快扣 (FAST) 2007 Q4 法說會逐字稿

Good day everyone and welcome to the Fastenal Company 2007 annual and fourth quarter earnings conference call.

Today's call is being recorded and will be hosted by Mr.

Will Oberton, Chief Executive Officer, and Mr.

Dan Florness, Chief Financial Officer.

The call will last up to 45 minutes.

The call with start with a general overview by our Fastenal host, Mr.

Oberton and Mr.

Florness.

The remainder of the time will be open for questions and answers.

Just as a reminder, certain statements contained in this presentation that are not historical facts are forward-looking statements and are thus prospective.

These forward-looking statements are subject to risks and uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.

More information regarding such risks can be found in Fastenal's quarterly and annual SEC filings.

At this time I'd like to turn our conference over to Mr.

Will Oberton.

Please go ahead, sir.

Thank you very much.

Thanks for joining us this morning.

The fourth quarter was positive for Fastenal in almost every respect.

Our sales improvement over the third quarter by over 2 percentage points from 13.5 to 15.7%, but what was most encouraging for me was the sequential growth, 14, 15, 16 as the quarter marched on, and we did that in a pretty tough economic environment.

Looking out into this quarter, for the first 14 days of January, our growth is on track with the fourth quarter numbers.

So we're feeling pretty confident that we're executing at a high level, taking it a day at a time with the economy, but we're actually very optimistic with how things are going right now.

Our earnings growth was really driven by two different areas.

One is the gross margin.

On a year-over-year basis, our gross margin was up by just over 1% from 49.9 to 51%.

We also did a nice job in our expense control.

One of the biggest areas of expense control that we worked very hard on was controlling the growth in our support labor, and on a head count basis that was up less than 5% year-over-year.

On the margin, that was really driven by really just hard work, not a lot of price increases, not a lot of inflation.

It was really just looking at everything we do and finding a little bit here and a little bit there.

But we're comfortable.

We've looked at this very close and we're comfortable that going forward we'll be able to maintain more in the 51% range where we are now with the initiatives we have going.

On the expense side, we had tremendous pressure from energy, not only the vehicle field, but utilities are up sharply also over last year but, as I said, we got some help from the support labor, and on a high-grade problem on the expense side is that our bonuses and our 401(k) match were up because of the improved performance in our fourth quarter earnings growth up at 26%.

We're making very good -- or we continue to make good progress on our initiatives to develop Fastenal as the best distributor of industrial products in North America, and when I say that what I mean is the entire system from purchasing, distribution, moving the products to the store and placing more products closer to more customers than anyone else in our industry.

That is our goal.

The two big initiatives that we've been talking about, other than the pathway to profit, are really the Indianapolis inventory expansion project which has gone very well in the second half of -- actually it's gone well throughout 2007 but we've made nice progress in the second half of 2007.

Our fulfillment levels have improved.

We've broadened the inventory.

It matches our current catalog we're putting out in February and March.

So we've really made tremendous improvements.

In talking to people in the field, we're getting very, very positive feedback from the people in the field about our ability to fulfill their orders on time and accurately.

The other project that we've worked hard on is the transportation initiative, and we really made progress there in two different areas.

One is we're speeding up the delivery times to our stores.

Looking at the calendar, looking at the days of the week and trying to look at how we can get places quicker by using weekends, by using nights, by pulling product more quickly so we can use product to our stores on our system instead of using outside carriers like UPS and FedEx, which we continue to use, but continue to lower that cost.

The other area that we continue to see improvement is the expense side.

We've lowered our transportation cost as a percentage of sales again in the fourth quarter, and that is in a time when fuel costs are at a record high.

So I have to commend the people who work on this for us, our transportation group, because they're really working hard to lower our transportation costs, and we're not backing off and letting them lower the service.

We're improving service and lowering costs at the same time.

But going forward into 2008, I think we still have a lot of opportunity to not only improve our service, but lower our cost for transportation into the New Year.

A little bit of an update on our pathway to -- excuse me, pathway to profit progress on pathway to progress is what I was trying to say.

The things that we stated we're going to look at, and just cover that a little bit.

This is the plan to lower our store openings from 15% to 8% and then take the savings that we have from the lower store openings and reinvest that in outside salespeople for those of you who aren't as familiar with our project.

The things that we're looking at, our average store size, our plan is to grow the average store size to increase the profitability.

