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Fastenal Company Reports 2012 Fourth Quarter And Annual Earnings

When we originally announced the 'pathway to profit' strategy in 2007, our goal was to increase our pre-tax earnings, as a percentage of sales, from 18% to 23%. This goal was to be accomplished by slowly moving the mix from the first three categories ($0 to $30,000, $30,001 to $60,000, and $60,001 to $100,000, these groups represented 76.5% of our store base in the first three months of 2007, the last quarter before we announced the 'pathway to profit') to the last three categories ($60,001 to $100,000, $100,001 to $150,000, and over $150,000, these groups represented 53.0% of our store base in the fourth quarter of 2012) and by increasing the average store sales to approximately $125,000 per month. The weak economic environment in 2009 caused our average store size to decrease, and consequently lowered our level of profitability; however, subsequent to 2009 we improved our gross margin and structurally lowered our operating expenses. This improvement allowed us to amplify the 'pathway to profit' and effectively lowered the average store size required to hit our 23% goal. Today we believe we can accomplish our 'pathway to profit' goal with average store sales of approximately $100,000 to $110,000 per month. In the second quarter of 2012, we achieved a pre-tax earnings percentage of 22.2% with average store sales of $89,169 per month.

Note – Dollar amounts in this section are presented in whole dollars, not thousands.

Store Count and Full-Time Equivalent (FTE) Headcount – The table that follows highlights certain impacts on our business of the 'pathway to profit' since its introduction in 2007.  Under the 'pathway to profit' we increased both our store count and our store FTE headcount during 2007 and 2008. However, the rate of increase in store locations slowed and our FTE headcount for all types of personnel was reduced when the economy weakened late in 2008. In the table that follows, we refer to our 'store' net sales, locations, and personnel. When we discuss 'store' net sales, locations, and personnel, we are referring to (1) 'Fastenal' stores and (2) strategic account stores. 'Fastenal' stores are either a 'traditional' store, the typical format in the United States or Canada, or an 'overseas' store, which is the typical format outside the United States and Canada. This is discussed in greater detail in our 2011 annual report on Form 10-K. Strategic account stores are stores that are focused on selling to a group of large customers in a limited geographic market. The sales, outside of our 'store' group, relate to either (1) our in-plant locations, (2) the portion of our internally manufactured product that is sold directly to a customer and not through a store (including our Holo-Krome business acquired in December 2009), or (3) our direct import business. 

The breakdown of our sales, the average monthly sales per store, the number of stores at quarter end, the average headcount at our stores during a quarter, the average FTE headcount during a quarter, and the percentage change were as follows for the first quarter of 2007 (the last completed quarter before we began the 'pathway to profit'), for the third quarter of 2008 (our peak quarter before the economy weakened), and for each of the last five quarters:

  Q1 2007 Q3 2008 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012
Total net sales reported $ 489,157 $ 625,037 $ 697,804 $ 768,875 $ 804,890 $ 802,577 $ 757,235
Less: Non-store sales (approximate) 40,891 57,267 86,737 92,459 98,735 100,124 95,951
Store net sales (approximate) $ 448,266 $ 567,770 $ 611,067 $ 676,416 $ 706,155 $ 702,453 $ 661,284
% change since Q1 2007   26.7% 36.3% 50.9% 57.5% 56.7% 47.5%
% change (twelve months)   17.5% 21.0% 20.2% 14.6% 10.1% 8.2%
               
Percentage of sales through a store 92% 91% 88% 88% 88% 88% 87%
               
Average monthly sales per store $ 72 $ 82 $ 79 $ 86 $ 89 $ 88 $ 83
 (using ending store count)              
% change since Q1 2007   13.9% 9.7% 19.4% 23.6% 22.2% 15.3%
% change (twelve months)   9.3% 16.2% 16.2% 11.3% 6.0% 5.1%
               
   Q1 2007  Q3 2008  Q4 2011  Q1 2012  Q2 2012  Q3 2012  Q4 2012
Store locations - quarter end count 2,073 2,300 2,585 2,611 2,635 2,650 2,652
% change since Q1 2007   11.0% 24.7% 26.0% 27.1% 27.8% 27.9%
% change (twelve months)   7.2% 3.8% 3.5% 3.0% 3.3% 2.6%
               
Store personnel - absolute headcount 6,849 9,123 10,328 10,486 10,637 10,604 10,347
% change since Q1 2007   33.2% 50.8% 53.1% 55.3% 54.8% 51.1%
% change (twelve months)   17.9% 14.1% 12.2% 9.3% 5.4% 0.2%
               
