快扣 (FAST) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Fastenal Company 2010 annual and fourth quarter earnings conference call.

I'd like to turn the conference over to your host, Ellen Trester.

Welcome to the Fastenal Company 2010 annual and fourth quarter earnings conference call.

This call will be hosted by Will Oberton, our Chief Executive Officer and Dan Florness, our Chief Financial Officer.

The call will last for up to 45 minutes.

The call will start with a general overview of our quarterly results and operations by Will and Dan with the remainder of the time being open for questions and answers.

Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal.

No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent.

This call is being audio simulcast on the internet via Fastenal Investor's Relations homepage at investor.fastenal.com.

A replay of the webcast will be availability on the website until March 8, 2011, at midnight central time.

As a reminder today's conference call includes statements regarding the Company's anticipated financial and operating results as well as other forward-looking statements based on current expectations as defined by the Private Securities Litigation Reform Act of 1995.

Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming or similar indications of future expectations.

It is important to note that the Company's actual results may differ materially from those anticipated.

Information on factors that would cause actual results to differ materially from these forward-looking statements are contained in the Company's periodic filings with the Securities and Exchange Commission and we encourage you to review those carefully.

Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matter contained in such statements will occur.

Forward-looking statements are made as of today's date only and we undertake no duty to update the information provided on this call.

Today, Globe Newswire is experiencing technical difficulties posting our press release this morning.

The 8-K filing on Edgar has posted and is available on our website.

We are looking -- working with Globe Newswire to resolve this issue as quickly as possible.

I would now like to turn the call over to Will Oberton.

Go ahead, Mr.

Oberton.

Thank you, Ellen.

I want to thank everyone for joining us this morning.

Proud to report the numbers for the fourth quarter and for 2010.

Starting out with the sales growth, we grew our business by 17.6% for the entire year.

For the quarter we grew 20.3%.

We did see a little bit of softness in November but it bounced back nicely in December and actually had a strong month from start to finish.

The positive things about our sales growth is that the growth is widespread.

We're seeing good growth in almost all regions of the country's geographic areas.

Our international business is doing very well.

The business grew over 30% for the year and we have a lot of good things going on the international side, so we're very excited about that and about the good domestic growth.

As a Company, we reported 44.8% pre-tax growth for 2010 and for the fourth quarter we hit right at 50%, very proud of those numbers.

We've worked very hard at that.

On the net earnings side it was a little lower because our tax rate was slightly higher from the year.

We had 43.9% earnings growth for the year.

We had 46.3% for the quarter, both solid numbers.

A lot of the earnings growth was driven because of the nice job we did on expense control.

Our SG&A for the year, overall expenses for the year were up 8.5%.

For the quarter it was a little higher, 15.1%.

Dan's going to touch a little bit on that as we go into the call.

Some of the expense areas that I was really excited about are non-payroll expense for the year was actually flat to down slightly.

It was basically flat for the year.

Really good job by the team, looking at everything we could do and working hard to control that.

With the payroll expense we were only up -- excuse me, 8.5% but that was driven by commissions and bonuses rebounding from our 2009 expenses.

Other areas in the expense category that I think we did a very nice job on, the first would be distribution.

Distribution expense is the closest expense we have related to the physical movement of product.

You move more product, you move more weight, you spend more money.

It's pretty straightforward, but our group worked really hard at implementing some new software, some new ideas, some better ways of doing business and they grew our business by 17% and grew their expenses by less than 4% in the warehouse side of our business.

I'm really proud of those numbers as I looked at them at the end of the year.

Proud of the team that did that.

On the transportation side it's also very physical part of our business moving weight because as I've said many times the product we sell is pretty inexpensive by the pound.

We sell processed steel.

Our transportation group did a nice job in a rising -- in an environment where the field prices were rising and actually turned to profit for the Company after you considered putting all of the credits we received from suppliers for hauling product, the charges we charge the customers for delivering product that netted out in our expenses.

It netted out and we actually had a profit for the year and I think in all three of the last three quarters we turned a profit in freight so another job well done by the people in the transportation department.

As far as hiring, we did hire about 700 salespeople throughout the year, people within our stores.

Going forward, we will continue to add people into our store and sales operations.

And right now, what we're planning for is to add people in the stores at about 60% to 70% the rate of our sales growth.

