Ace Hardware Reports Second Quarter 2013 Financial Results

Ace Hardware Reports Second Quarter 2013 Financial Results

• Revenues of $1.2 billion, an increase of 9.7% from last year (or 4.4% excluding all accounting impacts from the 2012 acquisition of Westlake Ace Hardware)

• Revenues from Ace International Holdings increased 8.7%

• Net income of $42.3 million, an increase of 184% versus last year

• Total external debt (excluding Westlake Ace Hardware's line of credit) was $216.6 million, down $110.4 million versus last year

• Earned seventh consecutive J.D. Power award

OAK BROOK, Ill.--(BUSINESS WIRE)-- Ace Hardware Corporation ("Ace" or the "Company"), the largest retailer-owned hardware cooperative in the industry, today reported total revenues of $1.2 billion for the second quarter of 2013, an increase of $103.4 million or 9.7 percent from 2012. Net income was $42.3 million for the second quarter of 2013, an increase of $27.4 million from the $14.9 million earned in 2012. The second quarter 2013 results include a charge of $6.2 million related to the estimated costs to close the Toledo, Ohio Retail Support Center (RSC), while second quarter 2012 results included a charge of $19.9 million related to a loss on the early extinguishment of debt.

"We were pleased with our second quarter and first half results," said John Venhuizen, Ace president and chief executive officer. "Sales increased in virtually every department with significant growth at both wholesale and retail from our Discovery Edge, Level 3 merchandising re-sets and branding initiatives."

"At the half way point, we are also optimistic about the remainder of the year as a result of our Ace retailers adoption and execution of 2020 Vision, our long term growth strategy." Venhuizen continued, "Same store retail sales were up 5.3 percent for the quarter and are up 3.0 percent for the first half. Same store retail sales growth has continued to accelerate. June same store retail sales were up 6.1 percent and July was up 9.8 percent."

On June 5, 2013, Ace reported The J.D. Power and Associates 2013 U.S. Home Improvement Retailer Store Satisfaction Study^sm again ranked Ace Hardware "Highest in Customer Satisfaction with Home Improvement Retail Stores, Seven Years in a Row." Ace has captured this ranking ever since the organization began researching the home improvement category seven years ago.

Comparability of 2013 and 2012 Results

The December 2012 acquisition by Ace of WHI Holdings Corp. ("WHI"), the indirect owner of the 86 store Westlake Ace Hardware retail chain, results in the consolidation of WHI's financial statements into Ace's financial statements for 2013. This affects the comparability of the 2013 and 2012 financial statements and results in a reduction of reported wholesale revenues, as wholesale revenues from Ace to WHI are now eliminated. This elimination totaled $21.9 million in wholesale revenues for the second quarter of 2013 and $40.8 million for the first half of 2013.

Ace's balance sheet is also affected by the WHI acquisition. Most notably, the Ace balance sheet as of June 29, 2013 now includes $69.0 million of WHI inventory, $19.1 million of property and equipment, $23.0 million of goodwill and other intangibles, and $21.9 million of WHI acquisition debt.

In December 2012, the Company sold its paint manufacturing assets to The Valspar Corporation. This also affects the comparability of 2013 and 2012 as the inventory and fixed assets of this business are no longer reflected in the balance sheet.

Revenues

Consolidated revenues for the three months ended June 29, 2013 totaled $1.2 billion, an increase of $103.4 million, or 9.7 percent, as compared to the prior year. Total wholesale revenues were $1.1 billion, an increase of $25.7 million, or 2.4 percent, as compared to the prior year. (Excluding the elimination of wholesale revenues to WHI of $21.9 million, the increase in wholesale revenues would have been $47.6 million, or 4.4 percent.) Increases were noted across virtually every department with plumbing, live goods, electrical, impulse, and power tools showing the largest increases.

Wholesale merchandise revenues to new domestic stores activated in the 2012 and 2013 fiscal year periods contributed $23.0 million in incremental revenues during the quarter while wholesale merchandise revenues decreased $9.5 million due to cancelled stores. Wholesale service revenues were up $3.3 million primarily due to the timing of advertising revenues.

