Good day, ladies and gentlemen, and welcome to your Fastenal Company 20 10 Second Quarter and Earnings Conference Call. At this time, all lines are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. And as a reminder, this program is being recorded. I would now like to introduce Ms.
Ellen Treaster. Welcome to the Fastenal Company 20 10 Second Quarter and Earnings Conference Call. This call will be hosted by Will Overton, our Chief Executive Officer and Dan Flores, 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 the Fastenal Investor Relations homepage, investor. Fastenal.com. A replay of the webcast will be available on the site until September 1, 2010 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 could 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. I would now like to turn the call over to Will Overton. Go ahead, Mr. Overton.
Thank you, Ellen, and thank everybody for joining us today. Also thank everybody for the support you've given us over the last several quarters because things have been a little tougher and we're starting to bring it back. I'm very proud to report that we had a nice quarter. The 2nd quarter turned out very well for Fast Snow. Our sales were really on track with where we thought they would be.
If you recall back to our January conference call, Dan and I talked about the sequential trends and where we thought they would come out. And after the call, we got some people that were cautioning us on being a little bit optimistic. But fortunately, they played out exactly where we thought they would be. If you look at the trend line, I believe 5 out of 6 months have been at or above the sequential pattern, historical sequential pattern. June came in right at 21.1%.
At the end of May, we thought maybe June would do a little bit better, but actually as it turned out, I think May was just a blockbuster month. We had a lot of things lined up for us. So we're not at all disciplined with June. May was just a spectacular month. The sales really were driven by our manufacturing customers, which were up 29.8% for the company or for the quarter, excuse me.
Very, very good pattern. Construction customers did come back just a little bit. They were way down in the Q1, came back to flat to plus 0.5%. So that's actually a very positive sign. We don't see a lot of activity there, but in some of the areas like oil and gas and some of the other more mechanical areas of construction, we are seeing some life coming into that business.
Our active accounts have not been growing the way that we would like them to. They were up 3% for the quarter. We've done a lot of research trying to understand that better and what we found, it's really being driven by the lack of actives is being caused by 2 things. One is that our construction customers, a lot of the residential, which isn't a big piece of our business, but it's a big piece of our actives and the small commercial contractors are just not showing up with the frequency they did at one time. Many of them are just very not a lot of business.
The other thing that's hurting our active accounts is that we've opened fewer stores and new stores have always been one of the greatest drivers of active accounts. So all of the actives are only up 3%. We're pretty comfortable with where we are after we've looked at the data. And on the manufacturing side, we have very nice growth in actives and that's driving that 29.8% growth in manufacturing business. Gross margins came in at 52.1 percent right on track of where we thought they would be.
And Dan is going to give a little more color later in the call telling you where the breakdown is, but we're improving in all areas of our business with the gross margin and we're comfortable that that trend will continue going forward based on everything that we're seeing. I'm very happy with the progress or the results that we're able to show on expense control. Our expenses were up 7.9% against the 20% sales growth. And if you take out the labor, we did a great job in pretty much every area of expense control. The reason I say take out the labor is the 2 components of labor, our base salary, our standard pay was in great shape, but our commissions and bonuses were way up and that's a great problem.
It's great for our employees to come back and make good bonuses and good commissions and that's a problem that we would take every day. So overall expenses up less than 8%. I think everybody in the field, everybody on the Fastenal team has done a really nice job of holding the line when things are picking up. And it's not easy at this time because we've been really tight for about 18 months, it seems like everyone's rallying to make that happen. At the beginning of the year, we talked Dan and I and all the regionals and senior people talked to people all year long and we said we really have if things go well, our expenses are going to go up.
They're going to go up for 1 of two reasons, either we get a little bit loose and just spend the money on miscellaneous things or we stay real tight and we spend the money on bonuses. And I'm happy to report to you and to the Fastenal employees that we're able to spend it on bonuses, not the other things, so the people did their job. Headcount standpoint, our headcount was up a little bit. I actually had hoped that our store headcount would have grown a little more. We will see headcount growth throughout the year, not much in support.
