Good day, ladies and gentlemen, and welcome to the Fastenal Company first quarter 2015 earnings results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance, please press star then zero on your touch-tone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Jan DeGallier. Ma'am, you may begin.
Thank you. Welcome to the Fastenal Company 2015 first quarter earnings conference call. This call will be hosted by Lee Hein, our President and 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 Lee 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 website until June 1st, 2015, 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 Mr. Lee Hein.
Thanks, Jan. Good morning and welcome to our Q1 2015 call. When you look at it's really two stories. One of things we can control and things we cannot control. Obviously, the things outside of our control are the currency, weather, oil and gas, and the port situation in California. The things we can control, I think when I look at the Fastenal team, I think it was a solid quarter. With that being said, I will always say this, that when we see single-digit revenue growth, we're not satisfied, nor are we happy. With 8.8% growth, we did some things, and I think hats off to the Fastenal team when you look at some different areas.
When I look at the fact that we stabilized our gross margins, I know there's been questions there, but I look at the fact that we were able to do some things there. A lot of that is truly execution when you really look at what our people are doing at the point of transaction. The second thing is we challenged our Fastenal team to really live within our means. What I mean by that's an old school BK philosophy that if we don't need it, don't buy it. You saw that play out in the first quarter when you look at meal, travel, and entertainment. We made a conscious decision to spend our money on labor in the stores. We said no to things that may sound nice and may actually help us long term in some regards.
Today, we made a decision to invest in our stores, to fuel our growth, to drive profits, and that's what you saw play out on the expense side, even when you take out the tailwind on the fuel. The other thing, some other highlights, we grew earnings 14%. That's a nice leverage when you consider we're at 8.8 on the daily average growth. More importantly and more impressive, I think, is the team was able to put up 32.2% in incremental margin growth. Again, a number that I think most companies would be thrilled with. When you look at the added energy in the store, this is where we really got to get down to what's truly happening, boots on the ground. From the end of Q3 2014 up until the end of Q1 2015, we've added 1,000 people into our stores.
Now, most of those heads came in the last half of Q1. January, folks, I got to tell you, January, coupled with the weather, the fact that the kids aren't back to school, it's a rough month for recruiting. In the second half of February and in the month of March, that's when you started to see the team really start to bring people into the stores. We'll continue that to looking at a few of our stores. When I talk about that, our large stores, our stores with a high number of customer, or we would just say a lot of traffic. We're looking at adding products into some of those stores to also build invoice, build customer satisfaction, all the things that we try to do every day.
Lastly, I think a shout-out really to Nick's team on the inventory side, coming in at $867 with inventory at $869 a year ago really is again a testament to the Fastenal team and what we can do when we put our minds to it. With that-
For those of you that were wondering, he's referring to Nick Lundquist and the team on the supply chain. They did a really nice job of managing the inventory in a tough environment. Typical to prior quarters, I'm going to reiterate a few of the points made and then touch on a few additional. I have the opportunity to talk to a lot of folks in the Wall Street community over the course of the months. One confusion there's been, and what we talked about in the January call, we really are focused on adding energy into the store to free up the time of our salespeople to get out and sell more. As Lee mentioned, in the last 12 months, we've added more than 1,000 people, 1,067 to be exact.
We intend to keep adding people to the store level. Internally, the way we've described to our folks is we have just under 300 district managers in the organization. We'd like to be in a position for each of those district managers to, on a net basis, add an employee into their business each month. Most of that hiring is going to be part-time. We continue to want to beef up our ranks on the part-time. It's really a means for us to recruit long-term, because we go into two-year technical colleges, four-year state colleges. We recruit people with a year or two years left of school with the hopes that when they graduate, they can come work for us full time, and we can really hit the ground running.
We have the dollars to put a lot of training into them during their entire cycle with Fastenal. If we added 300 people a month and, say, did it for hopefully 10 months of the year, maybe nine months, you'd be adding about 15% to your FTE base in the business. You add 3,000 people, they work about a little less than 20 hours a week. You start with a group of 10,000 FTE, you add 1,500 onto that, 15%. I don't know if when the dust settles at the end of the year if we'll hit that 15% number or if it'll be closer to 12 or 13. The economy's going to dictate a little bit how hard we push on that.