Our average store size fourth quarter over fourth quarter '06-'07 grew by just over 7%.

So now the average store size in the fourth quarter was just over $80,000.

Our profit per store, one of our biggest measures grew by 17% profit contribution per store unit and came in at just over $42,800 per store.

So that's a very nice improvement year-over-year.

Pre-tax profit percent is the one thing we talk a lot about, and our stated goal back in April when we rolled this out to the investment community was to see a 1 percentage point improvement year-over-year.

This quarter we actually were able to improve by 1.4% year-over-year, so we actually exceeded our goal nicely in our pathway to profit.

And we did that with lower revenue growth than we had anticipated way back when we planned this, back early in the year.

So with higher revenue growth, we could have actually seen more improvement.

The big part of our plan, or the most challenging part of rolling out this plan is developing our outside sales process and really taking a strong approach of developing a process to grow sales, the tools, the people, the systems, the measurements, all of the things we're doing; and I think we're making very, very good progress on that project.

The handheld computers are working well.

The zoning software that we showed at our investor conference back in April is really starting to work well.

The opportunity last week, I was in California and visited 11stores and talked to managers in every store about this, and it was all very positive.

The systems are starting to fall in place for our salespeople to be more productive and, on the average, they're telling me that their salespeople are staying out between 1 and 1-1/2 hours a day longer because they don't have to come back and download orders because it's being done electronically.

With that being said, I believe we still have a lot of opportunity going forward to improve the process, because we're really just getting started on the pathway to profit.

And although these resulted are very early, we've only been doing this about six months, I think the most positive improvement we see is the improvement in our five plus store growth -- five year and older store growth.

That has gone up from 6% -- just over 6% in October to just about 10% in December.

I think it was 9.7 -- 9.6, excuse me.

So that's very nice, nice improvement.

And the only thing I can attribute that to is the improvement in our sales process, because the economy has not improved over that -- it does not appear the economy has improved over that time.

And those are the oldest stores that are always the most subjected to the most pressure from a slow economic time.

I'm just looking at my notes to make sure I didn't miss anything that I was going to cover.

I think with that, I will turn it over to Dan, and then we will come back for Q&A.

Thanks, Will, and thanks everybody for listening on the call today.

I think Will covered in good detail items related to sales growth and margin.

I'm going to touch on a few things related to SG&A.

And what I want to touch on that talked about in previous quarters, and that related to the pathway to profit.

For much of calendar 2007, the pathway to profit from an operating expense standpoint, from an operating margin standpoint was a net negative because the store openings that we weren't doing in 2007 were very late in the year and will really benefit more into '08.

And the people we're adding we started adding in the May and June time frame, at a high pace.

So we were adding the SG&A to our expenses.

I'm pleased to say that the acceleration in top line has reallowed us to -- as Will mentioned, realize operating margin benefit from the pathway to profit in the latter quarter of 2007, and I think positions us well going into 2008.

Specifically within SG&A, some things I'd like to touch on, our payroll grew in the fourth quarter on an absolute dollar basis greater than I would have expected, and what really drove that is some things that are a good problem.

That is, our commissions came in higher because of the added sales growth.

Our bonus payout came in higher.

Usually, most of the leadership within Fastenal takes a pay cut in the fourth quarter because of the compression of our operating margin.

We paid out -- we were to pay out very attractive bonuses this is quarter because of the strong performance.

Third, our profit sharing contribution for the year, that number is up about 1.7 million over last year.

500,000 of that increase -- between 500 and 600,000 of that increase occurred in the fourth quarter.

So a nice position to be in where we can report a very strong quarter and also reward our folks internally at the same time.

We talked a bit about occupancy and with the changing -- changing the pathway to profit, changing the store openings from the mid teens to the upper single digit neighborhood, in the fourth quarter, as we cited in our press release, occupancy expenses grew about 16.4%, contrasting that with first quarter of about 28.5, and what we've seen over the last several years, occupancy has been growing in the 38% on a year-over-year basis.

Our goal going the next year is for that number to be somewhere in the approximately 10% growth for the year, and really predicated on the fact we're opening about 8% new stores and being very, very conscious of managing the occupancy expense in the remaining existing group of stores.

The other item within SG&A, some things that I'd like to touch on, as Will mentioned on energy crisis impacted us, so I'm pleased to say that 16.4% occupancy growth came in a quarter with meaningful increases in utilities.

