Winona, MN - Fastenal Company reported the results of the quarter and year ended December 31, 2013. Except for per share information, or as otherwise noted below, dollar amounts are stated in thousands.
Net sales (and the related daily sales), pre-tax earnings, net earnings, and net earnings per share were as follows for the periods ended December 31:
| Twelve-month Period | Three-month Period | ||||
| 2013 | 2012 | Change | 2013 | 2012 | Change |
Net sales | $ 3,326,106 | 3,133,577 | 6.1% | $ 813,760 | 757,235 | 7.5% |
Business days | 254 | 254 |
| 63 | 63 |
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Daily sales | 13,095 | 12,337 | 6.1% | 12,917 | 12,020 | 7.5% |
Pre-tax earnings | $ 713,468 | 674,155 | 5.8% | $ 157,274 | 158,151 | -0.6% |
% of sales | 21.5% | 21.5% |
| 19.3% | 20.9% |
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Net earnings | $ 448,636 | 420,536 | 6.7% | $ 99,229 | 98,716 | 0.5% |
Net earnings per share (basic) | $ 1.51 | 1.42 | 6.3% | $ 0.33 | 0.33 | 0.0% |
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Set forth below is certain information as of December 31: |
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| 2013 | 2012 | Change |
Number of stores |
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| 2,687 | 2,652 | 1.3% |
FAST Solutions® (industrial vending) machines (equivalent basis - defined later in document) | 33,920 | 21,095 | 60.8% | |||
Employee count |
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| 17,277 | 15,145 | 14.1% |
Statements from the company:
FOURTH QUARTER
In December 2013 we issued a press release intended to provide an update on the fourth quarter of 2013. This is only the second time, in our 26 years of being a public company, we have taken this step. Our goal is to keep this type of communication very rare. We took this step because our December sales trends were weak, but, more importantly, because our gross margin trends were deteriorating. In the days following our release, our sales and gross margin trends continued to weaken. This weakening was worse than we expected and this created additional drain on our ability to grow earnings. We did grow our net earnings in the fourth quarter of 2013, but we are disappointed our net earnings per share did not grow.
Regarding gross margin, we slid outside our expected 51% to 53% range in the fourth quarter. As previously disclosed in our December release, this is largely due to: (1) lower utilization of our trucking network which is expected to naturally correct in the new year as seasonality lifts our utilization; (2) supplier incentives, which are typically aligned with the calendar year and reset for 2014; (3) product mix (fasteners carry a higher gross margin), and (4) a very competitive marketplace. The last two factors require external and internal improvements. We are actively working on the internal component and are positioning our business to take advantage of improvements in the industrial economy, but the timing is uncertain. Despite this, we continue to believe the 51% to 53% range is appropriate for our business given our end market and product mix.
BUSINESS DISCUSSION
Similar to previous quarters, we have included comments regarding several aspects of our business:
- Monthly sales changes, sequential trends, and end market performance - a recap of our recent sales trends and some insight into the activities with different end markets.
- Growth drivers of our business - a recap of how we grow our business.
- Profit drivers of our business - a recap of how we increase our profits.
- Statement of earnings information - a recap of the components of our income statement.
- Operational working capital, balance sheet, and cash flow - a recap of the operational working capital utilized in our business, and the related cash flow.
While reading these items, it is helpful to appreciate several aspects of our marketplace: (1) it's big, the North American marketplace for industrial supplies is estimated to be in excess of $160 billion per year (and we have expanded beyond North America), (2) no company has a significant portion of this market, (3) many of the products we sell are individually inexpensive, (4) when our customer needs something quickly or unexpectedly our local store is a quick source, (5) the cost and time to manage and procure these products is meaningful, and (6) the cost to move these products, many of which are bulky, can be significant.
Our motto is Growth through Customer Service®. This is important given the points noted above. We believe in efficient markets - to us, this means we can grow our market share if we provide the greatest value to the customer. We believe our ability to grow is amplified if we can service our customer at the closest economic point of contact. For us, this 'closest economic point of contact' is the local store; therefore, our focus centers on understanding our customers' day, their opportunities, and their obstacles.