So if you look at the fourth quarter, it's easy to do the math.

We'll probably add 13% to 15% -- 13% to14% additional store people if we continue to grow at about the rate we're growing today.

If we were to accelerate out of that we would increase and if we were to slow down we would bring that back trying to manage our expense.

On the support personnel side which makes up approximately 30% of our labor force today, we will add some people in 2011.

We've been tight for the last few years.

Our plan there is to add support personnel at 50% or less the rate of sales.

So again, looking at where we are and with the month to month releases, it's pretty easy to figure out what our plan is.

Store openings, we had a strong finish in the store openings that was really designed in the beginning of the year, trying to understand how the year was going to play out, the year played out well so we increased our openings in the second half.

Going forward, our plan for 2011 is to open between 149 and 200 stores which is a 6% to 8% range.

We may round that up to 150 to 200.

It sounds better, Dan.

I'm joking.

So, we're optimistic that we're going to open stores.

We believe it's one of the cores to our growth strategy.

Switching to Pathway to Profit.

Pathway to profit for those of you that aren't familiar is our strategic growth plan that we laid out in 2007.

And what I'd like to say is we're back on course for the Pathway to Profit.

With the profit improvements that we've identified through this slowdown over the last two years, found new ways of doing business, ways of saving money, we now believe that we're going to achieve the 23% pre-tax number with a lower average store size.

If you recall when we first laid this out, we had said we needed to achieve an average store size of $125,000 per store per month.

Looking at our current release that we just put out today, if you look at that data it shows that we really need to be at about $100,000 to $110,000 per month looking at those numbers to achieve a 23% pre-tax rate and we're comfortable that these numbers are sustainable going forward.

If nothing else we might be able to improve them slightly.

Based on that, we should be able to achieve the $100,000 to $110,000 average store size in 2013, bringing the Pathway to Profit timeline back a couple years from what we had stated six to nine months ago, and so we're very excited about that.

The real benefit of the -- one of the great benefits of Pathway to Profit is the return on the business that we get, the return on invested capital assets, equity, however you look at it.

When the pre-tax moves up, the return gets moved up like it has a lever on it because there's a great advantage there.

So before I close and hand it over to Dan, I just want to let you know that as an organization, we are starting out the year with a very high level of optimism and focus and we're just really excited about going into the New Year.

With that I'm going to turn it over to Dan and when he's done, we'll answer some questions.

Thanks, Will and good morning, everybody.

Again thank you for joining us on our call this morning.

I'm just going to touch on -- highlight a few points in the press release just for the convenience of the reader out there.

First off, to reiterate Will's points, if you look at page one, one item that I did highlight is, as Will mentioned, the leverage slipped a little bit in our trend but December snapped back nicely and I'm pleased to say when I look at our various groups of stores and I look at our two plus group, the fact that we were at 16.8% growth in that group in the final month of the year was a nice way to end the year and launch into the new year, so I'm pleased with the recovery in December and nice sales number for the entire quarter.

When I look into the document a little bit and get into pages two and three and we start looking at some of the sequential patterns that started talking about a year ago on this call in a little more detail to try to explain -- or for us to try to understand what was really happening as we went through the downturn and then the recovering model to our business.

As you saw back in February there was a little weather weakness but other than that month we were at or above trend in every month as we progressed on our January to October pattern and prepare ourselves for 2011.

And continuing on to page four, that chart that lays out the patterns in our manufacturing and non-residential construction business, manufacturing as we had talked about in 2009 had bottomed out earlier in the year and was performing quite well towards the tail end of 2009 and into 2010.

If I look at the trend pattern in the bottom of page four, I see the non-residential construction and I look at the comparison to pre-slowdown, so I look at it in October 2008 time frame, we've been slowly inching back as we go through the year, back to that benchmark pattern from 2008.

And I feel again I believe that positions us well going into the New Year.

One other item I'd touch on is when I look at 2010 and in 2009, we had pulled back quite aggressively in our headcounts to manage through the downturn, and we saw some weakening in our active account growth as a result.

When I look at Q4 of 2010, it's our strongest quarter for the year in active account growth.

And again, I believe all those things line up to bode well as we begin the new year.

