Newsroom: Ace Hardware Reports Second Quarter 2019 Results

September 23, 2019

  • • Record second quarter revenues of $1.69 billion, an increase of 6.3 percent from last year
  • • U.S. same-store-sales up 1.7 percent; Acehardware.com up 58 percent
  • • In 2019, Ace ranked “Highest in Customer Satisfaction with Home Improvement Retail Stores” according to J.D. Power, twelve out of the last thirteen years
  • • Second quarter net income of $53.8 million, a decrease of 1.8 percent from last year

Ace Hardware Corporation (“Ace” or the “Company”), the largest retailer-owned hardware cooperative in the world, today reported record second quarter 2019 revenues of $1.69 billion, an increase of $99.8 million, or 6.3 percent, from the second quarter of 2018. Net income was $53.8 million for the second quarter of 2019, a decrease of $1.0 million from the second quarter of 2018.

“Significant growth from new stores, including 44 in the second quarter, solid same-store-sales growth and a 58 percent surge in revenue from acehardware.com fueled our 6.3 percent revenue increase,” said John Venhuizen, President and CEO. “Start-up expenses for our nine new Westlake Ace stores in California, increased LIFO expense and transition expenses out of two former Emery distribution centers on the east coast caused our net income to dip slightly for the quarter.”

The 1.7 percent increase in retail same-store-sales during the second quarter of 2019 reported by the approximately 3,200 Ace retailers who share daily retail sales data was the result of a 1.8 percent increase in average ticket partially offset by a 0.1 percent decrease in same-store transactions.

Revenues

Consolidated revenues for the quarter ended June 29, 2019 totaled $1.69 billion. Total wholesale revenues were $1.53 billion, an increase of $58.8 million, or 4.0 percent, as compared to the prior year second quarter. Increases were noted across all departments with grilling, power tools and electrical showing the largest gains. Wholesale merchandise revenues to new domestic stores activated from January 2018 through June 2019 contributed $58.3 million of incremental revenues during the second quarter of 2019, while wholesale merchandise revenues decreased $11.4 million during the second quarter due to domestic stores that cancelled their membership. Wholesale merchandise revenues to comparable domestic stores increased $44.9 million for the quarter. This net increase was partially offset by the elimination of approximately $19.0 million of sales to ACO Inc. (“ACO”) which was fully consolidated beginning in the first quarter of 2019. This elimination was not required in 2018. The Company’s Ace Hardware International Holdings, Ltd. (“AIH”) subsidiary had a $9.5 million decrease in wholesale revenue from the second quarter of 2018. This

decrease was primarily due to having had significant sales in the second quarter of 2018 related to hurricane rebuilding efforts in the Caribbean as well as lower sales to customers in Saudi Arabia and the UAE. Ace Wholesale Holdings LLC (“AWH”) had a $1.9 million decrease from the second quarter of 2018 as a result of a decision to reduce the number of products available for sale to certain customers due to low profitability.

Total retail revenues for the quarter were $158.7 million, an increase of $41.0 million, or 34.8 percent, as compared to the prior year second quarter. Retail revenues from Ace Retail Holdings LLC (“ARH”) were $150.8 million in the second quarter of 2019, an increase of $41.0 million, or 37.3 percent, from the second quarter of 2018. This increase was primarily due to the inclusion of ACO which contributed $35.2 million of this increase. The remaining increase was the result of new retail stores added by the Westlake Ace Hardware (“Westlake”) retail chain since the second quarter of 2018 coupled with a 2.4 percent increase in Westlake same-store-sales. Westlake operated 126 stores at the end of the second quarter of 2019 compared to 121 stores at the end of the second quarter of 2018. Retail revenues from Ace Ecommerce Holdings LLC (“AEH”) were $7.9 million in the second quarter of 2019 and 2018.

Ace added 33 new domestic stores in the second quarter of 2019 and cancelled 23 stores. The Company’s total domestic store count was 4,507 at the end of the second quarter of 2019 which was an increase of 84 stores from the second quarter of 2018. On a worldwide basis, Ace added 44 stores in the second quarter of 2019 and cancelled 24, bringing the worldwide store count to 5,298 at the end of the second quarter of 2019.

Gross Profit

Wholesale gross profit for the three months ended June 29, 2019 was $178.1 million, a decrease of $1.6 million from the second quarter of 2018. The wholesale gross margin percentage was 11.6 percent of wholesale revenues in the second quarter of 2019, down from 12.2 percent in the second quarter of 2018. The decrease in the wholesale gross margin percentage was largely due to higher receiving costs caused by lower Retail Support Center (“RSC”) productivity from continued high employee turnover and LIFO expense.

Retail gross profit for the three months ended June 29, 2019 was $69.3 million, an increase of $19.9 million from the second quarter of 2018. Approximately $14.0 million of this increase was the result of the inclusion of ACO results in the current quarter. The retail gross margin percentage was 43.7 percent of retail revenues in the second quarter of 2019, an increase from 42.0 percent in the second quarter of 2018. The increase in the gross margin percentage was a result of the inclusion of ACO results in the current quarter which carried a higher margin. 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.

Expenses

Wholesale operating expenses increased $4.5 million, or 3.4 percent, from the second quarter of 2018. The increase is due to higher distribution costs resulting from the increased volume from higher wholesale revenues. As a percentage of wholesale revenues, wholesale operating expenses decreased to 9.0 percent of wholesale revenues in the second quarter of 2019 from 9.1 percent of wholesale revenues in the second quarter of 2018.

Retail operating expenses increased $13.4 million, or 35.2 percent, from the second quarter of 2018. This increase was primarily due to the inclusion of ACO operating expenses of $10.7 million as a result of consolidating ACO results beginning in the first quarter of 2019. The remaining increase was primarily due to new stores added by ARH since the second quarter of 2018. Retail operating expenses as a percentage of retail revenue increased slightly to 32.5 percent of retail revenues in the second quarter of 2019 from 32.4 percent in the second quarter of 2018.

Retail pre-opening expenses of $3.7 million were incurred in the second quarter of 2019 primarily related to the nine vacant Orchard Supply Hardware stores in California acquired by Westlake during the quarter.

Balance Sheet and Cash Flow

Receivables increased $23.4 million from the second quarter of 2018 due to higher sales volumes.

Inventories decreased $16.4 million from the second quarter of 2018 due to the closure of the Portland, Maine and Pittston, Pennsylvania warehouses and an increase in the LIFO reserve due to tariffs and inflation.

Debt increased $34.6 million versus the second quarter of 2018 as a result of capital expenditures and acquisitions.

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