On the fuel going into our vehicles, a couple numbers I'd cite.

In the month of December, our gasoline going into our fleet of vehicles at our stores averaged $3 a gallon, a 32% increase over last year.

In Q4, for the entire quarter it was about 2.93 a gallon, an increase of 33%.

Diesel, 3.37 a gallon in the month of December, 3.25 a gallon in the fourth quarter, increases of upper 20% neighborhood in the fuel costs.

So we were able to leverage that into our organization very attractively because of continued improvements in our distribution management.

One item on the P&L I'd touch on just to save myself a few questions later on, income taxes.

Going through all of the static that occurs because of the discrete events that can occur in a FIN48 environment, we believe our core booking rate was about 38.2% for the year and would expect that on a going forward basis as well.

Finally on working capital -- and we'll touch on it very briefly so we can go to Q&A -- we're very pleased with our cash flow statement for the year.

As most of you are aware of, I personally, as well as the organization, we were frustrated with the operating cash flow performance in 2006.

Our operating cash flow as a percentage of net earnings for the year, came in at just shy of $0.50 on the dollar.

So every dollar of earnings generated about just over $0.49 of operating cash flow, and generated about $0.12 of free cash flow.

Those numbers changed quite dramatically in 2007.

Our operating cash flow as a percentage of earnings came in at $0.98 on the dollar.

Even stronger than I would have expected coming into the year, and the goals we laid out last April of targeting a consistent $0.85 on the dollar number on a go forward basis we believe is still very much in the cards and expect to perform at that level.

The free cash flow during the year came in at about $0.77 cents on the dollar of earnings.

And looking at -- at that figure for the last decade, we have only had -- ignoring this year, we have only had two years in the last decade where our free cash flow was greater than $0.50 on the dollar of earnings.

One of those years was the year we sold off a business unit, and the other year was the year we were very, very consciously managing our inventory.

But consistently we weren't able to do that.

Very pleased with the free cash management in the current year, and feel there's still improvements in the cards for our accounts receivable and inventory on a go forward basis to drive our operating cash flow.

The improvements we've made with distribution and with our master hub in Indianapolis really provide us opportunities for inventory management that frankly didn't exist 1, 2, and 3 years ago.

With that, I would turn it back to the moderator to open it up for Q&A.

Thank you.

(OPERATORS INSTRUCTIONS) And our first question will come from Mike Hamilton with RBC.

Good morning, and congratulations.

Thanks, Mike.

I was wondering if you could just kind of hit at a high level where you see the pathway to profits initiatives involving here evolving here as we roll into 2008, if you're coming up into any other areas that you think need more focus or you're pulling back on.

On the initiative, we need to continue to focus very strongly on the outside sales development, as I had mentioned.

But there's really nothing glaring in it at all and there's nothing we plan to pull back only.

Right now we plan to continue with our 8% store openings.

Our hiring will really be dependent on how our sales growth rolls out over the next 1 month at a time, and we believe we can control that very well.

So our store openings will be on track.

If sales were to pick up, we would probably increase our hiring.

Again, we'll be very conscious with that because we want to maintain the 1% improvement in our operating profit, 1 percentage point improvement in the operating profit line.

If I could follow up, how's your Asian sourcing playing into that at this stage?

Well, our Asian sourcing is really a separate initiative.

Our Asian sourcing is actually going very well.

We continue to improve the things we do over there.

In the last year, we opened two laboratories, one in Taiwan and one in Shanghai so we can speed up the sourcing.

Before, a lot of the product had to be shipped over here for quality checking and it was a lot slower.

So we invested a lot in the two labs and having them certified ATLA credited.

And that progress -- we have tremendous upside with our sourcing operation.

Right now we believe we're sourcing just over 20% of the product.

Based on the product mix there's potential for 40% of the direct.

But that will take us years to achieve at that level.

Thanks.

That's it for me.

Thank you.

Our next question comes from Piper Jaffray, Michael Cox.

Good morning.

Congratulations on a great quarter, guys.

Thanks, Mike.

I was hoping you could touch a little bit on the sales productivity of the new sales associates.

I guess I'm a little surprised by the pace of acceleration in sales that you experienced in the fourth quarter.

I was wondering if you could just talk a little bit about how the productivity of the new sales associates compare to the existing sales reps and the ability to move them up the curve.

