Newsroom: Ace Hardware Reports Fourth Quarter and Full Year 2018 Results

February 20, 2019

  • Record fourth quarter revenues of $1.4 billion, an increase of 5.7 percent from last year
  • U.S. same-store-sales up 1.3 percent during the quarter and 2.3 percent for the year
  • Fourth quarter net income of $25.2 million, an increase of 77.5 percent from last year
  • Record full year revenues of $5.7 billion, an increase of 6.1 percent from last year
  • Ace recognized as one of the “2018 Best and Brightest Companies to Work For in the Nation” by the National Association of Business Resources

Ace Hardware Corporation (“Ace” or the “Company”), the largest retailer-owned hardware cooperative in the world, today reported record fourth quarter 2018 revenues of $1.39 billion, an increase of $74.4 million, or 5.7 percent, from the fourth quarter of 2017. Net income was $25.2 million for the fourth quarter of 2018, an increase of $11.0 million from the fourth quarter of 2017.

Full year revenues were a record $5.7 billion, an increase of $328.6 million, or 6.1 percent, from 2017 revenue. Net income for fiscal 2018 was $128.2 million, a decrease of $19.2 million, from fiscal 2017. This decrease was due to warehouse expansion costs, lower Retail Support Center (“RSC”) productivity, and increased marketing and advertising expenses. The Company also incurred increased intangible asset amortization related to the final accounting valuation for Ace Ecommerce Holdings LLC (“AEH”) which was formed in the third quarter of 2017 for the acquisition of The Grommet on September 30, 2017.

“Strong new store growth, increased same-store sales, and a 43 percent increase in acehardware.com revenues helped us realize a healthy 5.7 percent increase in revenues during the fourth quarter,” said John Venhuizen, President and CEO. “The 6.1 percent full year growth fueled our $142 million dividend distribution to shareholders. While still meaningful, this is a reduction from last year driven by our expanded assortment, higher inventory and lower RSC productivity which drove expenses up and profit down for the year.”

The 1.3 percent increase in retail same-store-sales during the fourth quarter of 2018 reported by the approximately 3,000 Ace retailers who share daily retail sales data was the result of a 2.3 percent increase in average ticket, partially offset by a 1.0 percent decrease in same-store transactions. The 2.3 percent increase in retail same-store-sales for the full year was the result of a 3.3 percent in average ticket, partially offset by a 0.9 percent decrease in same-store transactions.

Revenues

Fourth Quarter

Consolidated revenues for the quarter ended December 29, 2018 totaled $1.39 billion. Total wholesale revenues were $1.28 billion, an increase of $55.1 million, or 4.5 percent, as compared to the prior year fourth quarter. Increases were noted across most departments with power tools, outdoor living, and electrical showing the largest gains. Wholesale merchandise revenues to new domestic stores activated from January 2017 through December 2018 contributed $35.1 million of incremental revenues during the fourth quarter of 2018, while wholesale merchandise revenues decreased $9.3 million due to domestic stores that cancelled their membership. Wholesale merchandise revenues to comparable domestic stores increased $23.7 million for the quarter. The Company’s Ace Hardware International Holdings, Ltd. (“AIH”) subsidiary had a $6.7 million increase in wholesale revenue from the prior year, while the Ace Wholesale Holdings LLC (“AWH”) subsidiary contributed $2.7 million of incremental wholesale revenue in the fourth quarter of 2018.

Total retail revenues for the quarter were $108.7 million, an increase of $19.3 million, or 21.6 percent, as compared to the prior year fourth quarter. Retail revenues from Ace Retail Holdings LLC (“ARH”) were $83.9 million in the fourth quarter of 2018. This was an increase of $16.1 million, or 23.7 percent, from the fourth quarter of 2017. The increase was the result of new retail stores added since the fourth quarter of 2017 as well as an increase in comparable domestic stores of $4.6 million. ARH operated 123 stores at the end of the fourth quarter of 2018 compared to 108 stores at the end of the fourth quarter of 2017. Retail revenues from AEH were $24.8 million in the fourth quarter of 2018. This was an increase of $3.2 million, or 14.8 percent, from the fourth quarter of 2017.

Fiscal Year

Consolidated revenues for fiscal 2018 totaled $5.7 billion, an increase of $328.6 million, or 6.1 percent, as compared to the prior year. Total wholesale revenues were $5.3 billion, an increase of $250.4 million, or 4.9 percent, as compared to the prior year. Increases were noted across all departments with paint, grilling, power tools, lawn and garden and electrical showing the largest gains.

Wholesale merchandise revenues from new domestic stores were $154.4 million in fiscal 2018. This increase was partially offset by a decrease in wholesale merchandise revenues of $40.9 million due to domestic store cancellations. Wholesale merchandise revenues to comparable domestic stores increased $115.3 million in fiscal 2018 compared to fiscal 2017. The Company’s AIH subsidiary and AWH subsidiary collectively contributed $18.3 million of incremental revenue in fiscal 2018.

Total retail revenues were $375.4 million, an increase of $78.2 million, or 26.3 percent, as compared to the prior year. Retail revenues from ARH were $329.7 million during fiscal 2018, an increase of $54.1 million or 19.6 percent. The increase was the result of new retail stores added during 2018. Retail revenues from AEH, which was formed in the third quarter of 2017 for the acquisition of The Grommet on September 30, 2017, were $45.7 million during fiscal 2018.