The concept of growth is simple, find more customers every day and increase your activity with them. However, execution is hard work. First, we recruit service minded individuals to support our customers and their business. Second, we operate in a decentralized fashion to help identify the greatest value for our customers. Third, we build a great machine behind the store to operate efficiently and to help identify new business solutions. Fourth, we do these things every day. Finally, we strive to generate strong profits; these profits produce the cash flow necessary to fund the growth and to support the needs of our customers.
SALES GROWTH:
Net sales and growth rates in net sales were as follows:
| Twelve-month Period | Three-month Period | ||
| 2013 | 2012 | 2013 | 2012 |
Net sales | $ 3,326,106 | $ 3,133,577 | $ 813,760 | $ 757,235 |
Percentage change | 6.1% | 13.3% | 7.5% | 8.5% |
The increase in net sales in 2013 and 2012 (and also in the latest three-month periods) came primarily from higher unit sales. Our growth in net sales was impacted by slight inflationary price changes in our non-fastener products and some price deflation in our fastener products, with the net impact being a slight drag on growth. Our growth in net sales was not meaningfully impacted by the introduction of new products or services, with one exception. Over the last several years, our FAST Solutions® (industrial vending) initiative has stimulated faster growth with a subset of our customers (discussed later in this document). The higher unit sales resulted primarily from increases in sales at older store locations (discussed below and again later in this document) and to a lesser degree the opening of new store locations in the last several years. The growth in net sales at the older store locations was due to the growth drivers of our business (discussed later in this document), and, in the case of 2012, the moderating impacts of the recessionary environment. The change in currencies in foreign countries (primarily Canada) relative to the United States dollar lowered our daily sales growth rate by 0.2% and 0.1% in 2013 and 2012, respectively, lowered it by 0.4% in the three-month period of 2013, and lifted it by 0.2% in the last three months of 2012.
MONTHLY SALES CHANGES, SEQUENTIAL TRENDS, AND END MARKET PERFORMANCE
Note - Daily sales are defined as the net sales for the period divided by the number of business days (in the United States) in the period.
This section focuses on three distinct views of our business - monthly sales changes, sequential trends, and end market performance. The first discussion regarding monthly sales changes provides a good mechanical view of our business based on the age of our stores. The second discussion provides a framework for understanding the sequential trends (that is, comparing a month to the immediately preceding month) in our business. Finally, we believe the third discussion regarding end market performance provides insight into activities with our various types of customers.
MONTHLY SALES CHANGES:
All company sales - During the months in 2013, 2012, and 2011, all of our selling locations, when combined, had daily sales growth rates of (compared to the comparable month in the preceding year):
| Jan. | Feb. | Mar. | Apr. | May | June | July | Aug. | Sept. | Oct. | Nov. | Dec. |
2013 | 6.7% | 8.2% | 5.1% | 4.8% | 5.3% | 6.0% | 2.9% | 7.2% | 5.7% | 7.7% | 8.2% | 6.7% |
2012 | 21.3% | 20.0% | 19.3% | 17.3% | 13.1% | 14.0% | 12.1% | 12.0% | 12.9% | 6.8% | 8.2% | 9.7% |
2011 | 18.8% | 21.5% | 22.8% | 23.2% | 22.6% | 22.5% | 22.4% | 20.0% | 18.8% | 21.4% | 22.2% | 21.2% |
Stores opened greater than two years - Our stores opened greater than two years (store sites opened as follows: 2013 group - opened 2011 and earlier, 2012 group - opened 2010 and earlier, and 2011 group - opened 2009 and earlier) represent a consistent 'same-store' view of our business. During the months in 2013, 2012, and 2011, the stores opened greater than two years had daily sales growth rates of (compared to the comparable month in the preceding year):
| Jan. | Feb. | Mar. | Apr. | May | June | July | Aug. | Sept. | Oct. | Nov. | Dec. |
2013 | 5.0% | 6.5% | 3.4% | 3.1% | 3.5% | 4.3% | 1.4% | 5.5% | 4.2% | 6.1% | 6.2% | 4.9% |
2012 | 18.8% | 17.1% | 16.8% | 14.5% | 10.1% | 11.1% | 9.1% | 8.6% | 9.8% | 3.8% | 5.1% | 6.6% |
2011 | 16.0% | 18.4% | 19.4% | 19.6% | 19.2% | 19.1% | 18.7% | 16.5% | 15.2% | 18.0% | 18.5% | 17.5% |
