Fastenal keeps on ticking: Sales up 10% for year

The Fastenal Company, of Winona, MN, reported net sales for the year ended Dec. 31, 2002 totaled $905.4 million, an increase of 10.7% over the $818,283,000 in 2001. Net earnings increased from $70.1 million in 2001 to $75.5 million in 2002, an increase of 7.7%.

Net sales for the three-month period ended Dec. 31 totaled $219. 3 million, an increase of 10.7% over the $198.1 million in the fourth quarter of 2001. Net earnings increased from $13.4 million in the fourth quarter of 2001 to $16.9 million in the fourth quarter of 2002, an increase of 26.5%. Earnings per share increased from $.18 to $.22 for the comparable periods.

Net earnings in 2002 include a gain on sale, before tax, of $5.9 million recorded in the fourth quarter and an extraordinary gain, net of tax, of $716,000 recorded in the second quarter. The two items represent, respectively, the gain from the sale of the DIY Business and the recognition of negative goodwill relating to the DIY Business acquisition. The impact of the DIY Business on the company's operations is discussed further below.

During the fourth quarter of 2002, Fastenal opened 30 new sites. During 2002 Fastenal opened 144 new sites, bringing the total number of sites to 1,169. There were 4,743 site employees as of Dec. 31, 2002, an increase of 11.3% from Dec. 31, 2001.

Management comments on 2002

The net sales disclosed above include $17.0 million and $8.5 million for the year ended 2002 and 2001, respectively, and $155,000 and $6.2 million for the fourth quarter ended 2002 and 2001, respectively, of net sales from the DIY Business. The operation, which had originally been acquired in August 2001, lowered the company's gross margin approximately 0.4% in 2002 and 0.2% in 2001. Due to the sale in early October 2002, the operation did not impact the company's gross margin in the fourth quarter of 2002; however, the operation did lower the company's gross margin approximately 0.6% in the fourth quarter of 2001. Except for the gain on sale recognized in the fourth quarter, and the extraordinary gain recognized in the second quarter; the activities of this operation did not contribute materially to the earnings of the company in either 2002 or 2001.

The daily sales growth rates shown below represent several trends. The first is a downward trend in the first 11 months of 2001 that reflected the overall weakening of the industrial economy in North America. This trend reversed itself from December 2001 to June 2002; this was partly due to changing comparisons in the prior year and partly due to stronger month-to-month (i.e. April to May and May to June) growth rates compared to 2001. During July 2002, the daily sales growth rate decreased and began to improve again in August 2002 and September 2002. During the fourth quarter, the daily sales growth rate continued to grow through November, and slipped in December, the final month of the quarter.

For 2002, the company experienced negative earnings leverage (growth in earnings versus growth in sales). This was due to:

1) the decrease in gross margin percentage, caused primarily by changes in product mix,

2) the decrease in gross margin dollars from older stores due to decreases in net sales,

3) the additional expenses of store site openings (see comments below),

4) the additional payroll expenses associated with employee additions in the first half of the year in anticipation of continued improvements in the daily sales growth rate trends mentioned earlier,

5) the added impact of increases in insurance costs when compared to the same period in 2001, and

6) the increase in depreciation expense associated with additions of property and equipment, most notably software and hardware for the company's management information system.

New store growth at 14% annual

Fastenal expects to open 165 to 185 new stores in 2003 (or an increase over December 31, 2002 of

14% to 16%). The company opened 128 new store sites during 2001 (or an increase over Dec. 31, 2000 of 14.3%) and 144 new store sites in 2002 (or an increase over Dec. 31, 2002 of 14.0%). While the new stores continue to build the infrastructure for future growth, the first year sales are low, and the added expenses related to payroll, occupancy, and transportation costs impact the company's ability to leverage earnings in a weakened industrial economy. As disclosed in the past, it has been the company's experience that new stores take approximately ten to 12 months to achieve profitability. The planned openings can be altered in a short time span, usually less than 60 to 90 days. The company will continue to reevaluate the level of planned openings in 2003.

In addition to the planned store expansion, Fastenal is proceeding with its customer service project (CSP). The goals of this project include the expansion of the products stocked at each store site as well as a more consistent display theme at each of these store sites.

On Dec. 31, 2002, 155 of Fastenal's 1,169 stores were operating with the ﾑcustomer service project' layout and product selection. Internal benchmarking information related to the store sites converted to the ﾑCSP' format in the third quarter shows strong improvement.