We're going to hold very tight in support and distribution. We may see a little bit in the distribution as volume picks up. But through the rest of the year, I could see between 305
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Out the Store Site Most of that at the store will be part time employees and a handful of full time salespeople. Another group of sales specialists are people that we're going to be adding and these people will come out of our stores and be replaced by newer employees is we're adding between 8085 sales specialists and some of those came into the Q2 and the rest will be added mainly in the 3rd Q4. And these people will be sales specialists in various areas from government sales, vending sales, manufacturing sales, product specialists that will be out working with our customers, driving business through our stores to help drive up the average store size. We've had some very good results with people we put in earlier in the year and so we're going to continue to add that again to drive people or drive revenue through our existing store sites. Another area that I'm very happy with our progress is our pathway to profit or our pre tax profit goal.
If you look on Page 6 of our earnings release, we have the chart that shows the profitability per store or per store size. And the one area that is the probably the best progress that we've made is in the small stores. And we had talked about that in both the 1st and the second quarter conference calls that we've been working very hard in that and probably the calls last year. Working very hard in those small stores to reduce the expenses and get them to grow faster. So we've really made progress in 2 areas.
One is we've greatly reduced the number of stores in that category and the other half is we've cut the losses by half in that group of stores. But in every category, our profitability has moved up nicely. The 30 to 60, 60 to 100 to 100 as you go down that list, everyone is up in, I think, a minimum of 2 percentage points over the previous year. And that's due to hard work, good expense control, improvement in margin and everybody just focusing on their business and taking it looking at one store at a time to improve the profitability. So I'm not ready to say that we're right back on track to pathway to profit, but we're getting really close and I think we're going to start marching forward assuming that the economy holds out for us and so far so good in that regard.
The last thing I want to touch on is store openings. We were very cautious in the second quarter opening stores. And in June, we thought we would open a few more stores. One thing that's happening there is we have to break the district managers loose a little bit. We've been really tight on them with adding people and controlling their expenses.
And so when things started to pick up, they were holding onto the rope pretty tight, didn't want to let go. And so we have to nudge them to open the stores. They're doing that. We believe that we'll open between 8095 stores, excuse me, in the back half of the year and we'll really be right back on track with our pathway to profit. That would give us 6% to 7% store openings for the second half of the year basis, and we're comfortable that we can get that done.
With that, I'm going to turn it over to Dan. Dan is going to give you a lot more color on the financials and then when he's done, we'll open it up for questions. Again, thank you very much for your support. Thank you, Will, and good morning, everybody. I will touch on some of the things that Will touched on.
I'll try to get a little more color without doing too much. But just some highlights, as Will mentioned, and I'd refer everybody to that table we have on the bottom of Page 3. And again, we started talking about this back in January. We looked at a period in history. The period we chose was 90 8 to 2,003.
We felt the characteristics of that time frame had many similarities with this time frame. We had a prolonged period of industrial slowdown that started with the Asian flu in 90 8. Really continues until the 2,003 timeframe when it started picking up. We pulled back our store openings in that timeframe, so a lot of similar dynamics in play. And as you can see on the pattern, 5 out of 6 months we're at or above it.
February was below because of weather impacts. May jumped out a little bit. Again, that was just a blockbuster month. And so very pleased with the progress we've seen. And based on what we've seen thus far in July, anticipate that trend line to continue and see how that plays out.
From a gross margin standpoint, and this is a sequential comparison, we picked up 100 basis points of additional margin gross margin. And if I split that apart, about half of that improvement came at what I'd consider the excuse me, 30% of that improvement came at margin. About 20% of it came at the organizational level, what we'd call the profit of our buying programs. About that's about half the improvement, those two pieces combined. We talked earlier in the year about rebates continuing in our vendor programs, which are really volume centric programs, which were mauled pretty severely in as we went through 2,009.
We made nice progress there from Q4 to Q1. We continued to make progress there from Q1 to Q2 picking up about 25 basis points of our improvement. So that's 75% of the improvement. The last 25% is all the other stuff. We continue to make great progress in this timeframe with what we're doing with our freight programs.
We continue to make eke out 5 basis points here, 8 basis points there of additional improvements. And if you lump them all together, it adds up to about 25 basis points. So there's 100 basis points of improvement. As I look at that going forward, I think we have nice momentum on the transactional side and the organizational side. The rebate piece, we still have some incremental gains, but they're becoming more marginal because we've really recouped back to historical patterns.