That's our intention, to invest heavily into time in the store and free up our salespeople, who are, quite frankly, the best in the industry, free up their time to get out and sell. As Lee touched on, quite a few of those came in the last, really, two months. In the first quarter here, we added about 614 people into our store locations. A little bit in the release, starting on page five, talk about the environment. Tough environment out there. Our sales growth softened as we got deeper into the quarter. Weather hit us hard in the January-February timeframe, oil and gas, and some of our customers that are involved with export markets. The currencies are, the strong U.S. dollar is not helping export. Our business did weaken as we went through the quarter.
You really see it showing up in the industrial, are producing fewer widgets and therefore they need fewer fasteners. The non-fastener business still maintained double-digit growth. It did weaken. It will move directionally with the other business. That's a more resilient piece of business for us. Part of it really stems to the fact that it's heavily influenced by our vending initiative of the last five years. Starting on page 10, we talk about the earnings, probably the things that jump out for me when I look at it personally is I frankly think it's a pretty impressive report. I'm the first one to let our folks know when we've had a weak quarter. I'm also the first one to let them know when we've had a strong quarter. I think from an execution standpoint, we put out a nice report because we executed well.
We added, in the last 12 months, over 1,000 people into our stores. We managed our labor expenses well. We managed our non-labor expenses even better. We were helped, obviously, by the fuel and gas prices in our business, but that was a known item for everybody. Even outside of that, we did a wonderful job managing our business. Finally, cash flow. Cash flow was very strong. Partly, as Lee touched on, we did a nice job with our inventory, but a strong performance looking at all aspects of the cash flow statement. Some things that might be worth pointing out. Late yesterday, we announced our second quarter dividend of $0.28 a share. That is consistent with our dividend in the first quarter. Late March, we announced that our board had increased our repurchase authorization for buying back stock to 4 million shares.
Just to give you a brief history on that, in January, they established a 2 million share authorization. From mid-February till the latter part of March, we spent and bought back 2 million shares. We spent roughly $82 million. We bought back stock at just under $41 a share. This depleted that authority. Therefore, we asked our board, and they agreed, to establish a 4 million authorization to use going forward. We have been in the process of increasing our credit facility, so we're in a position to exercise that if the market sees fit, and we'll see how that plays out. I think the report is pretty straightforward this quarter. There's not a lot of noise to it. Obviously, the top-line weakening is probably the most noteworthy thing. Again, everybody has seen January and February numbers, there's no surprises there.
I have one item I'll throw out as a reminder. We'll switch over to question and answer. That reminder is just a reminder, folks, our annual meeting is next Tuesday at 10:00 A.M. With that, we'll turn it over to Q&A.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. In the interest of time, we are asking that you limit yourself to one question and a follow-up. Our first question comes from Robert Barry with Susquehanna. Your line is open.
Hey, guys. Good morning.
Hey, Robert.
I wanted to start by asking about gross margin, because you mentioned that you had stabilized it in the quarter, and that's a positive, but it sounds like the language in the release sharpened a little bit this quarter and now seems to call for ongoing decline as average store size grows. Since you're not adding stores, it sounds like essentially saying gross margin decline as the business grows. Can you clarify what the expectation is for the gross margin going forward?
Yes, I'll take that one. I don't recall if it was the January call or the October call, but in that previous call, one of the things that I don't know that people always appreciate, we've talked about our pathway to profit table for years. In that pathway to profit, as our stores mature, they become more profitable because we dramatically leverage the fixed cost structure of our business. The flip side of that coin is, if we're visiting a $50,000 store, you don't have very many $20,000 and $30,000 a month customers in that store. I'd be surprised if you even have one. You visit a $150,000 store, you could have several. You could have three customers doing $20,000, $30,000 a month. Those customers, first off, they have more ability to negotiate pricing.