Page five, as Will mentioned on the Pathway to Profit, that table we have, Pathway to Profit starts on page five but the table we have on page seven really touches on what Will was pointing out is that when we started the Pathway to Profit, our target, $125,000 a month in, say average sales for our store group, we felt would yield a 23% operating margin, pre-tax margin for the Company.

With the improvements we've made on the operating expense side, and this despite a weakening in our gross margin as we went through 2009 and saw some recovery in 2010, despite that we were able to improve the relative profitability of the various groups such that we look at it now and say $100,000 to $110,000 is a reasonable range where we can hope to achieve the 23% operating margin and what that does is it shortens up the amount of time that gets pushed back by the recession.

One other item I'd point out just for the benefit of the reader is on page six, we changed the display of how we show that table, and we now have broken out what we -- not only store personnel but non-store selling personnel, because I think it's an important item to note, the selling energy and the investments we're making into the selling energy both in 2010 and as we progress through and report our 2011 numbers.

It just brings added clarity to where we're adding resources.

If I look at the support area and I ignore the distribution and manufacturing and look at true administrative support, you would see like we talked about back in 2007 as we slowed down the store openings and focused our energy on growing the stores, growing the headcount per store, growing the business per store, the amount of overhead, true overhead we have as an organization really holds pretty constant because the individual business units are levering up.

And you see that in our administrative personnel in that time frame, it's essentially flat over the last three years.

Finally, operating and administrative expenses, as Will mentioned, I feel we managed that well as we went through 2010.

In the release on page nine, we mentioned some of the changes in the cost components.

One item that I'd point out I think is useful for the reader to understand is when we look at -- we've always indicated and you can read it in our proxy, you can read it in a lot of our filings, we are very entrepreneurial organization.

We reward for growth.

There's two sides to that coin.

In 2009, we saw it and a lot of it.

Everybody within Fastenal had a tremendous belt tightening personally as they went through 2009 as incentive compensation dried up.

In 2010, that expended quite nicely and if you look at our increase in payroll costs for 2010 and you quantify the pieces, about 75% of the increase in payroll costs in 2010 is solely related to incentive comp.

Commissions paid to personnel at our store, bonuses, incentive bonuses paid to our district leadership, regional leadership, support infrastructure, distribution personnel, administrative personnel, et cetera, all of those combined bonuses and then the final one, our 401(k) match -- all of those pieces, the expansion of that resulted in 75% of our expense growth in payroll.

The other 25% was related to the actual adding of people and working more hours throughout the year as our business grew.

One other item I feel compelled to mention just for clarity to our operating expenses as well.

Last week, we put out a press release indicating we had settled a dispute that we had with the Department of Justice that's related to our TSA hardware contract and in our release last week, we indicated that we settled for $6.25 million.

$3.5 million of that settlement is recorded in our fourth quarter numbers, approximately $2 million was recorded in our third quarter numbers, and I think that's worthwhile to point out.

Number one, for the Analyst community to understand the numbers and for our shareholders in general.

If I looked at that and said that it wasn't there, the $3.5 million wouldn't 100% disappear but between 80% and 85% of it would and there's a balance that wouldn't disappear would be the additional dollars that would have been paid out in incentive compensation, and so that was felt by everybody within the organization in the fourth quarter.

One other item that I would mention and again I feel compelled only from the standpoint of for those of you that have owned our stock over the years had the opportunity to directly meet with Bob Kierlin in the past, Will Oberton in the present.

One thing you know about Fastenal is we, in our course of business, operate in a very ethical and forthright manner and we're proud of that and two items cited by the DOJ and their press release last week, we take exception to.

We believe over the course of the contract that we acted in good faith and we priced our product accordingly in terms of the contract.

The second item they cite was that we normally sold import product.

That statement actually is true.

In the contract, that was admissible because it was a walk-in contract, a hardware contract where a customer would come in and buy a product and it was broken out in the contract that the buyer was responsible for determining the country of origin.

We did sell that product when the customer came in.

We reported that in our reporting to the government, and we think that was appropriate in context of the contract but we agreed to disagree.

We settled it and now we move forward and I'm glad that's behind us so we can move forward in 2011.

The final item I'll touch on is on page 11 and that relates to cash flow.

Sorry there isn't a call but I want to at least touch on cash flow some time during the context of the conversation.

