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Fastenal Company Reports 2012 Third Quarter Earnings

Stocks in this article: FAST

In our first ten years of being public (1987 to 1997), we opened stores at a rate approaching 30% per year.  In the next ten years, we opened stores at an annual rate of approximately 10% to 15% and, over the last five years, at a rate of approximately 3% to 8% (we currently expect approximately 85 stores in 2012, or approximately 3.3%).  As we gained proximity to more customers, we continued to diversify our growth drivers – this was done to provide existing store personnel with more tools to grow their business organically – the results of this are reflected in our earlier discussion on sales growth at stores opened greater than five years. In the early 1990's, we began to expand our product lines, and we added new product knowledge to our bench. This was our first big effort to diversify our growth drivers. The next step began in the mid to late 1990's when we began to add sales personnel with certain specialties or focus. This began with our National Accounts group in 1995, and, over time, has expanded to include individuals dedicated to: (1) sales related to our internal manufacturing division, (2) government sales, (3) internet sales, (4) specific products (most recently metal working), and (5) FAST Solutions SM (industrial vending).  Another step occurred at our sales locations (this includes Fastenal stores as well as strategic account stores and in-plant locations) and at our distribution centers, and began with a targeted merchandising and inventory placement strategy that included our 'Customer Service Project' approximately ten years ago and our 'Master Stocking Hub' initiative approximately five years ago. This strategy allowed us to better target where to stock certain products (local store, regional distribution center, master stocking hub, or supplier) and allowed us to improve our fulfillment and our ability to serve a broader range of customers.

Our FAST Solutions SM (industrial vending) operation is a rapidly expanding component of our business.  We believe industrial vending is the next logical chapter in the Fastenal story, we also believe it has the potential to be transformative to industrial distribution, and that we have a 'first mover' advantage. We are investing aggressively to maximize this advantage. At our investor day in May 2011, we discussed our progress with industrial vending. In addition to our discussion regarding progress, we discussed our goals with the rollout of the industrial vending machines. One of the goals we identified related to our rate of 'machine signings' (the first category below) – our goal was simple, sign 2,500+ machines per quarter (or an annualized run rate of 10,000 machines). In 2012, we hit our annual goal of 10,000 machines during July, and the momentum has continued as we finished the third quarter. We intend to continue our aggressive push with industrial vending in 2013 and, to this end, expect to open approximately 50 - 100 stores in 2013, or an annual rate of new store openings of 2% to 4%. In addition, during 2012 we developed plans to (1) reinvigorate our fastener growth and to (2) improve the performance (growth) at under-performing locations.

The following table includes some statistics regarding our industrial vending business:

    Q1 Q2 Q3 Q4
Number of vending machines in contracts signed during the period 1 2012 4,568 4,669 5,334  
  2011 1,405 2,107 2,246 2,084
  2010 257 420 440 792
Cumulative machines installed 2 2012 9,798 13,036 17,013  
  2011 2,659 3,867 5,642 7,453
  2010 892 1,184 1,515 1,925
Percent of total net sales to customers with vending machines 3 2012 17.8% 20.8% 23.2%  
  2011 8.9% 10.5% 13.1% 15.7%
  2010 3.4% 4.6% 6.1% 7.5%
Daily sales growth to customers with vending machines 4 2012 33.9% 34.3% 32.9%  
  2011 50.6% 43.9% 42.5% 40.7%
  2010 37.4% 54.0% 56.4% 60.2%
1This represents the gross number of machines signed during the quarter, not the number of contracts.
2This represents the number of machines installed and dispensing product on the last day of the quarter.
3The percentage of total sales (vended and traditional) to customers currently using a vending solution.
4The growth in total sales (vended and traditional) to customers currently using a vending solution compared to the comparable period in the preceding year.

We are pleased with the increases in the number of vending machine contracts signed, and with our ability to install machines. We increased our installed machine base by 3,977 machines (17,013 versus 13,036) in the third quarter of 2012, by 1,775 machines (5,642 versus 3,867) in the third quarter of 2011, and by 331 machines (1,515 versus 1,184) in the third quarter of 2010.

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