More importantly than that, we have the ability to go after that business in a different way, because that market's a little different. You go after that business because you have more predictability of what your need is, and you can be a little sharper with your pencil, because you know that those revenue dollars and more importantly, those gross profit dollars, while there's some added expense to serving them, you're still in the same building. You're still the same semi delivering product. When we move from a $100,000 store, if you look at all of our stores over 100,000, our average store in that group is about $165,000 a month. Our gross margin in that group, I'm just reiterating what we talked about earlier.
Our gross margin in that group is about 90-100 basis points lower than the rest of our stores. However, our operating expenses drop off around 450 basis points. That $165,000 store has profit relative to sales dollar. It's 350 basis points higher, there's some trade-offs. You're giving up a little bit of gross margin, you're picking up an operating leverage. We like that trade-off. Once we popped above 100,000 a month in sales, as we move further away from $100,000 a month, I would expect our gross margin to decline. I'll take that trade-off of $1 here for $4.50 over there.
Yep. It sounds like the outlook for gross margin is essentially a secular decline, but you expect to more than make up for it at the operating margin level through SG&A leverage.
Yep. Three and a half to one.
I noticed you took the table out of the release this quarter that shows how the margins are progressing in the various store buckets. I don't know if that'll be in the Q, but maybe you can just share some thoughts on what has been happening with the margin in the largest bucket, because it looked like it had been declining.
Well, the operating margin improved, and you see that shine through. If you look at our stores that do over 100,000 a month, that's about half our revenue. Our overall profits are up 100 basis points from last year. That group was a big piece of that equation. I removed it for a couple of reasons. I think one thing, when we started the pathway to profit back in 2007, we dramatically expanded some of the information we disclosed, really because it was a big change for Fastenal. Five years ago, when we introduced the industrial vending, we expanded a bunch of our disclosures because, again, that was a big change for Fastenal. One thing we like to be in a position to do always with our shareholders is be able to think out loud, openly, and honestly with you about what we're doing.
I started the signal last year that I was going to pull back some of the disclosures, not because we want to disclose less, but we want to make sure that all the stuff we disclose doesn't create noise and take away from the message. You want to focus on, here are the major things and here are the minor things. We're trying to pare it back a little bit so we have a little bit more concise of a report. I also am a firm believer after seven, eight years of showing pathway to profit for the people that believe it, you don't need to see it every quarter. For the people that don't believe it, after eight years, I don't know if I'm going to convince anybody.
Okay. All right, Dan. Thank you.
You bet, Rob.
Thank you. Our next question comes from Flavio Campos with Credit Suisse. Your line is now open.
Hi there. Thank you for taking my questions. Just focusing on gross margin, just very quickly on Q1. It looks like fuel helped you about 10 basis points. A little bit of a reduction to that $8.8 million this quarter. You guys talked a little bit about seasonality as well. If you could just help us bridge that, and if you can also talk a little bit about the fact that on Fastener business, you've had a lot of cost deflation on the
The supplier side, now we are seeing a little bit of that price pressure on your customer side as you called out on the release. If that mismatch in timing has also helped gross margin right now, or if you're actually passing through a lot of the savings?
Yeah, no. The gross margin really hasn't been helped by any timing. Where we do have contracts that are tied to a CRU or some other type of index, it usually mirrors the turn of our inventory. Really, when I look at the gross margin, and I tried to touch on that in the release, the improvement in gross margin, there is always a seasonal lift that occurs. The real impact is we have a fixed cost with our trucking network. Our river from Winona is Red Wing, Minnesota, and there's a truck that stops there every morning. Whether that truck is carrying 10 packages or 20 packages, the cost of the truck is the same. From October to November and December, our volumes will drop off meaningfully because of the seasonality of the business.
That fixed cost of that truck weighs a little more heavily on the sales. When our sales snap up in the first quarter, that truck still costs us the same. I'm ignoring fuel here for a second. That truck still costs us the same, but we're delivering 10% more boxes. That lift is always there, and that drag's always there in the fourth quarter. I think what's more important about our gross margin is we did more than that. We got the lift that's there. It was added a little bit, as you mentioned, because our fuel cost came in less than, say, a year ago. Less than even fourth quarter, although that delta is smaller. More importantly, we did a better job pricing our product and sourcing our product.