Store personnel - FTE 6,383 8,280 8,684 8,900 9,126 9,244 9,035
Non-store selling personnel - FTE 616 599 953 998 1,054 1,066 1,070
Sub-total of all sales personnel - FTE 6,999 8,879 9,637 9,898 10,180 10,310 10,105
               
Distribution personnel-FTE 1,646 1,904 1,820 1,815 1,881 1,887 1,872
Manufacturing personnel - FTE 1 316 340 516 527 545 544 544
Administrative personnel-FTE 767 805 796 796 794 808 811
Sub-total of non-sales personnel - FTE 2,729 3,049 3,132 3,138 3,220 3,239 3,227
               
Total - average FTE headcount 9,728 11,928 12,769 13,036 13,400 13,549 13,332
               
% change since Q1 2007              
Store personnel - FTE   29.7% 36.0% 39.4% 43.0% 44.8% 41.5%
Non-store selling personnel - FTE   -2.8% 54.7% 62.0% 71.1% 73.1% 73.7%
Sub-total of all sales personnel - FTE   26.9% 37.7% 41.4% 45.4% 47.3% 44.4%
               
Distribution personnel-FTE   15.7% 10.6% 10.3% 14.3% 14.6% 13.7%
Manufacturing personnel-FTE 1   7.6% 63.3% 66.8% 72.5% 72.2% 72.2%
Administrative personnel-FTE   5.0% 3.8% 3.8% 3.5% 5.3% 5.7%
Sub-total of non-sales personnel - FTE   11.7% 14.8% 15.0% 18.0% 18.7% 18.2%
             
Total - average FTE headcount 22.6% 31.3% 34.0% 37.7% 39.3% 37.0%
               
% change (twelve months)            
Store personnel - FTE   15.2% 14.1% 13.7% 10.6% 7.1% 4.0%
Non-store selling personnel - FTE   -2.4% 33.8% 28.1% 24.0% 15.9% 12.3%
Sub-total of all sales personnel - FTE   13.8% 15.8% 15.0% 11.8% 8.0% 4.9%
               
Distribution personnel-FTE   6.0% 14.1% 12.9% 7.1% 3.1% 2.9%
Manufacturing personnel - FTE 1   1.8% 16.2% 14.3% 10.8% 6.0% 5.4%
Administrative personnel - FTE   7.9% 7.0% 4.7% 1.4% -0.4% 1.9%
Sub-total of non-sales personnel - FTE   6.0% 12.5% 10.9% 6.2% 2.7% 3.0%
               
Total - average FTE headcount 11.7% 15.0% 14.0% 10.4% 6.7% 4.4%

1 The distribution and manufacturing headcount was impacted by the addition of 92 employees with the acquisition of Holo-Krome in December 2009.

STATEMENT OF EARNINGS INFORMATION (percentage of net sales) for the periods ended December 31:  
         
  Twelve-month period  
  2012 2011 2010  
Net sales 100.0% 100.0% 100.0%  
Gross profit 51.5% 51.8% 51.8%  
Operating and administrative expenses 30.0% 31.1% 32.8%  
(Gain) loss on sale of property and equipment 0.0% 0.0% 0.0%  
Operating income 21.5% 20.8% 19.0%  
Interest income 0.0% 0.0% 0.0%  
Earnings before income taxes 21.5% 20.8% 19.0%  
Note – Amounts may not foot due to rounding difference.        

Gross profit – percentage for 2012 decreased from 2011, but stabilized in the second, third, and fourth quarters of 2012.

The gross profit percentage in the first, second, third, and fourth quarters was as follows:

  Q1 Q2 Q3 Q4
2012 51.3% 51.6% 51.6% 51.6%
2011 52.0% 52.2% 51.9% 51.2%
2010 51.1% 52.1% 51.8% 52.0%

The fluctuations in our gross profit percentages are typically driven by changes in: (1) transactional gross profit, (2) organizational gross profit, and (3) vendor incentive gross profit. The transactional gross profit represents the gross profit realized from the day-to-day fluctuations in customer pricing relative to product and freight costs. The organizational gross profit represents the component of gross profit we attribute to buying scale and efficiency gains. The third component relates to vendor volume allowances. In the short-term, periods of inflation or deflation can influence the first two categories, while sudden changes in business volume can influence the third.

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