Ron Baron on Fastenal
Fastenal has been the fastest growing of its distributor peer group and currently possesses among the highest profit margins and return on capital metrics. These results are driven in part by the company’s strategy of opening new stores organically (instead of through acquisition), which reduces integration risk, employee turnover, and in our view provides more predictable revenue growth. In addition, given the company’s heritage, over 50% of the inventory mix remains fasteners, which are sourced directly from China and carry gross margins over 60%. The company generates significant cash flow and has minimal capital needs as new stores and delivery vehicles are typically leased and require only basic fixtures and equipment. As a result, the company carries no debt and re-invests the majority of its cash flow into new growth initiatives aimed at driving improved results. One such program has been a recent store redesign, whereby the company changed the look of the store from a warehouse feel with a counter upfront and a big back room to a more intuitive, retail layout. This change entailed bringing all inventory from the back of the store out into displays in the front. The result has been a dramatic increase in store productivity, both from a sales and labor savings standpoint, as customers are spending more on accessories when shopping for product and the company’s ‘‘will call’’ business has grown at the expense of pricier delivery options.