10-QPeriod: Q1 FY2003

FASTENAL CO Quarterly Report for Q1 Ended Mar 31, 2003

Filed April 17, 2003For Securities:FAST

Summary

Fastenal Company reported solid top-line growth for the first quarter ended March 31, 2003, with net sales increasing by 9.9% year-over-year. When adjusting for the divested DIY Business, the organic growth rate was an even stronger 12.8%, primarily driven by higher unit sales and the expansion of new store sites. This indicates a healthy underlying demand for Fastenal's core products, despite some reported deflationary pricing pressures. Profitability also saw a positive trend, with net earnings up 7.5% and earnings per share (EPS) rising from $0.23 to $0.25. This performance was supported by improved operating expense control, which grew at a rate lower than net sales, and a favorable impact from the sale of the lower-margin DIY business. The company's strategic initiatives, including the Customer Service Project (CSP) and planned store expansions, appear to be progressing, setting the stage for future growth, although the immediate impact of new store openings on earnings needs to be monitored.

Key Highlights

  • 1Net sales increased by 9.9% to $235.8 million in Q1 2003 compared to $214.6 million in Q1 2002.
  • 2Excluding the divested DIY Business, organic net sales growth was 12.8%, driven by higher unit sales and new store openings.
  • 3Net earnings rose 7.5% to $19.0 million, and EPS increased to $0.25 from $0.23.
  • 4Gross margins were stable at 49.5% in Q1 2003, benefiting from the sale of the lower-margin DIY business, though partially offset by increased freight costs.
  • 5Operating expenses grew by 9.7%, less than net sales growth, due to the removal of DIY business expenses and improved payroll management.
  • 6The company opened 36 new sites in Q1 2003, bringing the total to 1,205, and plans to open 150-185 new stores in 2003.
  • 7Inventory levels increased significantly, partly due to the rollout of the Customer Service Project (CSP) initiative.

Frequently Asked Questions

Fastenal's sales growth in Q1 2003 was primarily driven by an increase in unit sales rather than price increases, indicating strong customer demand. This was further bolstered by the opening of new store sites in 2002 and 2003, and a steady performance from older store sites.

The sale of the DIY Business, which occurred in October 2002, had a positive impact on Fastenal's financial results. It allowed for a cleaner comparison of organic growth and improved the overall gross margin, as the DIY business operated at a lower margin (approximately 30%) compared to the core business.

The Customer Service Project (CSP) is a strategic initiative focused on stocking a broader inventory in stores and displaying it for customer self-service. This project is impacting inventory levels, generally increasing them as stores adopt the format. As of March 31, 2003, approximately 370 stores were operating under this model, and Fastenal intended to continue converting stores at a rate of 60-80 per month.

Fastenal plans to open approximately 150 to 185 new stores in 2003. The company anticipates funding these expansion plans primarily through cash generated from operations, existing cash and cash equivalents, and to a lesser extent, its borrowing capacity. There were no material outstanding commitments for capital expenditures as of March 31, 2003.