As Will mentioned in the end market arena, our manufacturing business when I compare Q1 to Q2 on a year over year basis, our improvement almost doubled. The non residential piece, beginning in May, that flipped positive. It's not helping our growth, but it's not going backwards. And so and we don't see anything in the near term that would cause that to change. But that's again, when I get back to that trend pattern, we talked about the sequential patterns, that's really inherent in what we're looking at is continued weakness in the construction.
I won't touch on it anymore other than as Will mentioned our store statistics, meaningful improvement in all categories, particularly proud of that first group, because that's not a case of business coming back or manufacturing business picking up that we saw the improvement. When you look at those stores doing less than 30,000 and the fact that our losses in that group dropped in half from a year ago as a percentage of sales, That's just hard work by our district managers and focused effort to say, I'm going to break these stores, I'm going to break them even faster And they're making really nice progress in that area. The pathway to profit information. One item I'll give a little color to FTE headcount. If we look at since we began the pathway to profit and I break out that information in the middle of the page, our store FTE is up about 11.5%.
So during that timeframe, we've continued to invest heavily in store personnel as we move down that pathway to profit. Obviously, took a bit of a step back in the last 12 months because of the economy, but continue to invest in our selling capabilities at the store. The remaining headcount is about 4.8% down. If you look at the last two groups combined from where it was in Q1, 2007. And that really plays into the fact that a lot of our support headcount are predicated on store locations, not sales, and we're getting very nice leverage there.
One item I'd point out, if you look at the distribution and manufacturing numbers on a year over year basis, you would see they're up. That up is caused that increase is caused entirely from the Holocomb acquisition. If you strip that out, that headcount would be down nominally from last year as well. As Will mentioned, operating and administrative expenses saw really nice leverage. And I'll share a few pieces of information.
As everybody knows, our earnings are up roughly 60% on a year over year basis. If we look at all the incentive compensation we pay out, store commissions, profitability bonus, project area bonuses, etcetera, and you lump all those together, our incentive comp was up almost 80% on a year over year basis and our profit was up 60%. So we did a nice job. When I think about our support areas, when I think about our store personnel, in 2,009, a lot of conversations talking folks through about what was going to happen as that year played out. And a lot of it was believe in where we can go as an organization and we're to get through 2,009 together.
And I think Q2 of 2010 is a nice exclamation point to being through with 2,009 in that we were able to reward our personnel for a job well done as we went through the year. And I believe a lot of links to that. Also happy to say our profit sharing bonus, which disappeared in 2,009 was up nicely when I look at the 2010 year to date and the Q2. One other item I'd touch on in the non payroll operating expenses. Our occupancy improved sequentially as we would expect with regard to the heating season.
We still have a lot of opportunity there and a lot of work to do and we would expect to see continued improvements in our occupancy expense. Interesting statistic, I was looking at our fuel consumption over the weekend. And since 2,008, our fuel expense and that's a piece of this is in operating expenses, a piece of this is in margin because the diesel fuel in our semi silicon margin, that is down 38.3% from the Q2 of 2,003. If I average out the drop in fuel prices, both diesel and gasoline combined, they're down about 26%. So we did a nice job of picking up a whole bunch of efficiencies in that 2 year period above and beyond just the unit cost differences.
Working capital, accounts receivable up 23% on a June to June basis, essentially in line with sales growth. We were at about 21.1% in the last 2 months. So a little bit of added a lot of that is really driven by the fact that our industrial business is growing faster, our large account business is growing faster as well as some of our international business is growing faster. And some of those customer bases have terms that go slightly longer and then pulls up our days a fraction of the day, but very nice job on the accounts receivable side. And our bad debt expense essentially dropped in half from where it was running in the timeframe of last year.
Inventory, that's one item on the quarter I'm frankly disappointed in. If I look at our store inventory, the store component, year to date that's down about $2,000,000 That should be down around 10. And so when I look at what we've done year to date overall with our inventory being up about $14,000,000 I'm disappointed that it's that I still we still have very nice momentum. The $2,000,000 that we have taken out occurred in the last several months. And so we have nice momentum, but we need to push hard in Q3 and Q4 to continue to manage that inventory number as we move forward.
