2004  $_{ }$ Management’s Discussion & Analysis of Financial Condition & Results of Operations (Dollar Amounts in Millions except Per Share Information and as Otherwise Noted)  The decrease in the gross margin percent in 2003  resulted from several factors. The DIY Business  operated at a lower gross margin, approximately  30%, so the sale of this business caused an  improvement in the overall gross margin. This  improvement was more than offset by (1) the  influence of increases in sales to certain large  accounts and to certain large one time sales,  which were made at lower margins, (2) the  influences of changes in product mix, and (3) the  slowdown in the growth of inventories since  May 2003, which also lowered the savings to  Fastenal related to vendor incentive programs,  including vendor freight allowances and rebates.  Operating and Administrative Expenses— Operating and administrative expenses as a percent of net sales was as follows:  (1) the sale of the DIY Business, which resulted  in a drop of approximately 194 employees (or  8.0%) and (2) tight management of employee  head count. The 2002 increase in the average  number of support employees was amplified by  the DIY Business acquisition.  In 2004, 2003, and 2002, the rate of increase in  occupancy costs was greater than the rate of  increase in net sales. Occupancy costs increased  due to (1) a 16.7%, 12.4% and 14.0% increase in  the number of store locations in 2004, 2003, and  2002, respectively, and (2) the upgrade of store  locations in connection with the CSP initiative. The loss on sale of property and equipment in all  years came primarily from the sale of used  vehicles. The gain on sale of the DIY Business  in 2002 of $5.9, before taxes, was from the sale  of the business acquired in 2001. The extraordinary gain of $0.7, net of tax, in 2002  resulted from the negative goodwill recognized  on the DIY Business acquisition.  Net earnings— Net earnings, growth rates in net  earnings, and net earnings per share (EPS), were  as follows:  The changes each year are primarily due to  changes in payroll and related costs, changes in  occupancy costs, and fluctuations in growth of  net sales in store sites greater than five years old.  The latter drives the Company’s ability to leverage its operating expenses. Payroll and related costs represent approximately  69%, 69%, and 71% of operating and administrative expenses in 2004, 2003, and 2002, respectively. In 2004 and 2003, payroll  and related costs increased at a rate which was  less than the rate of increase in net sales.  The changes in payroll and related costs were  due to the following increases (decreases) in the  average number of employees:  The 2004 increase in the average number of  support people was due to an increase in the  overall store count and the increasing sales  growth. The 2003 drop in the average number of  support employees was amplified by two events:  As indicated earlier, the net earnings in 2002  included a gain on disposal of the DIY business,  before tax, of $5.9 and an extraordinary gain on  acquisition, net of tax, of $0.7. The net earnings  growth rate before the gain on disposal of the  DIY Business and before the extraordinary gain  on acquisition was 18.2% and 1.5% in 2003 and  2002, respectively.  2004 2003 2002 Sales personnel  13.8% 1.6%  6.1% Support personnel  21.2% (13.2%) 11.4% 2004 2003 2002 Net earnings  $131.0 84.1 75.5 Percentage change  55.7% 11.4% 7.7% Basic EPS  $1.73 1.11 1.00 Diluted EPS  $1.72 1.11 1.00 2004  33.6%  2003  35.5% 2002  37.0% 2004 ANNUAL REPORT – PAGE 12 