Wholesale revenues by Ace's international business increased $5.1 million, or 8.7 percent, in the second quarter as compared to the prior year as a result of higher revenues to retailers in the Latin America and the Middle Eastern markets.

Retail merchandise revenues were $77.7 million in the second quarter of 2013 as a result of the December 2012 acquisition of WHI. Same store sales at these 86 stores were down 3.4 percent as the colder early spring weather in Westlake Ace markets drove lawn and garden sales down 6.8 percent.

Ace added 34 new domestic stores and cancelled 19 domestic stores in the second quarter of 2013 for a net increase in store count of 15. This brought the company's total domestic store count to 4,121 at the end of second quarter 2013.

Gross Profit

Wholesale gross profit for the three months ended June 29, 2013 was $141.5 million, an increase of $8.0 million from the three months ended June 30, 2012. Gross margin percentage was 12.9 percent of wholesale revenues in the second quarter, up from 12.5 percent in the prior year quarter. The increase in the wholesale gross margin percentage was primarily driven by higher domestic paint volume, which has a higher margin, and product mix.

Retail gross profit was $32.9 million and the retail gross margin percentage was 42.3 percent of retail revenues in the second quarter of 2013. Note that retail gross profit as reported in the Ace financial statements is based on the Ace wholesale acquisition cost of product and not the WHI acquisition cost which includes Ace's normal markup from cost.

Expenses

Wholesale operating expenses increased $5.7 million, or 6.1 percent, during the second quarter of 2013 as compared to 2012, primarily due to the planned increase in advertising spending. The Company also recorded a $6.2 million charge for estimated expenses related to the announced closure of the Toledo, Ohio RSC. This charge includes estimated severance and employee related costs as well as future payments that are expected to be paid to the multi-employer pension fund that covers the union employees at the Toledo, Ohio RSC.

The addition of retail operating expenses of $23.5 million in the second quarter of 2013 was a result of the acquisition of WHI in December 2012. This included approximately $1.5 million of non-cash depreciation and amortization expense for assets and liabilities established as part of the opening balance sheet of WHI.

Interest expense declined $3.6 million, or 49.3 percent, in the second quarter of 2013 as compared with 2012. The decline resulted from the refinancing of the Company's credit facility and the redemption of the Company's senior secured notes during the second quarter of 2012, as well as from lower average balances outstanding.

Balance Sheet

Excluding the impact of WHI's inventory, the Company was able to reduce wholesale inventory levels by $117.4 million, or 19.2 percent, to $495.2 million at June 29, 2013 from $612.6 million at June 30, 2012. Despite this significant decline, service levels remained in excess of 97 percent during the second quarter of 2013.

The decrease in wholesale inventory levels resulted in a corresponding decrease in third party debt. Total debt, excluding the $21.9 million WHI line-of-credit, was down $110.4 million from $327.0 million at June 30, 2012 to $216.6 million at June 29, 2013

Following the close of the second quarter, in late July the Company entered into an amendment to its existing credit agreement with participating banks. The amendment extends the maturity date to July 27, 2018 and reduces the interest rate spread by 25 basis points. The amendment reduces the Company's third quarter 2013 interest rate to LIBOR plus 175 basis points.

About Ace Hardware

For nearly 90 years, Ace Hardware has been known as the helpful hardware store in thousands of neighborhoods across America, providing customers with a more personal kind of helpful. In 2013, Ace ranked "Highest in Customer Satisfaction among Home Improvement Stores for the Seventh Consecutive Year," according to J.D. Power and Associates. With over 4,700 hardware stores locally owned and operated across the globe, Ace is the largest hardware cooperative in the industry. Headquartered in Oak Brook, Ill., Ace and its subsidiaries currently operate 14 distribution centers in the U.S. and also have distribution capabilities in Shanghai, China; Panama City, Panama; and Dubai, United Arab Emirates. Its retailers' stores are located in all 50 states, the District of Columbia and approximately 60 countries. For more information on Ace, visit www.acehardware.com.