A lot of our sourcing is done at the store level, which is fairly unique for industrial distributors in general, because we're very entrepreneurial in our nature. It's really looking at everybody square in the eye and challenging everybody. You know what? We need to stop this and stabilize. We did a little bit better than that.
Perfect. That's very helpful, caller. Thank you for that. If I can just have a quick follow-up on the non-resi side of the business. That slowed down a lot in March, and that seems to be a little less levered to the headwinds of oil and gas and exports. I'm not sure if that's accurate, but if you just could comment a little bit on the health of that end market.
Yeah, that business did slow down for us. One item just to keep in mind. A chunk of our non-res construction is directly tied to energy. It's infrastructure. Because of where we operate and the infrastructure that's being built to support both the production as well as downstream refining and the transmission in between, we're involved in those 3 stages of oil and gas. Oil and gas does have an impact on our non-res, that business was a little bit weaker. Part of that was weather-centered, it did soften a little bit. I think there's a lot of tentativeness in the marketplace right now.
Perfect. That's helpful. Thank you for taking my questions.
You're welcome.
Thank you. Our next question comes from Ryan Merkel with William Blair. Your line is open.
Hey, guys. Good morning.
Morning.
First question, when I look at your March growth rate and I look at the ISM index, it looks like demand is slowing sort of beyond oil and gas and beyond exports. Are you seeing this as well, and what do you think is driving this?
Well, I think, yes, we are, I think what you really have is those two you mentioned, exports and oil and gas, they cast one heck of a shadow.
It's not just the folks that are directly involved in that business. If you're in the same geographic area and the manufacturing pace, the manufacturing heartbeat of that area is weaker, everything else kind of takes a step down. If you're working at an industrial business and you're kind of worried about what's going on in your business, people aren't as quick to do other things, to buy a car, to buy things, to make a renovation to their home. People, because I don't need to replace this television set today. Stuff like that, you just become a little bit more conservative because everybody's a little nervous.
Ryan, I'll jump in. The other thing on the oil and gas, last call, we talked about it being 10%-12% from a geography standpoint. Even when you start to consider the steel mill that's making the frack pipe, that's not even part of our discussion last quarter, but there is a ripple effect that I think, as Dan said, that is greater than I think most people really understand.
Okay. Well, asking it a different way, do you have the growth rate in the quarter for the energy states and the non-energy states? Was there a big difference there?
I don't have that right in front of me, Ryan.
Okay.
If I was looking at the energy in general, in the case of March, it was probably about a 3% impact.
Okay. Incremental margins were very strong, as you pointed out, but I'm just wondering if growth sort of stays at 6%-7% range and then you're going to ramp the FTEs a bit, it sounds like. What's a reasonable incremental margin range in your mind as we look at 2Q, 3Q, 4Q?
Well, one thing to keep in mind, second quarter and third quarter last year, our gross margin was at 50.8. Fourth quarter, it took a little dip down, and now we're back at 50.8. We could be in a position to invest well if the noise of gross margin is silent, it's really about our operating expenses. I see no reason why I don't know if we'll stay north of 30, but I feel very good about staying north of 25.
Thank you. Our next question comes from Luke Junk with Robert W. Baird. Your line is now open.
Yeah, just building off your last comment there on the gross margin line, Dan. Kind of weigh out, in terms of the outlook for the rest of the year, things that you can control and some of the things, say, you've been working on the pricing side versus maybe some of the headwinds we might face this year, especially in the fastener product line, just how those dynamics interact and maybe better understanding as we're seeing the drop in steel prices right now on a piece of your business that you're probably turning.
A situation having deflation now for a few years. It makes it challenging as we go through the year. At the end of the day, though, I really look at it in a little longer term perspective than just that. I try to understand what are the long-term drivers of our gross margin? That's really the things that you focus on. The long-term drivers of our gross margin really gets down to business and product mix. Customer mix, which is coming with customers of different sizes. One thing that we've done a nice job in recent years, and by recent years, I'm saying the last 15, but we've done a nice job of leveraging this infrastructure that is Fastenal, this store base that is Fastenal, and growing our large account, our national account business quite aggressively.