Cash flow standpoint,
done
a nice job year to date. 96% of our earnings have is our operating cash flow as a percentage of earnings and free cash flow is just north of 70%. And if you recall from previous calls, our target number is 80% to 90% for operating cash flow as a percentage of earnings and free cash flow of 50 to 60 and we're well above those numbers 6 months into the year. With that, I will turn it over to the Q and A.
Thank Our first question comes from Tom Hayes from Piper Jaffray.
Great. Good morning, gentlemen.
Good morning, Tom.
Just wondering if you could elaborate a little bit on your expectations on the you had mentioned some great performance on the profit by store size. Just your thoughts on timing on those smaller stores and your expectations on timing to get those towards more breakeven?
Well, that size of group, the 0 to 30 will probably never be at a breakeven. What they do is they migrate out and then we open new stores. So that pool is somewhat consistent, if that makes sense. Okay. But based on where they are, we think that the operating losses should be anywhere from 8% to 12%, not 24%.
We were putting additional expense and they're trying to drive growth and we weren't getting much progress or seeing much improvement in the growth. So we backed up the expenses. They're still growing at the same rate, they're spending less money to get there. Okay. We don't foresee them going to profitability.
If you think about that group, the average store in there probably does around $20,000 a month. So there's about $10,000 of gross profit dollars and there's right now there's $12,000 of operating expenses. That math doesn't really change. The fact that we took 12% down from 14% a year ago was quite an accomplishment.
No, it is. And you've done a great job across the whole spectrum of store sizes. Just as a quick follow-up, we haven't talked much lately about the private label progress as far as your growth in that area. I was just wondering if you provide any kind of update as far as new lines or the growth rates in the private label versus kind of the broader spectrum of products?
I actually don't have the growth rate on it, but we continue to work hard developing our private label brands and continue to find success and higher margin. But the actual numbers I don't have with me.
Okay. Thank you.
Our next question comes from David Manthey from Robert W. Baird.
Good morning. This is actually Luke Chunk on for David this morning. My first question is, as we're getting back on track with pathway to profit here, could you maybe talk a little bit about how you're thinking about contribution margins going forward in light of the very strong 44% year over year that we saw this quarter?
Good morning, Luke. When I look out at Q3 and Q4 as an example and I look at year over year basis and look at sales growth, as you see in that table on the bottom of Page 2, when you look at those patterns, we're getting to the point where we get midway through Q3, we start to anniversary the comparisons. And then our real operating leverage is getting back to 2 things, pathway to profit, because our growth now is on a constant year over year basis. And the second piece is our ability to enhance our gross margin. We were very pleased with the 44%.
We're hopeful that when we look out to the balance of the year in Q3 and dropping off a little bit in Q4 that we're able to maintain upper 30s type of incremental margin.
That's helpful. And then if we turn to pricing, I know you mentioned in the release some the bias would be positive this year. And we've been hearing from some of our contacts some higher faster prices coming over from Asia in the second half. How do you see that hitting the market as we move forward?
There are some well, there were higher fastener prices. They've kind of backed off a little bit recently over the last month or so. It's backed up a little bit. We see pricing going up, but it's going to be in the low single digits. The fastener product line has a long tail because people have a lot of inventory.
If we see any benefit, it will be in this later half of the third quarter going into the fourth quarter as we see a little bit of benefit. But right now, it's a little bit murky because of the uncertainty in the overall economy. It's not like it was back in late 2007 where the angles are going up at just a huge angle. It's slight increases here and there.
Okay. Thanks guys.
Our next question comes from Adam Uhlman from Cleveland Research.
Good morning, Adam. Hi, guys. Good morning.
I was wondering if you could just give us a little bit more color about the sales trends that you've been seeing. If you could talk about sales by geography across the what would you see in Canada? And I guess Mexico is still kind of small for you. And then also if you could just talk a little bit more about how you guys are growing your non residential construction sales right now, if you've done any work and how much of that is new account growth versus better oil and gas and mechanical customers, as you mentioned earlier? I can touch on the geographical.
As far as the construction, we don't have all the fine detail on that. But geographically, we've actually seen a nice pickup across the country. There's no area that's weak. We're particularly strong in Eastern Canada. Western Canada is growing about at the same level as the other part of the business.
