Fastenal Co (FAST) Reports In-Line Q2 EPS; Offers Business Update

Fastenal Co (NASDAQ: FAST) reported Q2 EPS of $0.44, in-line with the analyst estimate of $0.44. Revenue for the quarter came in at $949.94 million versus the consensus estimate of $952.95 million.

BUSINESS UPDATE

In July 2013, we disclosed our intention to increase our investment in people at the store level and in additional leadership personnel at the district and regional levels. We felt this expanded investment was necessary to add 'selling energy' to the organization. With expanded investment, comes expanded expectations - in July 2013 we grew average daily sales over the same month in the preceding year in the low single digits, in June 2014 we grew average daily sales over the same month in the preceding year by 12.7%.

We believe these investments in 'selling energy', when combined with the related investments in 'support energy' (people, distribution, and internal manufacturing capabilities), in new store locations, and in FAST Solutions® (industrial vending) devices gives us a great platform for growth. Set forth below is information related to average employee headcount during the quarters indicated, and actual employee headcount, store count and FAST Solutions® (industrial vending) device count as of the end of the periods indicated:

Our business discussion below is extensive, but we believe necessary to convey our opportunities and challenges. The opportunities provided by a large end market are self-evident; however the current challenges center on two things: gross profit and working capital. As it relates to gross profit, our discussion later in this document provides a detailed explanation of trends and causes of fluctuations. This discussion also provides some book-ends to our gross profit range (51% to 53%). There are always competing priorities within any organization; for us, two of those priorities are sales growth and gross profit. Today, the dial is closer to sales growth and this is reflected in a lower gross profit percentage. We continue to believe in our stated range, but acknowledge the bottom half, and possibly just below the range, is a likely outcome for the short-term. Part of this acknowledgement relates to sources of our growth, which is heavily related to large customer success given the unique advantage our store-based business can bring to a multi-location customer.

This brings us to the second challenge - working capital. Most of the challenge relates to sales mix. Large customers have the ability to leverage their scale into the payment terms they command. This slow change in the mix of payment terms within our business has slowly extended the average number of days we have invested in accounts receivable. We have had similar short-term accounts receivable challenges in the past, and we have found ways to counteract the issue. This includes improving our billing and collecting processes, improving the sales volume and the related inventory leverage, and improving our sourcing. We believe we have the ability to address this issue in a similar fashion in the future.

We closed eight stores during the second quarter and identified additional stores we intend to close in the second half of 2014. This is described in greater detail later in this document under the caption 'GROWTH DRIVERS OF OUR BUSINESS'.

For earnings history and earnings-related data on Fastenal Co (FAST) click here.

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