That continues to outgrow the rest of the business. Not because we're losing opportunities in the smaller customer base. It's because we're underrepresented in the large customer base, we continue to grow a little bit faster there. To me, long term, the growth in that large customer base, as well as the residual impact to our product mix, that ultimately drives our gross margin. As we see, as our revenue base grows and our gross margin does decline a bit, we do a very nice job of our business model of leveraging that cost and doing a nice job with the pre-tax. Which really, at the end of the day, is of all the numbers in the P&L, really the only one that matters is the one at the bottom of the page. Everything else above that is just discussion points.
It's still healthy to appreciate the points and understand how that differs from business. Ultimately, it gets down to what's our customer mix and what's our product mix within those customers.
Just to follow up, Lee, you'd mentioned that the port situation was something that did impact you during the quarter. Just curious at a high level what impact it may have had on your supply chain, on product pricing, the need to source any product domestic that you typically import, et cetera.
We kind of tried to get a message to our folks that we thought this thing would get rectified and to really try to take care of our customers. Really, we took, I think, a fairly tough stance that we're not going to go out and find something or secure parts domestically and eat the difference. We did a nice job there. To put a number on it, I couldn't do that. It caused, I think, for maybe a few months, a month, a little bit of problems here and there, but nothing to the degree that it really moved the needle for us on the margin side.
One thing that helps us in situations like this is the fact that we have inventory that turns roughly two times a year. We have more resiliency than our peers really do when it comes to this matter because with 2,600, 2,700 store locations and 14 distribution centers, we have a lot of inventory stored around the country.
Thank you. Our next question comes from Charles Redding with BB&T Capital Markets. Your line is now open.
Hi, gentlemen. Thanks for taking my question. I wonder if we could just drill down a little more on Canada. I realize your exposure is certainly more heavily weighted towards the eastern markets. Have you seen the weakness there confined to direct oil and gas exposure? Have you seen that really bleed over into some of the more ancillary markets?
For Western Canada, obviously our business there has been impacted pretty dramatically. Yeah, it bleeds over into everything in that geographic area. As you noted in your question, when we originally entered Canada, we entered from essentially southern Ontario and grew through Ontario, then from there expanded east and west. The core of our business is really in the province of Ontario. That business there has held up reasonably well, if I'm looking at Canadian dollar to Canadian dollar. Obviously, the Canadian currency is very much tied to the fact that their economy is tied to extractive industries. The weakness in oil and gas, the weakness in energy in general has not helped their currency. In a local currency basis, we're growing reasonably well. When you convert it to USD, and that's what we report in, the picture isn't quite so good.
The underlying business is sound.
Okay, thanks. On heavy manufacturing and ag, I know your exposure there is relatively limited as well, but if you could just provide a little more color on heavy manufacturing right now, kind of trends, where you're seeing that and how you're seeing that shaping up over the next quarter or two.
That piece is pretty weak right now. A chunk of our heavy manufacturing is tied to The easiest way to describe it, big wheeled pieces of equipment. That's mining equipment, that's agricultural equipment. It might be military equipment. We have a good focus there because those end markets really value what we can bring to their table from the standpoint of fastener expertise and fastener availability, as well as everything else that goes with it. All those areas are pretty weak right now. You folks know as well as we do what's going on in some of those end markets, as far as what some of those large customers are experiencing right now. It's not a pretty picture. That's impacting our fastener business because it's impacting our heavy manufacturing.
Thank you, Dan.
Yep.
Thank you.
Thank you. Our next question comes from Robert McCarthy with Stifel. Your line is now open.
Good morning, guys. Congratulations on a good quarter and a tough operating environment.
Thank you.
Yeah. This question's been asked prior, but could you just walk through, do you think there was any kind of benefit from kind of the rollover in steel, just from a contract perspective and as contracts get reset, how you're thinking about kind of more of a normalized gross margin in the back half of the year? It's a bit of a leading question, so you can argue with the premise of it, that's fine. I just wanted to ask it.
