- Sales - our manufacturing sales are improving, driven by customers engaged in light and medium duty manufacturing (largely related to consumer products). However, the heavy manufacturing component of our business began to weaken late in 2012 (this consists of large OEM fastener customers largely related to construction, military, and mining equipment), and this weakness has intensified in recent months. This heavy manufacturing group represents approximately one quarter of our manufacturing business, and it has been experiencing negative growth for much of the year.
- Employee costs - the expansion of our store headcount (discussed above) and the increase in our field leadership (from May to November, we expanded our district manager group by over 27%) were known events, we just need more gross profit growth to fund this expansion. These costs have been partially offset by lower incentive pay and lower profit sharing contributions, but this doesn't change the basic math - we need a better gross profit picture to fund the expansion.
- Gross margin - is running below our expectations. The first drivers are lower utilization of our trucking network and lower supplier incentives. These are expected to naturally correct themselves in the new year as seasonality lifts our utilization and supplier incentives (which are typically aligned with the calendar year) reset for 2014. The final components relate to product mix (fasteners carry our highest gross margin and have had a weak 2013) and a very competitive marketplace. These 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 of this is uncertain.
"Despite the trends noted above, we believe we will have growth in net earnings per share in the fourth quarter of 2013, when compared to the fourth quarter of 2012 (when we reported net earnings of $0.33 per share), and are optimistic about our prospects going into the new year. The added selling energy in our store locations is expected to position our business well for the future and, if we were given the opportunity to repeat 2013 with the benefit of complete hindsight, we would have expanded our headcount sooner and would have been willing to forego short-term earnings. In closing, we felt an obligation to share this message with our shareholders. This message also allows us the ability to speak more frankly within the Fastenal organization - this serves us all well. We sincerely hope you have a safe and enjoyable holiday season."