Ace added 174 new domestic stores in fiscal 2018 and cancelled 116 stores. This brought the Company’s total domestic store count to 4,476 at the end of fiscal 2018, an increase of 58 stores from the end of fiscal 2017. On a worldwide basis, Ace added 257 stores in fiscal 2018 and cancelled 125, bringing the worldwide store count to 5,253 at the end of fiscal 2018.

Gross Profit

Fourth Quarter

Wholesale gross profit for the three months ended December 29, 2018 was $147.7 million, an increase of $11.9 million from the fourth quarter of 2017. The wholesale gross margin percentage was 11.5 percent of wholesale revenues in the fourth quarter of 2018, up from 11.1 percent in the fourth quarter of 2017. The increase in the wholesale gross margin percentage was primarily the result of an increase in vendor funds earned, partially offset by unfavorable inventory reserve adjustments and LIFO expense.

Retail gross profit for the three months ended December 29, 2018 was $44.7 million, an increase of $8.0 million from the fourth quarter of 2017. The retail gross margin percentage was 41.1 percent of retail revenues in the fourth quarter of 2018 and 2017. For ARH, retail gross profit is based on the Company’s wholesale acquisition cost of product, not ARH’s acquisition cost which includes a markup from the Company.

Fiscal Year

Wholesale gross profit for fiscal 2018 was $634.2 million, an increase of $9.9 million from fiscal 2017. The wholesale gross margin percentage was 11.9 percent of wholesale revenues in fiscal 2018, a decrease from the fiscal 2017 gross margin percentage of 12.3 percent. This decrease in the wholesale gross margin percentage was primarily the result of higher receiving costs due to lower RSC productivity as well as unfavorable inventory reserve adjustments and LIFO expense. These decreases were partially offset by an increase in vendor funds earned.

Retail gross profit for fiscal 2018 was $160.9 million, an increase of $30.9 million from fiscal 2017. The retail gross margin percentage was 42.9 percent of retail revenues in fiscal 2018, down from 43.7 percent in fiscal 2017. The decline in margin was primarily the result of the inclusion of lower margin revenues realized by The Grommet for all of 2018 versus only in the fourth quarter of 2017.

Expenses

Fourth Quarter

Wholesale operating expenses increased $6.6 million, or 5.4 percent, from the fourth quarter of 2017. The increase is primarily due to higher marketing and advertising expenses and higher payroll expenses due to lower RSC productivity as a result of continued higher employee turnover. As a percentage of wholesale revenues, wholesale operating expenses remained at 10.0 percent of wholesale revenues in the fourth quarter of 2018 and 2017.

Retail operating expenses increased $9.0 million, or 26.5 percent, from the fourth quarter of 2017. This increase was primarily due to expenses from new retail stores added by ARH as well as additional marketing and fulfillment expenses incurred by AEH. Retail operating expenses as a percentage of retail revenue increased to 39.6 percent of retail revenues in the fourth quarter of 2018 from 38.0 percent in the fourth quarter of 2017.

Fiscal Year

Wholesale operating expenses increased $31.2 million, or 6.5 percent, in fiscal 2018 as compared to fiscal 2017. As a percentage of wholesale revenues, wholesale operating expenses increased to 9.6 percent in fiscal 2018 from 9.4 percent in fiscal 2017. The increase includes higher payroll expenses from prior year to support higher revenues, lower RSC productivity and higher inventory adjustments due to high employee turnover and increased labor costs incurred to setup the new Fredericksburg RSC while shutting-down the Prince George RSC. In addition, marketing and advertising expenses increased from the prior year.

Retail operating expenses increased $41.0 million, or 35.6 percent, in fiscal 2018 as compared to fiscal 2017. ARH’s retail operating expenses of $120.3 million increased $19.6 million, or 19.4 percent, in fiscal 2018 as compared to fiscal 2017. The increase was driven by expenses from new retail stores added in 2018. The remainder of the increase was due to the inclusion of retail operating expenses from AEH for a full twelve months which was an increase of $21.4 million. Included in AEH’s 2018 operating expenses was $4.5 million of amortization of intangible assets identified as part of the final accounting valuation. Retail operating expenses as a percentage of retail revenue increased to 41.6 percent in fiscal 2018 from 38.7 percent in fiscal 2017.

During fiscal 2018, the Company recorded a $0.1 million charge for warehouse facility closure costs to update its estimates from fiscal 2017. During fiscal 2017, the Company recorded warehouse facility closure costs of $4.0 million related to the future closing of certain warehouse and distribution facilities.

Balance Sheet and Cash Flow

Receivables increased $18.7 million from the prior year end due to higher sales volumes.

Inventories increased $154.3 million from the prior year end primarily due to the intentional build-up of seasonal and safety stock inventory to support Ace retailers. The increase in inventory was partially offset by a $63.9 million increase in accounts payable.

Debt increased $105.7 million versus the prior year end as a result of capital expenditures and the funding of operating activities to support the planned growth in inventories and receivables.

Recognition

The National Association for Business Resources named Ace Hardware Corporation as one of the “Best and Brightest Companies to Work For in the Nation”. Ace was named one of the top 101 highest-scoring companies in the country.

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