Again I'll frame it back when we started Pathway to Profit back in 2007.

In that meeting that we held with our shareholders, we talked about the Pathway to Profit, what we were hoping to accomplish from a standpoint of profitability.

We also touched on what we hoped to accomplish from a standpoint of cash flow.

In that discussion, we said, generally speaking, our target was to have operating cash flow as a percentage of earnings at around, at least 85%.

In 2010 we came in at 90.6%.

We also talked about that spending somewhere in the 25% of earnings in the form of capital expenditures, so if you take the 85% back off to 25%, our goal would be to have approaching a 60% of our earnings available in free cash flow to use for other purposes that might be returning to our shareholders, that might be other investment opportunities that come along.

In 2010, we spent about 26% of our earnings in net CapEx leaving 64.5% of our operating -- earnings available as free cash flow.

We paid out 68.9% of our earnings so we depleted our cash flow as we went through the year but a very, very strong cash flow and I believe again, that sets us up well as we go into 2011.

With that, I will turn it over for questions.

Thank you.

Thank you.

In the interest of time, we are asking that you please limit yourself to one question and a follow-up.

(Operator Instructions) Our first question comes from Ryan Merkel with William Blair.

Thanks, good morning guys and great quarter.

Thanks Ryan.

My first question has to do with your sales outlook.

Will, at one point you had thought that 15% to 20% top line growth was achievable in 2011 and I'm wondering if you still believe that's a reasonable target and what some of the puts and takes are in your mind?

I think it's a reasonable target.

Some of the puts and takes would be if you look at the historical patterns, we normally start out January at or above where our October daily average was which puts us in the 20% range in January.

If you start out there, even if it slowed down a little bit, you should be able to get the 15% to 20% for the year and right now, we're not -- we do not predict that it will be slowing down so we're pretty confident in the 15% to 20% sales range at this point.

Great and then my second question is on gross margins.

I notice that fastener sales were about 48% of sales in the quarter but you were still able to achieve nice gross margins so what drove the mix change and then do you think you can continue to hold gross margins near that 52% range?

Well, the mix change as we've gone through the year, we've had some variations of our large account business, from our OEM business being very strong which actually pulled it up a little bit in the middle part of the year.

We have a broad base of business.

The construction improving as we went through the year, a lot of non-fastener products including those sales as well so that pulled that mix down a little bit.

I think what really drives our ability to manage as we go through that mix is the job our procurement group has done over time of building a nice offering of products, if you look through our catalog, great selection of products, great job of sourcing.

And we've done a nice job adding the exclusive brands and it still has a percentage of our sales -- if you ignore the fastener piece is still relatively small, but it's been building every year and I think that puts us in position to maintain and improve that 52% as we move into the new year.

And then maybe if I can sneak just one more in, I'd like to explore the decision to expand the universe of salespeople that you measure, so I'm wondering what prompted this decision and then how is it different than what you had been doing?

Thanks.

Well, what prompted it is that we continued to put more sales specialists outside of the store trying to drive additional products, things -- products or markets.

In 2010, our biggest initiatives were adding government sales reps, manufacturing sales reps, and sales reps sending -- excuse me, selling our vending systems, but none of those showed up in our sales investments and they are purely a sales investment, and even over and above those, the costs of keeping those people on the road so we really want to give the clearest picture we can of what we're doing and the reason we chose to put a lot of investment into those areas is it's the greatest way to lever our sales.

Going into 2010, we weren't sure what the economy was going to bring us and the business was going to do so we really looked hard and we said we think we can get a better boost in our business by putting sales specialists above the store umbrella and driving business to the store than the entry level salespeople doing it one small account at a time.

They're both important but if you only had so many people to add we felt this was our best investment, and so we wanted to state that in the way you look at our sales investments in our releases.

Thank you.

Our next question comes from David Manthey with Robert W.

Baird.

Hi, good morning guys.

Hi David.

Just a few questions on inflation.

Could you talk about if you had inflation realized in the fourth quarter, your expectations for 2011 and then specifically I think there's price increases coming in the channel for fasteners, but could you talk about not only fasteners, but non-fasteners, as we're hearing pressure across other categories as well?

To answer your first question, we didn't have a lot of inflation in the fourth quarter.

