Fastenal Q1 Conference Call Highlights

Fastenal FAST reported its first quarter earnings on April 11, 2014. Shares of the company are down 1.71 percent or $.87 per share to $49.86. Below are some key takeaways from its conference call: Will Oberton, Chief Executive Officer: • Very good sequential improvement overall in the business, but what we're really excited or especially excited about is the improvement in our older stores. If you look at the March number of almost 10%, that's very strong. And, historically, this has been a very positive indicator for both future growth and profitability. So that's one number that gave us great encouragement. • And I believe one of the reasons that we're doing, we're - the direction is going as well as it is, is that Lee and his team back in the fourth quarter spent a lot of time talking about our goals and really putting time into make sure that our goals are realistic, our sales goals for our stores are realistic for 2014. Dan Florness, Chief Financial Officer. • With that said, we can always do better and that's that we're working to do, both on the AR side and continuing to challenge the inventory. Over time, our inventory naturally leverages as our average store size grows. We just want to get a better piece of that. Sales: • Oberton: Our sales growth of 8.7% for the quarter was moving in the right direction sequentially. • Oberton: We had a very strong March at 11.6%, so we're very encouraged by that and believe we're moving in the right direction with adding and more selling energy in the stores. • Oberton: Although our signings were down, the most important number and the one we're very focused on, growth of the vending customers and a growth of the number of customers using it, and growth with that group of customers, both moved up. And so we're very excited about the program. • Florness: This quarter, I think we could have had a release that was about a half page long. I think the number that matters is that first line on that first page of 8.7% top-line growth. • Florness: And when you look on, as Will touched on, the pages where we dissect stores of varying ages, the fact that our oldest group of stores is close to 10% growth is a tremendous feat. • Oberton: The extreme weather that we had caused expenses to go up in more areas than you can imagine, simple things like snow plowing, the fuel, all of those things, heating expenses, but overall it's very challenging with the hard weather. • Oberton: Some stores need to grow 30% to hit their goal because of the situation they're in, and some stores may not grow at all to hit their goal because it's a difficult comp, something like that; and it's working. • Florness: Sequentially, very strong February to March. January and February were both heavily impacted by the weather as Will touched on, but a very, very solid step-up to get us back to where the business inherently is as opposed to where it was getting pounded down to because of the weather. • Florness: End market wise, last year, our manufacturing customer base which represents about half of our business, grew just over 6%, 6.3% to be exact. In the first quarter, as we touched on in the release, to grow at 9%, in March it grew at 11.5%. Margin: • Oberton: On the earnings side, the story really is year-over-year margin. It's very difficult if not impossible to grow our earnings relative to sales when our sales are in the single-digit and our margin was down almost to 100 basis points. • Oberton: So directionally, we feel good about the margin, it's just at a lower point than it was last year and it made the earnings growth very difficult. Profit: • Oberton: Here at Fastenal, we have an old saying and the saying is that sometimes you have to take a step back to get two steps ahead. We've been saying that for about 30 years in our business. And I think that really frames up our pathway to profit. We did take a step back in the first quarter because we added a lot of selling energy in the store and we went backward slightly. • Oberton: But we are very focused on the 23% pre-tax growth in the overall concept of pathway to profit; larger stores, average stores becoming larger, and the profitability improving per store. • Oberton: Looking at one of our very important initiatives, the head count, we're on track, we're up about just over 15%. We're going to stay on that track, continue to add labor at 15%. But understand, it doesn't translate into 15% more labor dollars. • Florness: Expense wise, we break out a few pieces. Payroll, labor expenses increased, primarily related to head count as a lot of folks within the organization. When you're in an organization that values incentive compensation, you get a piece of prosperity; you also feel a piece of when the economy is more challenging • Florness: Final item on the cash flow, first quarter is traditionally a solid cash flow quarter for us. We benefit - it's the one time of the year where we don't have Uncle Sam putting his hand out and taking a big toll on us. And so we're able to have a better cash flow in the first quarter. • Florness: With the added growth in the business, especially leaning towards the latter third of the quarter, AR grew a little bit faster than we prefer to see. A couple things that are challenging in the numbers, one is the earlier piece I talked about, the amount of growth that's coming from those customers where we have great engagement.