Yeah. I'll answer it this way.
Yeah.
Deflation in steel never helps our reported margin. It's the steel-based products that are the slowest turning for us. If there is some deflation in non-steel products that we sell, so the non-fasteners, that inventory turns a little faster. There, you can realize some impact. For us, what we are always endeavoring to do is manage the noise of timing. In other words, manage where you're giving price concessions and where you're not. Really, the only time you ever really can get an impact is if you go back to, I think it was the 2008 timeframe. There was a lot of inflation going on in steel. We actually saw some short-term gross margin improvement because of it. That was a little unusual because it was so extreme.
Generally speaking, the improvement we had in gross margin is, if there's any impact from steel pricing in there, it's negligible. I'm not even sure if it's measurable.
Really? You don't think it's material?
No.
The second question is, and I know you're reluctant to pull out your crystal ball, but I'll ask you. Just looking at the compares in the back half of the year and some of your comments around non-residential construction in terms of the fact that oil and gas, the penumbra or the emanation from oil and gas and the weakness is going to affect more markets than we would like and we would think. How do you think about if you saw a commercial construction recovery of some stripe in the back half of this year and the compares? Are the prospects there that you could still see mid to high single digit organic growth in terms of sales given the acceleration in non-res?
We believe so.
Okay.
The business really weakened in this three-month period. We don't know where we are in the weakening cycle. We don't know if it's 90% behind us or 50% behind us. We just don't know.
Yeah, where oil's going.
Yeah. What we do know is that, I think we've demonstrated an incredible resiliency to managing through it. I think the selling energy we've added into our stores gives us a great means to defend anything the market's going to deliver to us. Our focus has always been on, and Lee touched on it really well at the beginning. Being a farm kid, I appreciate that perspective really well. You worry about the things you can affect. I don't worry about the weather when I'm growing up on the farm because I can't affect it. I worry about how I react to it. Same thing here. I don't worry about the economy, but we do focus our energy on how we can react to it. I know that's not a real satisfying answer to your question.
It's largely because we don't frankly know what the economy's going to deliver in the next 9-12 months.
One more question. I'm sorry. Is there any data points that you've seen in terms of your order book, your sales, that has been particularly troubling or that you're really monitoring closely versus just a normal slowdown versus a pronounced cyclical rollover? Is there any evidence on one side or the other?
No.
No, there's not.
There's not. Okay. Thanks for your time.
Thank you. Our next question comes from Kwame Webb with Morningstar. Your line is now open.
Good morning, gentlemen. Thanks for taking my call today.
Good morning.
There's been a lot of talk about adding support people to the stores. Maybe if you can just kind of bring us up to date on what you've done in terms of headcount additions for the national sales initiative, just in terms of adding extra bodies, adding extra IT resources, just to help us understand a little bit better why that business seems to be growing a lot faster than it historically was.
Yeah. I think it's a case of all the things that we've done. It's a combination. It's not about what we did in the last three months or six months or 12 months. It's a combination. Our store footprint puts us in a position. Picture yourself, last week we had our Annual Customer Show down in Nashville, Tennessee. I had the opportunity, over the course of three days, to talk to probably more customers than I've ever talked to in a three-day period, which was a wonderful event because what it demonstrated to me is maybe sometimes the realization of how big the opportunity really is and what that means for our ability to grow our business. The fact that we positioned ourselves with a great store network, staffed with great people, a distribution and support infrastructure behind the scenes to support their day-to-day activities.
Last five years, we've built basically a half a billion-dollar a year business selling products through vending machines. All those things support a multi-location customer who wants to have product available for their employees but doesn't want to have waste, that's where vending comes in, who wants to have a supplier base that can support them, not in one location or five locations, but all 20 locations.
Yeah, they want consistency.
Yeah. That's a really important thing. I think we just, over the years, have gotten better and better at realizing what we bring to the table. Probably, at least I can speak for myself, realizing just how massive the opportunity is out there. That's why I'm a firm believer that business is growing faster because we're underrepresented there. Not because the small account business isn't growing. It's because we're underrepresented in one, and we're really poised to sell into that and demonstrate what we can do and take advantage of growth there.