The one area, I guess, if there was a one area that we're seeing a little bit of weakness is basically the Rocky Mountains, basically from Montana to New Mexico, that strip is a little bit soft for us. But some of that is that we did real we're doing better last year. It didn't taper off as fast and so it's not coming back as fast. The brightest spot that we have is our international business. Asia is doing very well for us.
Singapore and Malaysia, China is growing well above 50% and we're seeing just a lot of good things going on there. But in the U. S, it's really pretty even coming back other than that Rocky Mountain area. Okay. And as far as the construction, most of the large jobs that we're seeing are energy related either coal fired power plants are going on.
There's a lot of oil and gas in North Dakota, some construction up there putting in wells and infrastructure. We're doing a lot of Most of the Most of the business that we're seeing now is coming from existing mechanical contractors that are doing well. The part of commercial construction that's missing is you just don't see a crane up in downtown in the cities. Another area that we've really seen basically completely gone is where they're putting up big boxes throughout the first half of the 2000 to 2,006. There was a Target, a Walmart, a Home Depot going up in about 100 or 200 of our cities at any given time.
And that is really nice business for us because it's usually local regional contractors and they're walking in the store. If there's a Home Depot going up, you'll pick up $3,000 to $5,000 a month of miscellaneous business until the project is done. That business is just not existent today. Okay, great. Thanks for the color.
And then just a follow-up on the international business. Some time ago, you had some aspirations of opening up quite a few of international stores. Can you just update us on your thoughts there? What Dan is going to show, he's pointing out the number, but I can't read it. Yes.
International locations, when I look at this year, close to almost 10% of our openings are international. And so we look at that from a percentage standpoint, that's meaningfully above where they are as a percentage of business. And that trend is going to continue to broaden. The limiting factor always on locations, especially I think of international business is 2 things. 1, when I think of our I'm going to exclude Canada when I say this because Canada is far enough along developed that these two pieces don't really come into play.
It operates very much like our U. S. Centric store based business. But when I think of international, I always think of the 2 limiting factors. 1 is always the development of people and the ability to open stores.
And that's the limitation that we've always had in our organization. The second one is when you look at particularly our Asian business, our model there is a little bit different, which is more of an OEM centric faster model, where we have fewer locations with larger business per location. So the dynamics of pure store openings are a little bit different, but we will continue to invest heavily in people into those international locations. Great. Thanks, guys.
And on a positive note, the international business is trending from a profit standpoint is trending atorabovethecompany numbers. So that's not a concern.
Our next question comes from Brent Rakers from Morgan Kegan.
Good morning. First, just there's a comment in the release that reads, payroll was tracking in the 60% to 65% of SG and A range through the Q1 and now it's moved back to the 65% to 70% historic range. I was hoping you could maybe give me a little color because obviously there's not that kind of sequential jump Q1 to Q2, but I was hoping you could just talk through that a little bit more detail. Well, I mean, if you look at it historically, when you look at all the components of payroll, base pay, bonus pay, profit sharing, our school of business dollars, our healthcare dollars. Historically, we were in that upper range.
Last year, unfortunately, because if you think about the business model and you think about the components of operating expense, that is the most variable expense we have. Occupancy in the short term is much less variable because you have your locations and your expenses, your expense. You can change the thermostat, you can renegotiate leases, but those are that's about it. You aren't you still have a base of locations. And so that dropped last year because that variable expense dropped dramatically.
When you look at on a year over year basis and a sequential basis for that matter, earlier I mentioned that our profitability, our commissions and profit bonuses combined were up almost 80% on a year over year basis. That combined with our FTE stabilizing and growing on a sequential basis is causing that expense as a percentage to grow faster than everything else. And so it's getting it's moved back to where its norm is. Last year wasn't the norm. Okay, great.
That's helpful. And then Will, just maybe just to make sure I want to clarify this. The target for the second half of the year in terms of FTE additions, 300 to 500 plus you also referenced another 80. So that means maybe approximately 400 to 600 sales force oriented additions on an FTE basis second half. Did I hear that correct?
