01—Abstract
Summary
Summary of the 10-K filed February 9, 2012. Cited figures are marked; the original filing is the authoritative source.
Fastenal (FAST) closed 2011 with a strong year: net sales rose 21.9% to $2.77 billiona, up from $2.27 billion in 2010, and net earnings grew 34.9% to $357.9 million, or $1.21 per diluted share.
Pre-tax margin expanded 180 basis points to 20.8%b, driven by good sales growth and tight expense control, while gross margin was essentially flat at 51.8%. Growth came mainly from higher unit sales at older stores, with same-store daily sales growth of roughly 15-18% across store age cohorts, and from non-store initiatives such as national accounts, government sales, and FAST Solutions industrial vending. Management continued its "pathway to profit" strategy, slowing new store openings (122 opened in 2011, about 5% growth, with 100-150 planned for 2012) while adding sales specialists.
The company now believes it can reach its 23% pre-tax earnings target with average monthly store sales of $100,000c-$110,000, rather than the original $125,000, and is targeting 2013 for that goal. Vending installations ramped sharply, with about 7,453 machines installed by year-end, and the company reports that 88% of sales now flow through stores. Investors should weigh the strong earnings momentum against a meaningful rise in working capital, with receivables up 25% and inventory up 16%, and capital expenditures nearly doubling to $116 million, mostly for vending equipment and distribution expansion.
The balance sheet remains conservative, with no debt drawn on a small $8 milliond credit line, $117.7 million in cash, and $1.46 billion in equity. Shareholder returns came through dividends of $0.65 per share (about $192 million), with no buybacks in 2011 and 1.8 million shares still authorized. The 2010 supplier lawsuit, which sought $180 million, is considered remote by management following favorable rulings, with appeals pending.
02—Key points
Key Highlights
- Net sales rose 21.9% to $2,766.9 million in 2011, the best growth since 2005 and achieved despite a reduced store-opening plan.
- Net earnings increased 34.9% to $357.9 million ($1.21 diluted EPS), with pre-tax margin expanding 180 bps to 20.8%.
- Gross margin held steady at 51.8%, though Q4 2011 dipped to 51.2% on product/customer mix and lower vendor incentives.
- Same-store (stores open over two years) daily sales grew about 17.9% in 2011, and older stores drove most of the growth.
- FAST Solutions industrial vending expanded rapidly, with 7,453 machines installed at year-end (up from 1,925) and 15.7% of Q4 sales from vending customers.
- Working capital and capex rose: receivables grew 25.3%, inventory grew 15.9%, and capex reached $116.5 million, mainly for vending equipment and distribution.
- The company paid $0.65 per share in dividends (about $192 million), made no buybacks, and kept a strong balance sheet with no borrowings and $117.7 million in cash.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, Fastenal Co kept $0.13.
- Revenue$2.77B100.0%
- Cost of revenue−$1.33B48.2%
- Gross profit$1.43B51.8%
- Operating costs−$859.6M31.1%
- Operating income$574.6M20.8%
- Interest, other & tax−$216.7M7.8%
- Net income$357.9M12.9%
Where FY2011 revenue went
$2.77B- Cost of revenue: $1.33B, 48% of revenue
- SG&A: $859.4M, 31% of revenue
- Net income: $357.9M, 13% of revenue
- Interest, other & tax: $216.7M, 7.8% of revenue
Kept 13% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 9, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $2.77B$2.27B | +21.9% |
| Cost of Revenue | $1.33B$1.09B | +21.7% |
| Gross Profit | $1.43B$1.17B | +22.1% |
| SG&A Expenses | $859.37M$745.11M | +15.3% |
| Operating Income | $574.61M$429.69M | +33.7% |
| Interest Expense | $0— | — |
| Net Income | $357.93M$265.36M | +34.9% |
| EPS (Basic) | $0.30$0.23 | +34.4% |
| EPS (Diluted) | $0.30$0.23 | +34.4% |
| Shares Outstanding (Basic) | 1.18B1.18B | +0.1% |
| Shares Outstanding (Diluted) | 1.18B1.18B | +0.3% |
05—Questions
Frequently Asked Questions
How is Fastenal's 'pathway to profit' strategy changing the company's growth model?
Fastenal is slowing new store openings to about 4-6% annually (122 in 2011, with 100-150 planned for 2012) and redirecting savings into sales specialists such as national accounts, government, and vending personnel. The company now expects to reach its 23% pre-tax margin target with average monthly store sales of $100,000-$110,000, down from the original $125,000, and sees 2013 as the target year. Management acknowledges that this strategy has not yet been proven over the long term.
Is the 2011 earnings growth sustainable given the margin profile?
Much of 2011's margin gain came from operating expense leverage, as operating and administrative expenses fell to 31.1% of sales from 32.8%, while gross margin was flat. Q4 2011 showed early pressure, with gross margin dropping to 51.2% on product mix, lower vendor incentives, and lower freight utilization. Investors should watch whether sales growth continues to outpace expense growth, since payroll rose 20.7% in 2011.
What are the main risks to investors from the company's working capital and capital spending?
Receivables grew faster than sales in recent months, and management has said that managing that growth relative to sales has been difficult, especially with international and large-account customers. Inventory rose 15.9%. Management targets an annual sales-to-receivables-and-inventory ratio above 3.0:1, but the year-end ratio was 2.8:1. Capex nearly doubled to $116.5 million, and 2012 is estimated at about $99 million, so cash flow conversion (operating cash flow was 75% of net earnings) is a key metric to monitor.
How material is the supplier lawsuit disclosed in Item 3?
A California fastener supplier sued in 2010 claiming an alleged exclusive distribution violation with damages of $180 million. Fastenal won summary judgment in August 2011 and was awarded partial costs and fees in December 2011, and the supplier has appealed both rulings. Management believes a material liability is remote, and no reserve was recorded for this matter, which appears to have been fully addressed in the legal reserve line, now at $100 thousand.
06—Continue