I want to say, about one year ago, I had a conversation with you guys in terms of just making sure all the incentives were there. I believe there was some commentary saying that you were comfortable paying double commissions both at the store level and at the national accounts level just to make sure that people weren't competing against each other for business. Is that still true?
We believe it's harder to grow than it is to maintain. We pay a higher commission on growth, just like we pay a higher bonus to our non-sales personnel on profit growth than on profit. The status quo is easier than change, we reward for change.
Your question, I believe, though, is are we stacking commissions both at the.
Yeah
account rep by sign Yeah.
Oh, I'm sorry.
Yeah. We pay both, but it's much like the national account folks are the hunter, but our stores do the work day-to-day to support the accounts. We pay both, and that's factored into our decision, and it's a great move. We're all lined up at the company. If the company wins, our employees, our leadership team wins, our support folks win. We don't. We move on.
Our shareholders win.
Yeah.
Just before I hop off, when we talk about these big national account wins, who exactly is this business coming from? Is it still mom and pops, or is it more sort of national top 15, top 20 type industrial distributors?
It's coming from everywhere. There's a lot of very, very good local and regional distributors out there. They have probably 70% of the market. Just the odds would say they should be getting impacted 70% of the time. It's both, but it's a mix.
All right. Thank you.
Bud?
Thank you. Our next question comes from Brent Rakers with Thompson Research Group. Your line is now open.
Yeah. Good morning. I wanted to follow up on the implications, I guess, the cost implications of some of the employee additions you're talking about. Dan, if you hit the targets by the time the fourth quarter comes around, do you have a sense for what the impact would be on overall compensation? Are we talking about an $8 million-$10 million a quarter type of number?
The real driver is looking at those 300 people we're adding every month, and the way to think about it. We're adding 300 people. They're working, let's just say for discussion sake, 20 hours a week. Depending on what the geography is, our average hourly rate is probably around $11. That's probably the best way to think about the math, Brent, is kind of those three pieces, and that's kind of the layering effect we'd have on each month going forward as far as the expense.
I guess, Dan or Lee, the related question is how do you look at the payback from that? You're talking about adding basically about 15% FTEs. How productive does that make the other store sellers to get that revenue growth and gross profit dollar to offset or even to get a decent return on those part-time additions?
It doesn't take a lot of business to get payback on that type of expense, when you spread it across a hundred and some thousand dollar store. What it does provide is the employee base that we have in that store, and I'm really talking about the salespeople that we have in that store, the seasoned salespeople. That's, A, not an inexpensive population, but more importantly, it's a very productive population. If they're coming in every day to help receive in the truck or to make deliveries, it removes from their day, from their window, the sheer amount of time to get out and sell. Again, as I touched on in the earlier question about opportunity is staggering.
I still visit a lot of stores, I'm always amazed by just when I ask people in the store, what are some of the customers or what are some of the opportunities in this market? The opportunities are staggering. We want to be able to unleash that because this cost, at the end of the day, on a store-by-store basis, because if you look at it, we have around 2,600, 2,700 stores. We're talking about really adding Doesn't take a lot of revenue dollars and gross profit dollars to pay for that and get a pretty attractive return because all your other expenses in the store are fixed.
Brent, I would just jump in. When you add a part-timer, now I'm going back to my days in the store. When you add a part-timer into a store where you have a general manager and Onsite and a team that understands the value they bring to the market, and they can actually present that more often, the return on that part-timer is hard to measure. Dan's really touching on a lot of things. We have opportunity within current customers. We saw that last week in Nashville. We need to be out in the market daily, taking market share, and that's what this part-time employee brings. Not only, but it's the other side of the coin, is the part-timer gets to understand our company and our culture to make a decision long-term for them.
It's a win-win for both the employee coming in and for our teams in the store.
Thank you. This concludes our question and answer session. I would now like to turn the call back to Leland Hein for closing remarks.
We just want to again thank you. We appreciate your support. We don't take it for granted, and we look forward to talking to you next quarter. Thank you.
Thanks, everybody. Have a good day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.