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Fastenal Company (FAST)

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Fastenal (FAST)

Q2 2011 Earnings Call

July 12, 2011 10:00 am ET

Executives

Ellen Trester -

Willard Oberton - Chief Executive Officer, President and Executive Director

Daniel Florness - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Hamzah Mazari - Crédit Suisse AG

Holden Lewis - BB&T Capital Markets

Sam Darkatsh - Raymond James & Associates, Inc.

Robert Barry - UBS Investment Bank

Ryan Merkel - William Blair & Company L.L.C.

Thomas Hayes - Piper Jaffray Companies

David Manthey - Robert W. Baird & Co. Incorporated

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fastenal Company Q2 2011 Earnings Results Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Ms. Ellen Trester. Please go ahead.

Ellen Trester

Welcome to the Fastenal Company 2011 Second Quarter Earnings Conference Call. This call will be hosted by Will Oberton, our Chief Executive Officer; and Dan Florness, our Chief Financial Officer.

The call will last for 45 minutes. The call will start with a general overview of our quarterly results and operations by Will and Dan, with the remainder of the time being open for questions and answers.

Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent.

This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage, investor.fastenal.com. A replay of the webcast will be available on the website until September 1, 2011, at midnight, Central Time.

As a reminder, today's conference call includes statements regarding the company's anticipated financial and operating results, as well as other forward-looking statements based on current expectations as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming or similar indications of future expectations.

It is important to note that the company's actual results may differ materially from those anticipated. Information on factors that could cause actual results to differ materially from these forward-looking statements are contained in the company's periodic filings with the Securities and Exchange Commission, and we encourage you to review those carefully.

Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matter contained in such statements will occur. Forward-looking statements are made as of today's date only, and we undertake no duty to update the information provided on this call.

I would now like to turn the call over to Will Oberton. Go ahead, Mr. Oberton.

Willard Oberton

Thanks, Ellen, and thank you, everyone, for joining us this morning. I'm pleased to announce our second quarter earnings. We're very happy with the results. Sales came in, as you know, at 22.9%. Comfortable with that, and we're happy that June came in as strong as it did, looking at the ISM in May and other indications that it might be slowing down a little bit. But based on our June numbers, we think it's pretty steady, and we're happy with that.

Probably the most impressive thing for me in the sales results is our sequential pattern from January to June. Historically, we would've grown our sales, daily average sales, from January to June at about 12.5%, 12.6%. But this year we're actually up 16.3% over that same time period. So it really put us in a good position for good growth through the rest of the year. If we can maintain even our historical pattern, it would put us in a good position for starting out 2012.

From an earnings standpoint, we did see some nice leverage. We reported 36.1% earnings growth, and the thing that makes me smile on this is that our operating margin came in at 21.4%. It was a 180-basis-point gain over last year. And those of you that know the story well, we're talking about the “pathway to profit” and trying to pick up 100 bps or basis points year-over-year each year going forward, and we're able to do 180. If you have the earnings release by you and if you look at Page 8 on that, if you look at the information on “pathway to profit” and the store profitability, I sat and looked at this a lot because it's exactly the model that Dan and I had laid out 2 or 3 years ago when we talked about moving stores into larger categories. At the bottom, if you look at the 2 small categories of stores, basically the $30,000 to $60,000 -- or $0 to $30,000 and $30,000 to $60,000, in 2009, 61% of our stores are in that category. It dropped to 54% in 2010 and down to 36% this year.

In the largest 2 categories, the stores that are doing more than $100,000 per month, in 2009, 13.2% of our stores were there. That grew to 18.1% in 2010 and 23.3% combined in 2011. And so the actual profitability per store size has not changed much. We really haven't improved that, especially in the large stores. You look at the over $150,000 stores -- excuse me, Dan's correcting one of my numbers as I'm going here. I added something wrong. The small group of stores in the 2011 timeframe is actually 42.6, -- 46 -- excuse me, I put a 3 instead of a 4, my mistake. But anyway, if you look at the larger stores, over $150,000, we were at 28.3% last year, 28.3% this year. But everything moves up into a larger category, and we had 180 basis points. That's really the point I'm trying to make. If we can continue to do that, we will march forward as our “pathway to profit,” reach our 23% operating goal. But understand the 23% operating goal is really just a point in time for us. If we do a great job, maybe we can exceed that further into the future.

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