About half of the 80 have been put in place. So it's correct if you just took it down by you take it down by 40 to 50 and you're right. Okay, great. And then just one and most of that understand though that most of that at the store level will be part time. So as a percentage of labor, it's not nearly as high as it sounds because it's at a lower cost level, a lower rate.
Okay. And then maybe just a follow-up just to kind of tie what Dan said earlier. There are also talk about keeping the non store based headcount relatively constant with where it is now. Is that as a percentage of total numbers or just constant with current levels because as you add more stores, would that provide the need for more additions there? We believe we can hold our support labor out.
There will be some additions in distribution, but they will not be nearly as high as our sales growth should be. We're going to work very hard to hold the support pretty much flat and whatever dollars we have, we want to put them into sales positions growth drivers. We really believe if you can only invest in certain parts of the business closer to the customer will give us a greater return. And we found through the slowdown of 2,009 that do we compromise a few things when we have fewer support people? Absolutely, we always do.
But our people have got better prioritizing and really getting things getting the things done that are necessary that are most important. So hold the support very tight, invest in sales and see how it plays out and grow our business.
Our next question comes from Sam Turckesh from Raymond James. Good
Dan, I thought I recall last quarter you mentioned that you expected the rebates to continue to improve in terms of having a positive contribution as the year progressed. And now it looks like was there a pull forward or an acceleration of that timeframe into Q2? I'm just trying to get a sense of juxtaposing what you said last quarter with what you're looking at now.
Historically, that component of our margin is worth about 100 basis points. And last year, what happened as we went through the year, that 100 dropped down to in the Q4 it was at about 30 basis points. We lost about sequentially through the year we lost about 70 basis points. We gained about half of that back in the Q1. Q1, we had about 65 basis points.
That number, if you look at what we earned in the Q2, we're at about 97 basis points. We're basically back to 100 basis points. Points. A little piece of that sits in ending inventory because of the way turns work. And so in our P and L, we picked up 25 basis points and we're running right now at 90.
I see no reason why we won't get back to 100. When I talk about the contribution going forward, I see that being at 100 basis points. I didn't think 10 basis points sequential improvement was enough to talk about.
Got you. Very helpful. Thank you. And then the with respect to the new store productivity, it's very impressive getting the younger stores less of a loss leadership standpoint. To talk about the new store productivity from a sales basis where you're looking at from stores maybe a year old, what the average sales rate is for those stores versus perhaps a year or 2 ago?
Is it a combination of additional leverage? Or is it more heavy lifting at the store level irrespective of sales trends?
Yes. I don't have those stats in front of me, so I'm going to talk a little bit from the hip. As Will mentioned earlier, when we have improving trends in sales growth, what happens is stores graduate out of that group and they move to the 2nd group and then to the 3rd group, the 4th group, the 5th group, etcetera. So when I look at that group, could the average store in there be 5% or 10% higher than it would have been a year ago? Maybe, but that wouldn't really change that number because of the piece that would be getting paid out and added commissions and we'd be adding people because that store is growing or adding hours to the part timer.
It really changed because we lowered we essentially we took a couple of grand worth of monthly expenses out of those stores because the district manager decided it wasn't bringing value to my business and I'm going to do it without it. Now the fact that we might have given the DM a nudge to do that, that's irrelevant. The DM took dollars out of that store because if the store is growing faster and it's getting hitting to a higher level, it just it that's what drives us to graduate from that group.
Got you. Last question, if I might. Will, you mentioned last quarter that your econometric model was
suggesting that organic
growth rates would perhaps would perhaps push that out a little bit or bring it forward? Or is that still the timeframe you're looking at?
You mean year over year sales growth numbers? Yes, sir. Actually, I'll let Dan. Dan is jumping on me here. Yes.
Actually, if you look at that trend pattern, once we past July and into August, you really see a pattern that starts to mirror that historical pattern. Collectively above the historical pattern. Yes. But then so the growth then is on more of a steady state business. That's what I was alluded to earlier when I was talking about the path to profit and what's going to drive our profitability improvements in the future.
When we talk about September October, that's really a comment not unique to 2010. That's every year in our business. Those are our peak sales months on an absolute dollar basis for the year, because our business is always running forward and growing. What happens in November December is there just aren't enough business days and you have such so many holiday impacts with businesses that are shut down for part of the Thanksgiving week, they're shut down for the Christmas and New Year timeframe. So the quality of the business days in November December plus construction business slowing because the seasonality fall off.