There were small price increases coming through from the middle of the year but for the most part they were smaller categories and we were putting up the arm and holding them back, doing the Heisman on the price increases coming, but with oil prices going up, the plastic products and other products go up.

So right now, we are seeing more price increases coming through, we're mitigating them as well as we can, and going into the year, the costs will go up some.

With the inventory cycle, it's going to take -- that will be coming through more at probably end of the first quarter going into the summer months on the non-fastener products.

We'll start trying to push price increases sooner than that but it always takes time.

On the fastener products, the steel has been a roller coaster lately.

The US steel is way up.

Asian steel has not risen as much but our purchasing manager just got back from a week in Asia and everyone is selling and prices are going to be going up.

One of the things that's really throwing it off now is the flooding in Australia because the coking compound that they need for making steel comes from Australia.

No one quite knows how that's going to affect things yet.

We don't know if that's real or just hype to push up steel, so we're going to be watching it very close.

We have a lot of people on the ground over there and as soon as prices start going up, we're going to push up with them.

If anything, we think it's a positive for our business going forward as long as it doesn't get too crazy, but pricing is real visible, so if I had to guess, I would say we would have above average inflation in 2011 from what we're seeing today.

I do not predict at this time it would look like 2008 but it's really too early to say that.

Great.

Thanks a lot Will.

Our next question comes from Thomas Hayes with Piper Jaffray.

Please go ahead.

Hi guys, it's Dan Garofalo on for Tom today.

Good morning, Dan.

Congrats on the quarter.

Just had some questions on the gross margin.

Just right off hand, did the Department of Justice settlement, which line item on the P&L do those reside?

That is in operating expenses.

Okay.

And so you had discussed or you mentioned briefly the international side of the business and you have to excuse me.

I'm not terribly familiar with that and I was just wondering if you could give us some color on what percentage that is and what are the drivers in that business?

You'd mentioned I think 30% growth.

Yes, the international business, I'll back into the number, because it's sometimes a better way to explain it.

If you look at it from the standpoint of the pure definition of the international business, it's about 8% to 9% of our business.

If you take a step back and you say, let's look at North American versus non-North American, most of our international business is in Canada and then Mexico and then the rest of the world, so if I looked at outside North America, I don't have the stat right in front of me, it's between 1% and 1.5% of our sales that's outside North America.

But let me state that the comment I made about our international growing north of 30% includes Canada and Mexico.

It's the full 9% of our business grew.

So Canada is outgrowing the Company, Mexico is way outpacing the Company, Singapore, Malaysia, China, Europe are all doing very, very well, so we're very optimistic about that business going forward, and its becoming meaningful to the overall performance of the business.

Okay, and just one quick follow-up.

I notice just on the stock repurchase last item on the 8-K here, it looks like you still -- you're obviously opportunistic in 2009 but looks like there's still $900,000 remaining on the existing plan.

Is there any thought towards putting some of the cash to use for repurchases or otherwise?

I guess 2011 we'll see how it plays out and how the marketplace looks at our stock and the type of cash we generate.

In 2009, 2010, we really chose to return cash to our shareholder base and even though we did some buybacks in 2009, the dollars were really centered on returning cash in those years to our shareholders to do with what they saw fit in the marketplace.

From a tax standpoint, it was still, it's still an efficient way of returning dollars to our shareholder base.

Looks like that will be in place for another couple years and that efficiency, so we'll see how things play out as far as how we return dollars to our shareholders, but fortunately we're in a position where we have a nice strong free cash flow to do either/or but in 2010 and for the most part in 2009 we chose to just return dollars to our shareholders as a dividend.

Got it.

Thanks for taking the questions.

Certainly.

Our next question comes from Brent Rakers with Morgan Keegan.

Please go ahead.

Yes, good morning.

Two questions.

Hi, Brent.

The first one I was hoping you guys could maybe comment a little bit about what if any the weather impact might have been in the month of December and maybe if you're seeing anything for January whether it be a pick-up in seasonal sales or possibly a disruption to revenues?

We won't comment on our January numbers at this point but as far as December, we saw a little bit here and there but I don't think there was really anything unusual.

We had a lot of bad weather in the Midwest early in the month but overall, I think it was business as usual in December and January we'll see how it plays out.