What we're actually finding is the new sales rep -- well, there's a wide range.

Some of the new reps come in and they come in at a very high level.

What we need to do a real opportunity is improving the bottom probably third of the group.

And we're not -- we still have not figured out if it's training, if it's just we hired the wrong people, it's leadership.

That's what our sales development group.

We have a team we put together, new for Fastenal since June, that they're working on trying to go through all the information and really determine why some are growing so well and some are just not performing at the same level, and this is the question I guess that all sales managers face.

On the whole, our productivity is right about where we thought it should be, but the range is much wider than we thought it would be.

The good ones are really well above and the ones on the bottom, we have a lot of improvement to make.

Does that help?

Okay yes, it does.

Just one follow-up.

Looking at the working capital and the three to one ratio you've talked about for some time now, I'm curious as to what time frame we should expect reaching or attaining that goal.

Obviously you're shooting for sooner rather than later, but what would be a realistic expectation?

Is it 2008 or perhaps '09?

You know, I believe, in 2008, it's achievable.

I think it's probably going to be 2009 because I don't want to paint ourselves into a corner of -- the wild card when I go into 2008 that will challenge that, is there will be some inflation in our inventory number, and so that's going to create a challenge.

But when I look at the operating cash flow in that relative to our earnings number, I feel -- I feel very comfortable on our ability to perform very strongly on that in 2008 and going forward.

And feel we're in a great position to ramping up that in the next two years.

Great.

Thank you very much.

And our next question will come from Holden Lewis with BB&T.

Great.

Thank you, ladies and gentlemen.

Morning, Holden.

Just comment a little bit about the sort of the revenue trends that you are seeing out there.

And I guess in a broader sense you say before that you thought the biggest mistake you made during the last downturn was to slow your store openings.

If, in fact, there is a tough environment out there somewhere.

You had made comment about sort of watching your sales personnel pretty closely, but do you intend to sort of plug through with the same sort of -- same sort of strategy, whether things weaken or strengthen.

How should we sort of view your looking at your cost structure in an environment that is somewhat less certain?

Well, first off, on the going back in time, I think what we've talked about in the past, is back in the '98 time frame, when the Asian flu came through and things really slowed down, we slowed our store openings; but more explicitly, we slowed our investment in selling energy.

And in the 2001 time frame we chose not to do that.

We maintained a very high level of investment in our sales initiatives which, at that point in time, as of '98, was centered very much on new store openings and the only change in 2002 that you saw was it was also supplemented by our store -- our CSP project.

When I look at today's world, we've really taken our sales investment dollars, or sales investment energy, and split it across investments in new store openings, and investment in additional salespeople at the store level.

I really would anticipate that our new store openings will come into play very much as we're talking about them today in that 7 to 10% range, kind of zeroing in on an 8%.

In our investment and outside salespeople, as we've mentioned in last quarter's call, we'll be continuing to at a very high pace, and be influenced within a range of the higher low end of the range in the upper teens neighborhood, really based on what our top line we're seeing and, as Will mentioned, we can influence that in a relatively short time frame to the upper or lower end of that scale.

One of the other positives that we're seeing out of the outside sales program is that the sales generated by this, the outside salespeople are calling in smaller accounts.

The margins are running at 3 to 4 points over the company average.

So if that's the growth that -- or the fuel that drives our growth, we have some upside in this program to help pay for the program, too.

Because we're not out selling to the huge customers with that group.

They're the smaller, more traditional Fastenal customer.

Okay.

And then, as you -- obviously if you continue to grow at this level, you start spinning off a fair amount of profitability and leverage and that type of thing.

Are there other areas that given that increasing profit and cash flow that you would want to invest in?

And I guess specifically, are the management ranks kind of where you want them or do you want to add managers, reduce maybe the size of the geography that they cover, anything of that sort that would go hand in hand with this now that it's beginning to kick in?

I don't know if it goes hand in hand with that, but we have made -- we made a decision in the fourth quarter to try and reduce the average number of stores per district manager.

The district manager, the field leaders that the store managers report to, and that number had been growing.

The average number of stores had been growing, and we made a very conscious effort with Nick Lundquist and Lee [Hine] going district by district and bringing that back.

But we've already put those people in place and we've basically paid for them by taking savings in other areas, mainly support labor.

So it wasn't a greater investment overall.

It was just a greater investment in leading our troops in the field.

