13.5% to $2.34 billion and net earnings grew 20.2% to $279.7 million. Earnings growth outpaced sales because gross margin improved about 2 points, driven by pricing discipline, direct sourcing, and the freight initiative, while occupancy costs were managed tightly.
Is the slowdown in late 2008 a concern for investors?
Yes. Daily sales growth fell from 14.3% in September to 11.9% in October, 6.8% in November, and 0.0% in December. Management attributed this to the broader economic downturn and noted that the company's customers, spread across manufacturing, non-residential construction, and services, cut spending.
What is the pathway to profit strategy?
Fastenal is slowing new store openings from a historical 13-18% annual rate to about 7-10% and redirecting that capital into outside sales staff at existing stores. The goal by 2012 is to raise average monthly store sales to $125,000 and expand the pretax operating margin from 18% to 23%. The company says these targets are not assured.
How strong is the balance sheet and cash position?
The balance sheet is conservative. Cash rose to $85.9 million, total stockholders' equity was $1.14 billion, and the company had no outstanding borrowings on its $40 million line of credit at year-end. Inventory rose 11.8% and receivables 3.6%, and the ratio of annual sales to receivables plus inventory was 2.9:1, short of the 3.0:1 target.
What legal and dividend items should shareholders note?
A $10 million cash settlement of a class action over Assistant General Manager overtime classification was recorded in Q3 2008 and remains subject to court approval. Dividends rose sharply: 2008 payouts totaled $117.5 million ($0.79 per share, including a $0.27 special dividend), and management expects comparable semi-annual payments going forward.
06—Continue