And historically, we look at our business and once we get through October, we now are developing our plan for the next year on our sales trends because January October, really September, October, the daily average in that timeframe tends to mirror over historically what we're going to see the following January. So it was an absolute dollar peak, not a sales growth peak.
I understand completely. Thank you much.
Our next question comes from Hamzah Mazari from Credit Suisse.
Thank you. Just wondering if you could comment about sales trends between your larger accounts versus your smaller customers as well as is it fair to say that everything you're seeing in the market right now is just a strict sell through? Your customers are still pretty cautious regarding restocking. Any color you can give there would be appreciated. Thank you.
As far as the large accounts versus the small accounts, we're seeing better growth numbers out of the large accounts, but it's probably more about what type of account. Typically, our manufacturing customers are our largest customers and they're growing nicely. And many of the small accounts, as I said earlier, are the residential and non residential contractors, which aren't doing very well at all. So I think it's more about the type of company than what the business that they're in versus the size that they are because even our small manufacturing customers are growing nicely. And what was the second half of your question?
The second half was about sell through versus inventory. This is a belief. I don't know this to be a fact. But I know businesses that I talk to, people that I talk to, nobody is too excited about putting their neck out too far right now on two fronts. I don't think people are adding are willing to put their neck out adding people too fast right now, but they're not there's enough uncertainty still about the future.
And so you're not seeing a lot of headcount added by any company. The second one is inventory. I think a lot of people have a very good memory of 2,009. A lot of businesses got squeezed really hard where they have a certain inventory level to support their business. The business falls through the floor and all of a sudden the stuff is coming in the one door is greater than the stuff that's going out the other door.
And a lot of companies built up inventory and that's what amplified what happened in 2,009. And we were no different late in 2008. Our inventory grew dramatically and the inventory we dropped in the first half of 'nine was really working off the bubble that built in the last 3 months of 'eight. And so I don't believe people are adding to their inventory other than to meet their shipping needs of the next few weeks or the next month depending on their business cycle and their supply chain. And so I believe the business we're seeing is real and it's not being lifted by inventory build.
If you think of the historical pattern of what Dan is talking about with customers stocking less inventory, it goes all the way back to the early 90s, the early recession, early 90s. Coming out of that, companies started just in time inventory and a whole bunch of trends throughout our industry to lower what they had. Then in the early 2000 slowdown, it became much greater. CFOs are getting involved in their businesses, call it Class C items and say, you know what, we don't need that tool crib with $600,000 $800,000 $1,000,000 Let's get rid of that and let the distributors do it first. That has been good for our business for 20 years.
We believe this trend is even stronger because the hit was even worse with the economy and where I'm hearing and I've been out talking to lots of customers, what can you do to close down my 2O crib and you guys just take care of it? That is a very positive trend for Fast Knoll because we have more inventory closer to more customers than almost probably than anyone out there. So we're very optimistic that no one will ever rebuild their inventory and they'll depend on Fastenal to be their supply store for their factory. So it's very positive. You're welcome.
Thank you. With that, I will close out the call. We're at 944. Close out the call by again thank you to shareholders listening to this call for your support and belief in Fastenal over the last 18 months through some pretty trying times. Thank you to the employees that are listening to this call for weathering through 2,009.
It wasn't a lot of fun. And a last item I'll throw out there and this is from I've been traveling
for a
month the last couple of months and I was with Ken Nance who heads up our business in from basically Dallas and then into Southern California. And when I was out to visit with Southern California DMs back in May, very impressive group. And he said something and he repeated it yesterday in the Board meeting that I thought was interesting. And one thing he really preaches to his guys, I'm not sure if he read it in the book or if he came up with it or if he heard it from somebody else, but he said, first thing I always impress upon my folks, you have to believe that we can do something. Once you believe it, then it gets a lot easier.
You plan, you execute and you repeat. That's all we do every day. Will, anything you want to add? No. Thank you very much.
Thank you.
Ladies and gentlemen, this does conclude today's program. You may now disconnect and have a wonderful day.