We believe that 10 is a good average number for the district -- for number of stores per DM.

Now that's going to range from 6 to 15 more than likely.

And your store is at 10 now?

That process of putting more people in place is complete?

We should be right at 10, Nick is with us here.

11 and a half.

11 and a half?

Yes.

11 and a half.

So we'll see a few more.

Okay.

Now did most of those get in the fourth quarter, or was that cost largely born in the fourth quarter, therefore it's kind of in there?

It was added in the third and fourth quarter, so almost all of it it is in there.

Great.

And then, lastly, if I could -- yes?

I'm going to cut you off.

It sounds like everybody is going to two.

So I'll let you circle back in queue.

Fair enough.

Thanks.

Our next question will come from Lehman Brothers, Dan Wayne.

Yes.

Good morning.

First question was regarding your comment about in the first 14 days of January you saw trends that are similar to 4Q.

I think January probably has slightly more favorable comps, but could you talk about kind of the core trends out there and perhaps some of the end-market trends that you're seeing?

The end market trends we're seeing right now are very similar to the fourth quarter.

Now, I have to qualify that in the last few weeks, I've not been with many customers.

I've been out in several of our stores, and I'm getting positive reports, but I've not spoken to a lot of customers.

The larger accounts -- and I think you put out the key account numbers, our large accounts grew at just over 13% in the fourth quarter.

That's tracking in line.

Some of the major construction sites are slower than they were.

But we're really seeing nice growth from these small to medium size accounts and that's being driven by our ability to distribute product on time and accurately and solve problems and we're making more sales calls.

We're out there hitting and pounding on the doors harder.

And for the first 14 days, the accounts are easier -- January is a little easier than December, but we're really looking at the October to January -- as a company, we've always looked at our October to January growth because historically I believe we're at 1.5% as -- the daily average in January would be 1.5% over the daily average in October, which is the trend line we're seeing right now through 14 days in the month.

So it's more of a longer view than just -- or different view than year-over-year.

Does that make sense?

Yes, it does.

And somewhat just going back to the December sales, I think that was the result of -- December was better than what most of us had anticipated, and I think, in the release you talked about that you think part of that -- that acceleration in daily sales growth rate in the fourth quarter versus the third quarter came from the pathway to profits earnings to contribute.

Is there any way to quantify?

What would have daily sales been without the benefit of the pathway to profit in December?

We really don't know that because it is Fastenal.

We would have opened another 140 stores and they would have contributed.

So you'd really have to dissect it.

I think I'll go back to what I said in my earlier comments.

If you look at the growth in our five plus stores, the way it grew sequentially month to month, and I'll flip my sheet back out here, 6.3, 7.9, 9.6, I think we're beating the economy there.

We're outperforming what the market is giving us, and these are the stores that, what really dropped the bottom line is that the big stores are growing and they're the most profitable stores, or what's really dropped to the bottom line is what I meant to say.

We're very reluctant to try to pull the pieces out because that's who we are today.

We're a company opening 8% more stores and adding more salespeople.

Right.

Now, pathway to profit, do you think you'll start calling that PTP or in line with the whole CSP.

Who knows?

With the world of acronyms.

Okay.

Thank you very much.

And our next question will come from Morgan [Kegan] (inaudible)

Good morning.

Dan, earlier I think in your comments you talked a little bit more about the payroll numbers coming in a little higher than expectation in commissions driven by the better revenues.

I was wondering if you could maybe put some firmer numbers on those?

I don't have real firm numbers to throw out at my fingertips, but I can tell you this.

The commission numbers, as a percentage of sales, were consistent.

It was more of a comment on the absolute dollar that came in higher because our sales came in better than I expected.

We were very pleased with December's results.

The increase in dollars between the third quarter and the fourth quarter can all be attributed to the 401(k) match increase.

And the profit bonus.

And the profit bonus, because the way our 401(k) match works is we have to exceed 16% operating profit or pre-tax profit before it kicks in and last year I believe we are at 16.4% pre-tax.

And so it was just barely there.

But once it goes up -- and so it's a very positive increase because it's coming -- or very positive problem because it's coming back to benefit our employees.

So now, Dan and Will, if the FTE numbers in the quarter I think were up about 14.5% year-over-year, do you think the total payroll number is about in line with that, or a little above that, or --?

Well, ignoring the profit piece that Will was touching on and the profit sharing piece that Will was touching on, our payroll growth on an FTE growth -- it was actually 14.1 -- for the month of December would trail that.