Its been really, really ugly in the Northeast but it's still early in the month.

Okay, great and then second question.

Just on the trends within bad debt expense.

It seems like the last couple quarters has been inching up a little bit.

I was hoping you could maybe just comment on that.

Well, it happened slightly although at a much better level than we saw in 2009.

There's no doubt about it, 2009, you saw a fair number of business failures.

You're still seeing some of that in 2010 and so you're still seeing some bad debts being realized but in the context of our P&L and the context of our overall business, extremely manageable figure.

Dan, any target for 2011 as a percent of revenues?

I'm always frustrated when it's over 30 basis points and so you can imagine I was a fun person to be around in the last two years but -- when it was north of that but I -- when I look at 2011, I don't want to get ahead of myself but just based on the trends over the last two years, we were north of 40 basis points, I believe that was the number in 2009 and we got that down closer to the upper 30s.

It would be nice to keep whittling that down as we move through 2011 with the eventual goal of getting that below 30 basis points but time will see how that plays out.

Okay, thank you.

Our next question comes from Adam Uhlman with Cleveland Research.

Please go ahead with your question.

Hi guys, good morning.

Good morning, Adam.

A couple of clarifications, Dan.

You mentioned active account growth was really strong.

Can you put some figures around that in the fourth quarter?

It was stronger in the fourth quarter than it had been all year long.

It was just shy of 4% but it had been between 2% and 3% in the first three quarters, so just seeing that move north was a positive sign to see.

Okay, and then in December, the total Company average daily sales growth was 21% with manufacturing up 17% and non-res construction up 13%.

I'm wondering what was so strong to drag the Company average all the way up to 21%?

Good question.

I was asking my folks that just end of last week when I was going through some of the data.

I said, What's going on that could pull it up that way?

A big chunk of our business, and part of it's the way you look at the data, you measure the data.

We use mixed codes as you would suspect and included in our customer grouping is something that shows up in mixed code as a reseller.

It's a little bit of a fuzzy category because some contractors depending on how the mixed code or classified can show up there as can a true reseller.

That business grew quite nicely in the fourth quarter and in the month of December and that pulled the overall piece up and I believe, I don't have that stat right in front of me.

That's between -- It's just north of 15% of our sales and it grew well above the Company number.

My suspicion is some of those contractor-like businesses, you know an electrician could easily show up as a reseller because they're an [attrition], they have a small front room to their business and even though they are really supporting construction they are showing there, so I think there's been some pick-ups in construction that maybe wouldn't be necessarily apparent in all of the published data.

Got it.

Thank you.

Our next question comes from Hamzah Mazari with Credit Suisse.

Please go ahead with your question, sir.

Thank you.

I just have a question on the overall gross margins again.

You touched on mix being a negative impact.

Could you comment a little on how we should think of our vendor rebates, what impact that has on gross margins going forward, and then what is the lag on any pricing adjustment you can put through given the increase in commodities?

Well, I'll explain in a few fashions.

One, what we've historically said about our incentive vendor incentive portion of gross margin, it's around 100 basis points and what you saw as you went through 2009, that kept getting whittled away and then as we got into 2010 that snapped back nicely in the first six months and we're at or slightly above that level as we end the year which again puts us in a nice position for the new year.

So that's one piece of the equation.

The other piece we've talked about when you look at when there is some inflation going on, when there is some fluidity to pricing, one of the things that people sometimes don't like about our business is the fact that our inventory turns about twice a year.

Fortunately for us our gross margins make it, provide for us to get a great returns deal on that inventory.

In a period of deflating times, as we saw in 2009 that beats the heck out of us because you're selling higher priced product on the shelf for quite a few months into a weakening marketplace.

In a marketplace where prices are going up, six months of inventory and maybe 10 or 11 months of import inventory plays out a little bit better in that it affords you the opportunity to see the pricing changes as they are happening to have a better plan for how you're going to react to that price increase or price change and it allows you a three to seven month window of some pricing flexibility.

One thing I will add is when you compare this time to back in early 2008 when we saw the inflation, we have a much stronger team of people here that do nothing but study the pricing, look at what's going on with the market so it appears I believe we'll be able to react much quicker and with better data to the stores because a big part of it is convincing our stores to go out and raise prices to their best customers.

