10-QPeriod: Q3 FY2003

FASTENAL CO Quarterly Report for Q3 Ended Sep 30, 2003

Filed November 12, 2003For Securities:FAST

Summary

Fastenal Company reported solid growth in its third quarter and first nine months of 2003, with net sales increasing by 8.3% and 11.0% respectively, when excluding the disposed DIY business. This growth was driven by higher unit sales and the expansion of new store sites, rather than price increases, as the company experienced some deflationary pricing impacts. Profitability saw a notable increase, with net earnings up 21.7% for the quarter and 9.5% for the nine-month period, attributed to sales growth and disciplined management of operating and administrative expenses, particularly personnel costs. The company's balance sheet shows a strong increase in cash and cash equivalents, rising significantly from the previous year, partly due to improved operating cash flow. Inventories saw a slight increase year-over-year but showed a decrease in the third quarter as the company managed inventory levels at distribution centers. The ongoing Customer Service Project (CSP) is progressing, with over 700 stores converted to this format, aimed at improving customer self-service and broadening inventory offerings. Fastenal continues to focus on strategic expansion, with plans for further new store openings, while carefully managing capital expenditures and maintaining a healthy cash position.

Key Highlights

  • 1Net sales grew by 11.0% for the nine months and 11.2% for the three months ended September 30, 2003, when excluding the divested DIY business.
  • 2Net earnings increased by 21.7% for the third quarter and 9.5% for the first nine months of 2003 compared to the prior year periods.
  • 3Operating and administrative expenses, as a percentage of net sales, decreased, reflecting effective cost management, particularly in employee numbers.
  • 4Cash and cash equivalents saw a substantial increase to $55.1 million as of September 30, 2003, driven by strong operating cash flows.
  • 5The company's Customer Service Project (CSP) is advancing, with over 700 stores converted, focusing on broader inventory and customer self-service.
  • 6Fastenal opened 106 new stores in the first nine months of 2003, contributing to future growth infrastructure, while maintaining a controlled pace.
  • 7Gross profit margins remained stable, with a slight improvement in the third quarter due to the divestiture of the lower-margin DIY business, though offset by other factors.

Frequently Asked Questions

The primary driver of Fastenal's sales growth was an increase in unit sales, rather than price increases. This was supported by the opening of new store sites in 2002 and 2003, and to a lesser extent, sales increases at existing store sites. The company experienced some deflationary impacts on pricing during this period.

The divestiture of the DIY Business, completed in October 2002, had a positive impact on profitability. The DIY Business operated at a lower gross margin (approximately 30%), so its removal improved the overall company gross margin. It also simplifies year-over-year comparisons of core business performance, with sales growth figures excluding the DIY business showing a higher percentage increase.

The Customer Service Project (CSP), aimed at stocking a broader inventory for customer self-service, is progressing well. As of September 30, 2003, approximately 701 stores were operating under this format. The project has led to increased inventory levels in converted stores and contributed to fluctuations in inventory growth, affecting operating cash flow. Management intends to continue converting stores at a significant pace.

Fastenal's liquidity position is strong, evidenced by a significant increase in cash and cash equivalents to $55.1 million. Net cash provided by operating activities improved substantially due to better inventory management. The company anticipates funding its expansion plans, including new store openings and renovations, through internally generated cash, existing cash reserves, and available borrowing capacity, with no material outstanding commitments for capital expenditures as of the reporting date.