Okay.

And then --

The new folks coming in are early in their career and so they're not adding at an equal-weighted basis.

Great.

That's good.

Last question.

I think in, the press release, you just real briefly mentioned a comment about the general insurance costs.

Could you maybe elaborate on that?

Yes.

In calendar 2006, we had -- our frequency of -- the big driver in our general insurance really centers on three things: The worker's connotation portion, the vehicle fleet -- and that vehicle fleet I'd split in two pieces: Our semis as well as our store delivery vehicles.

On the semi side of the equation we had, from a trend standpoint, a very safe year.

We had very good results from the standpoint of occurrences with any kinds of accidents.

So that was trending actually quite nicely.

Worker's compensation, sometimes what you see when the economy weakens is worker's compensation expenses going up.

We didn't see that.

And then the third and final piece, which I consider a real plus -- as you can appreciate this, and now that I'm 44 years old I'm getting on the other end of the spectrum.

I'm 44 years old with four children.

I'm on the other end of the spectrum when it comes to driving.

But when I was in my 20s I wasn't quite as safe a driver as I am today.

We have a lot of folks in our organization, young people, driving in our vehicles every day and our frequency of accidents is improving on a year-over-year basis despite the fact we've added all these outside salespeople and they each have a vehicle they're driving.

So it improved our trend, and improved from what I would have expected in the fourth quarter and in the third.

And I believe puts us in a nice position going into next year.

Part of the frequency is we've taken and made a real conscious effort to try to do better background checks on our new employees.

You actually have to get a Fastenal's driver's license to drive our vehicles, or we check people out.

Little things that make a big difference in the end.

Great.

Thanks a lot, guys.

Our next question will come from David Manthey with Robert W.

Baird.

Hi, guys.

Good morning.

Good morning.

Gross profit margins solidly at 51% throughout '07, and Will, I think you mentioned smaller customer size as you roll out pathway to profit here.

Could you discuss in 2008 what you see the impact from the China value added tax?

And then, overall, I believe, Will, you mentioned that you thought you could sustain a 51% -- could you just give us an idea of what the intakes are there, and what your level of confidence is even if the demand environment slows somewhat?

Yes.

If you look at our numbers historically, Dave, our margin hasn't dropped in recessionary times.

If you go back to 2001 or go back to early '90s, we've always been able to maintain our gross margin through slower times.

Part of it is that production normally slows down first and the smaller accounts pick up.

There's more maintenance and repair and less building.

So that's good for our business from a margin standpoint.

As far as the Chinese value-added tax, the positive about that is that it's across the board, it's not a selective thing like someone buys better than another company.

And so that should pass through the market.

Another positive on that is it's going into only about half of our importing comes out of China.

So it affects the fasteners, and so it's a smaller part of our inventory, and we've been able to pass it along so far.

It really came in in July.

So you've seen six months of that increase.

And still been able to maintain our margins.

At the same time, we continue to resource products to help that out.

Every day we're looking for new lines, high quality product lines that we can bring in to soften some of the pressure from other areas, like the value added tax.

The outside salespeople are calling on smaller customers.

I don't think we've seen a lot of that benefit yet in our margin.

I think that's more of a go-forward is what I meant to indicate there, that it's an opportunity as we grow the business.

And we're very, very focused on the margin, maybe a little more than we were one or two years ago.

We've always been focused on it.

We're working on it.

Okay.

As far as some of the -- we'll talk about numbers of (inaudible).

The only pull that we'll be challenged with, and we were challenged this with in the fourth quarter, is what the fuel price.

I think we're executing well against that.

I think we still have opportunity to improve the margin through transportation even in this economy with high fuel prices.

Okay.

Thanks very much.

Our next question will come from John Baliotti with FTN Midwest Securities.

Thank you.

I was wondering if we could talk about free cash flow, as you pointed out improved significantly over last year.

And you also discussed focusing on inventory turns.

Obviously the largest of three working capital components on your balance sheet, and just maybe Will or Dan, do you have an idea or some sort of a target as to where you think that might be by '08?

Back toward 2.2 or -- how do you look at that, because obviously that would swing that combined ratio you look at the fastest?

I'll touch on that.

As we stated last spring and a couple last conference calls, really our goal is over the next several years is to move that closer to 150 days of inventory on hand versus the closer to 170 that we had been running at.