That's not an easy thing to do, especially when they haven't seen their costs go up so to get the source and get out there in front of it I think is a challenge and I think we have people in place that can get that done.

Okay, thank you.

That's very helpful.

One follow-up question.

You guys reiterated 15% to 20% top line growth.

Just curious as to what your assumption is as to what multiple of GDP or industrial production you can grow at and then is it fair to say that 15% assumes store growth at 6% and the 20% sales growth assumes 8% plus store growth or just curious if you can put some assumptions behind that number?

Thank you.

I don't want to punt on the question but I will to a certain degree in that you're probably over-thinking it a little bit from the way we look at the business and what we're able to understand in our business is the trends that we lay out, the sequential patterns to our business.

We also understand the store openings, the growth plans we have as far as adding salespeople, both store based and non-store based and we look at all those pieces and we say, based on this, what do we think is a reasonable way to plan our business and plan our business for the New Year?

Just as we did coming into 2010, in 2011 we come into the year and we say, based on all these things, what's a reasonable range for growth?

We think that's a reasonable range.

If you look at that and say the economy is stronger or there's some inflation, we would hope that would be a range that we would be at the high end if not beating, if the economy were to take a dip down or there was deflation which I'd be surprised by but if those kind of thing happen it beats you up towards the lower end but I can't cite for you the fact that we assume this kind of GDP growth.

What I will say is we do pay attention to the ISM and if we see an ISM number that were to all of a sudden change appreciably, that tends to lead our business by about three months and so it would give us a little room to react as far as some of our expectations.

Okay, thank you.

I appreciate your answers.

Our final question comes from Robert Barry with UBS.

Please go ahead.

Hi guys.

Thanks very much for taking the question.

Good morning, Robert.

Just a couple things on the non-residential construction and market.

Can you give a little more color on how you see that coming back and if that continues to recover, how does that impact mix?

Well, we see it probably -- we're seeing it right now coming back the strongest is in energy related projects, oil refining, power plants, all of the things related around energy.

The other area where we see good building in non-res construction would be healthcare, education and government, where they're building hospitals, schools, college buildings, things like that.

Where it's very weak in the non-res construction would be anything to do with retail, very little warehousing being built, the private sector business, non-energy private sectors very slow.

We don't see that coming back.

You look at the releases coming from the Targets and people like that, they aren't planning on ramping up their store openings any time soon or most of them are not so we're going to work hard to put our energy or our sales energy into those types of projects that the healthcare, energy things, like that.

If it were to come back stronger, if the economy picks up and people start freeing up the pocketbooks, there's no question it would help our business because it's a big sector that's pretty sought.

Margin is about a push between manufacturing and big construction so there wouldn't be much there but it would really just hopefully push us up above the numbers that we're talking about and I think that's basically what Dan just said is we got a boost from a sector or just the overall economy we should see it moving up.

Right now we're not over-investing in construction.

We're just looking at the big projects.

The dollars today are pretty concentrated around big projects like the energy field.

Great.

And then just a second one on the store growth and I don't want to hang on every nuance of how you talked about store growth but I think in third quarter you talked about an 2011 growth rate of 7% to 9% or even 6% to 10% which implies a mid-point of about 8% and 6% to 8% seems a shade lower.

Should we read anything into that?

Is there anything that's changed over the last quarter in the way you're thinking about the store growth rollout?

Not at all.

We're looking at it and we're looking at what we opened in 2010 and what our sales growth was.

We're looking at it for 2011.

We know that there is at some point we're hitting a saturation and we think this is a good growth level.

We are continuing -- probably what you should read into it is that we're more positive about some of our specialty sales areas so we're willing to give up a little bit and we think 7% is still a good number.

We're willing to give up a little bit on that because we had some really good investments that we're making and we're getting positive returns from them.

Yes, that makes sense.

Okay, thank you.

Well, again, thank you, everybody for joining in our conference call this morning.

I hope this combined with our press release is informative for our shareholder base and the analyst community in understanding not only our business in 2010 but a little bit of an understanding of how we're approaching 2011.

Thank you and have a good day.

Thanks, everyone.

Thank you, ladies and gentlemen.

Thank you for your participation in today's conference.

This does conclude the conference.

You may now disconnect.

Everyone have a wonderful day.