Ace Hardware Reports First Quarter 2019 Results

• Record first quarter revenues of $1.38 billion, an increase of 5.1 percent from last year
• First quarter net income of $22.6 million, an increase of 89.9 percent from last year
• U.S. same-store-sales up 3.9 percent; Acehardware.com up 55 percent
• Acquired remaining 58 percent ownership of ACO Inc. (“ACO”), which operates 50 stores under the name of Great Lakes Ace Hardware located in Michigan and Ohio

Ace Hardware Corporation (“Ace” or the “Company”), the largest retailer-owned hardware cooperative in the world, today reported record first quarter 2019 revenues of $1.38 billion, an increase of $66.4 million, or 5.1 percent, from the first quarter of 2018. Net income was $22.6 million for the first quarter of 2019, an increase of $10.7 million from the first quarter of 2018. The increase in net income was driven by revenue growth and the timing of vendor funds earned.

“Significant growth from new stores, including 47 in the first quarter, solid same-store-sales growth and a 55 percent surge in revenue from acehardware.com fueled our 5.1 percent revenue increase and 89.9 percent net income growth,” said John Venhuizen, President and CEO. “My sincere thanks and appreciation to our local owners and the entire Ace team for their hard and effective work.”

The 3.9 percent increase in retail same-store-sales during the first quarter of 2019 reported by the approximately 3,200 Ace retailers who share daily retail sales data was the result of a 3.0 percent increase in average ticket and a 0.9 percent increase in same-store transactions.

Revenues

Consolidated revenues for the quarter ended March 30, 2019 totaled $1.38 billion. Total wholesale revenues were $1.30 billion, an increase of $50.0 million, or 4.0 percent, as compared to the prior year first quarter. Increases were noted across most departments with winter goods, grilling and power tools showing the largest gains. Wholesale merchandise revenues to new domestic stores activated from January 2018 through March 2019 contributed $41.0 million of incremental revenues during the first quarter of 2019, while wholesale merchandise revenues decreased $9.8 million due to domestic stores that cancelled their membership. Wholesale merchandise revenues to comparable domestic stores increased $16.5 million for the quarter. The Company’s Ace Hardware International Holdings, Ltd. (“AIH”) subsidiary had a $1.1 million increase in wholesale revenue from the prior year, while the Ace Wholesale Holdings LLC (“AWH”) subsidiary contributed $7.3 million of incremental wholesale revenue in the first quarter of 2019.

Total retail revenues for the quarter were $79.5 million, an increase of $16.4 million, or 26.0 percent, as compared to the prior year first quarter. Retail revenues from Ace Retail Holdings LLC (“ARH”) were $73.3 million in the first quarter of 2019, an increase of $16.3 million, or 28.6 percent, from the first quarter of 2018. This increase was the result of new retail stores added by the Westlake Ace Hardware (“Westlake”) retail chain since the first quarter of 2018 coupled with an 8.2 percent increase in comparable domestic stores of $4.4 million. Westlake operated 124 stores at the end of the first quarter of 2019 compared to 116 stores at the end of the first quarter of 2018. The remaining increase in ARH revenues was the result of the acquisition of the remaining 58 percent of the outstanding stock of ACO Inc. (“ACO”) in March 2019, which now requires Ace to include ACO’s operating results in its statement of income. ACO operates 50 stores under the name of Great Lakes Ace Hardware and contributed $6.1 million of revenue in the first quarter of 2019. Prior to the March 2019 purchase Ace owned 42 percent of ACO. Retail revenues from AEH were $6.2 million in the first quarter of 2019 compared to $6.1 million in the first quarter of 2018.

Ace added 41 new domestic stores in the first quarter of 2019 and cancelled 20 stores. The Company’s total domestic store count was 4,497 at the end of the first quarter of 2019 which was an increase of 79 stores from the first quarter of 2018. On a worldwide basis, Ace added 47 stores in the first quarter of 2019 and cancelled 22, bringing the worldwide store count to 5,278 at the end of the first quarter of 2019.

Gross Profit

Wholesale gross profit for the three months ended March 30, 2019 was $153.8 million, an increase of $14.2 million from the first quarter of 2018. The wholesale gross margin percentage was 11.8 percent of wholesale revenues in the first quarter of 2019, up from 11.2 percent in the first quarter of 2018. The increase in the wholesale gross margin percentage was largely the result of the timing of vendor funds earned.

Retail gross profit for the three months ended March 30, 2019 was $36.8 million, an increase of $7.7 million from the first quarter of 2018. The retail gross margin percentage was 46.3 percent of retail revenues in the first quarter of 2019, a slight increase from 46.1 percent in the first quarter of 2018. 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 $10.1 million, or 8.5 percent, from the first quarter of 2018. The increase is primarily due to higher payroll expenses resulting from increased headcount in our Retail Support Centers (“RSC”) to support increased retailer demand and lower RSC productivity due to continued employee turnover. As a percentage of wholesale revenues, wholesale operating expenses increased to 10.0 percent of wholesale revenues in the first quarter of 2019 from 9.5 percent of wholesale revenues in the first quarter of 2018.

Retail operating expenses increased $3.5 million, or 10.2 percent, from the first quarter of 2018. This increase was primarily due to the inclusion of ACO operating expenses as a result of the acquisition of the remaining 58 percent of ACO in March 2019. Retail operating expenses as a percentage of retail revenue decreased to 47.7 percent of retail revenues in the first quarter of 2019 from 54.5 percent in the first quarter of 2018 primarily due to retail operating expense leverage resulting from Westlake’s significant increase in sales and the timing of advertising expenditures.

Balance Sheet and Cash Flow

Receivables increased $12.0 million from the first quarter of 2018 due to higher sales volumes.

Inventories increased $48.8 million from the first quarter of 2018 primarily due to the inclusion of ACO retail inventory and the increase in the number of stores owned by Westlake.

Debt increased $97.9 million versus the first quarter of 2018 as a result of capital expenditures, acquisitions and the working capital needed to support the planned growth in inventories and receivables.