And the only reason I'm a little bit cautious on making a real strong statement on next year is the impact of some of the inflation in our products.

But this year we grew it at just over 10%.

I think that's a very attractive place for us to be.

I'd like for us to be in the single digit number next year.

And our question is really a case of making the investments we want to make with new stores with our a la cart inventory with specific inventory and our distribution base -- and also driving our direct sourcing.

Doing those four things and still growing our inventory at less than 10% in calendar '08.

I think -- go ahead.

I'm sorry.

Just, the other component of your free cash is you had a nice -- I guess -- I don't know how you'd want to characterize it, maybe more efficient use of CapEx.

Historically it's been a little bit above 4% at least the last couple of years and this year looks like it declined to just under 3 as a percent of sales.

Is that something that is more of a normalized basis now that you would think about for the next couple of years?

The CapEx number came in less than I would have expected this year, and probably the biggest driver of that is our distribution center that we're building in Dallas was delayed in the middle of the year because of weather considerations.

It was pretty wet down in the area where we're building and the construction was delayed.

And so that number came in less than I would have expected.

Our net CapEx came in at about 50 million.

The year before that, it was about 73.

When I look at the next two years, we have the projects going on in Dallas as well as project going on at our Indianapolis facility with both expansion of the building, installing an ASRS system at both of those locations.

And so our CapEx will be north of -- will be in the $70 to $80 million range, that CapEx.

When I look at 2008 and probably in that similar range in 2009.

And then I think it tapers off a little bit.

Okay.

Great.

Thanks.

I'm sorry, I cut you off, Will.

No.

I lost my thought now.

Sorry.

Okay.

Thanks.

I was listening to Dan.

Which could be painful in and of itself.

And our final question will come from Louie [Tomo] with Delta Partners.

Nice quarter, guys.

Thanks for taking my call.

I guess what I want to try to understand -- I know you said the trends so far in January were positive, but just looking at the business and the context of the numbers that we've seen recently with the Philly fed numbers and the ISM numbers and then if you could just -- if you go back to the last time we had economic downturn, your stores that are over five years old were down I think 10% in 2000 and around the same in '01.

So just if you could help me understand what the -- how you guys look at that in terms of if we do enter another type of environment similar to that, is that kind of a downside to your mature stores or are the initiatives that you're doing are enough to offset that?

Well, I'll comment on that.

When you look back at the 2001 time frame for the year I believe the stores -- and I don't have the numbers in front of me.

I'm going on memory here, so please excuse me if I'm off a little bit.

I believe we contracted about 2.5%.

The worst month, which was, I believe, November October of '01, we were down about 10, 11% in that group of stores.

There's no doubt about it, a weak environment becomes very challenging for our five plus year old stores, because they have a meaningful market share in the local market and if the customer base is spending less, they're really finding head wind.

As far as our investments now, what they're doing to counter that.

When you look at -- Will touched on it earlier in the call and we should probably say it five or ten times out loud because it's such a huge statement.

Our five plus year old stores -- December, I think, is a tough environment.

And our five plus year old stores not just didn't hold ground; they improved.

And historically the number I've always cited looking at our data for the last 20 years is our five plus year old stores.

When they're growing in the low double digits, that 10 to 13% neighborhood, that's usually a sign of a good economy.

A strong economy.

That's usually a sign we're executing well.

We have a strong economy and things are going well.

The executing well part, I think, is occurring.

The strong economy is not when I look at the fourth quarter, particularly in December, and so I think that puts us in a very good position for a weakened environment to be able to grow and move the needle in our operating margin as Will has talked about in the pathway to profit.

Even in a tough environment.

I think the one difference when you go back to 2000 and 2001, is we were going in a very strong environment, and it's really like we almost fell off the edge.

We believe 2007, the entire year was slow, looking at our customer activity, and the fourth quarter was probably the slowest part of the year.

So although it may slow down more, time will tell, but I don't think it's going to drop like it did there.

The drop will be slower or less severe is what we're predicting.

We'll see as the numbers come in.

Okay.

Well, keep up the good work.

Thank you very much.

Thank you.

And at this time there appears to be no further questions in the queue.

Thank you.

Thank you, Christine, and thanks, everybody, again, for listening to our call today.

That does include our teleconference today.

We'd like to thank everyone for your participation, and have a wonderful day.