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How Fastenal Plans to Drive Operating Margins Higher

September 28, 2010

Fastenal CFO Dan Florness spoke at the Morgan Keegan Industrial/Transportation Conference this month. In short, he said, Fastenal is "back on a path of growth." Fastenal is No. 9 on MDM's list of the top 40 industrial distributors.

Florness focused his presentation on Fastenal's plans to drive operating margins higher by driving its average store size up. The goal, he said, is to take the average store size of $70,000-$75,000 a month to about $125,000 a month in sales. Operating margins will grow through better labor efficiency and use of space – in other words, leveraging the distributor's fixed costs. "We believe the recession may have delayed our goal by a couple of years, but the logic behind it is as sound as it was a few years ago," Florness said.

The distributor also has a goal of growing from 2,400 locations in the U.S. and Canada up to a potential 3,500 locations. Fastenal views its market as a $140 billion space, which it defined as the products it sells that go through industrial distributors.

Other highlights from his presentation:

  • Fasteners make up about 49 percent of Fastenal's sales. In 1995, fasteners made up closer to 85 percent of sales, Florness said. He didn't disclose margins on product lines, but said that the distributor's "gross margin is less about product mix, and more about stores." "Managers are paid more on growth than on maintenance," he said. (Learn more about incentive plans for the recovery in Part 2 of the recent MDM Webcast on sales: Designing Sales Incentives for the Recovery.)
  • Vending is expected to be a "meaningful piece" of the distributor's strategy in the future.
  • Fastenal continues to benefit from its internal trucking network, which it views as a long-term competitive advantage.
  • Not surprisingly, it continues to be difficult to forecast into the next year. "We don't have much visibility," Florness said. "I've often joked that we have about eight hours' visibility." That said, the distributor says that it is "reasonably optimistic looking out into the next six months."
  • Of Fastenal's top 10 stores, two are in Asia.
  • The distributor continues to build out its training programs. "We hire talent when it's undeveloped, and we challenge that talent," Florness said. The distributor provides training on both leadership and products.

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