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Settings.settings generates Settings.Designer.cs which presumably generates app.config which then is copied to output directory as Foo.exe.config. When I distribute the application without the config file, nothing bad seems to happen. So, what is that file for?
If you don’t have the config file, it uses the default values from the designer. However, the config file allows users/administrators to easily change settings – such as the server you talk to, themes, etc. If you don’t have the file, where would you expect those settings to be stored?
You can have per-user settings as well as per-application settings, which are stored in different locations.