Stores opened greater than five years - The impact of the economy, over time, is best reflected in the growth performance of our stores opened greater than five years (store sites opened as follows: 2013 group - opened 2008 and earlier, 2012 group - opened 2007 and earlier, and 2011 group - opened 2006 and earlier). This group, which represented about 88% of our total sales in 2013, is more cyclical due to the increased market share they enjoy in their local markets. During the months in 2013, 2012, and 2011, the stores opened greater than five years had daily sales growth rates of (compared to the comparable month in the preceding year):
| Jan. | Feb. | Mar. | Apr. | May | June | July | Aug. | Sept. | Oct. | Nov. | Dec. |
2013 | 3.2% | 5.6% | 2.3% | 2.0% | 2.7% | 3.4% | 0.6% | 4.7% | 3.2% | 5.3% | 6.1% | 4.8% |
2012 | 17.4% | 15.8% | 15.7% | 13.7% | 9.0% | 10.2% | 8.3% | 7.9% | 8.5% | 2.6% | 4.6% | 5.6% |
2011 | 15.3% | 17.9% | 19.2% | 19.1% | 17.9% | 18.2% | 17.3% | 15.2% | 14.5% | 17.0% | 17.4% | 16.9% |
There are three distinct influences to our growth: (1) execution, (2) currency fluctuations, and (3) economic fluctuations. This discussion centers on (2) and (3).
Summarizing comments - The change in currencies in foreign countries (primarily Canada) relative to the United States dollar impacted our growth over the last several years. During 2011 it lifted our growth by 0.7%, in 2012 it lowered our growth by 0.1%, and in 2013 it lowered our growth by 0.2%.
Regarding economic fluctuations, in 2011 we enjoyed strong growth. This reflected the strengthening economic environment being experienced by our customers. While the strength did not apply to all customers and to all geographies we serve, it was strong enough to produce acceptable results. During 2012, the growth in the first three and a half months generally continued the relative strength we saw in 2011. Then we began to experience several distinct economic slowdowns. The first occurred in the late April/May time frame, and then moderated until September 2012. The second occurred in the October/November time frame. This was exaggerated by the impact of Hurricane Sandy and an unusual business day comparison in October (23 days in 2012 versus 21 days in 2011 - the maintenance portion of our business is often linked to monthly spend patterns of our customers, which are not as business day dependent, this can dilute the daily growth picture given the change in business day divisor). The third occurred in the spring of 2013. This involved our fastener product line and our construction business (primarily non-residential construction). This third slowdown, similar to the first two listed, mirrored or slightly led some softening in the PMI index (discussed later in this document). The fastener piece was heavily impacted by our OEM (original equipment manufacturing) customers. These customers utilize our fasteners in the manufacture/assembly of their finished products. The end markets with the most pronounced weakening included heavy machinery manufacturers with exposure to: mining, military, agriculture, and construction. The construction piece in 2013 was also hampered by poor weather during the winter and spring time frame throughout many areas in North America. The fourth and fifth occurred in July 2013 and December 2013. The daily sales growth in July 2013 and December 2013 were negatively impacted by the timing of the July 4th holiday (Thursday in 2013, Wednesday in 2012, Monday in 2011) and the Christmas/New Year holiday (Wednesday in 2013, Tuesday in 2012, and Sunday in 2011). This resulted in a 'lone' business day on Friday, July 5th in which many of our customers were closed, and three distinct one to two day work periods in the last two weeks of December. The December impact was amplified due to poor weather conditions.
Our daily sales growth trends have improved since September 2013. This was largely related to changing comparisons to 2012. Our sales to customers engaged in light and medium duty manufacturing (largely related to consumer products) are improving; this makes sense given the trends in the PMI index. However, our sales to customers engaged in heavy machinery manufacturing (primarily serving the mining, military, agricultural, and construction end markets), which represents approximately one fifth of our business, continued to experience weak performance in the fourth quarter of 2013.
This release has been truncated. For the full release, please visit www.fastenal.com.
