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 $1.0 billion for the third quarter of 2013, an increase of $84.4 million or 8.9 percent from 2012. Net income was $34.4 million for the third quarter of 2013, which was essentially flat from the $34.3 million earned in 2012.
“We’re pleased with the growth at both wholesale and retail in the third quarter," said John Venhuizen, Ace president and chief executive officer. ”Retail same store sales in the U.S. were up 6.9% for the quarter and stand at 4.4% year to date. We continue to invest heavily in retail initiatives to help fuel growth for our local owners and that growth, in turn, is propelling the corporation.”
“During the third quarter we also launched our meaningful investment in the rollout of the Paint Studio Initiative which will transform the paint department in over 3,000 Ace stores in preparation for the May 2014 national launch.” Venhuizen continued, “As part of our strategic alliance with The Valspar Corporation, this investment is a significant portion of our strategy to double paint market share for our Ace retailers.”
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 $21.3 million in wholesale revenues for the third quarter of 2013 and $62.1 million for the first nine months of 2013.
Ace’s balance sheet is also affected by the WHI acquisition. Most notably, the Ace balance sheet as of September 28, 2013 now includes $67.7 million of WHI inventory, $19.1 million of property and equipment, $23.0 million of goodwill and other intangibles, and $23.9 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 September 28, 2013 totaled $1.0 billion, an increase of $84.4 million, or 8.9 percent, as compared to the prior year. Total wholesale revenues were $979.8 million, an increase of $29.9 million, or 3.1 percent, as compared to the prior year. (Excluding the elimination of wholesale revenues to WHI of $21.3 million, the increase in wholesale revenues would have been $51.2 million, or 5.4 percent.) Increases were noted across virtually all departments with lawn and garden chemicals and seed, electrical, hand tools, lawn and garden power equipment, and paint supplies showing the largest increases.
Wholesale merchandise revenues to comparable stores increased $25.1 million in the third quarter of 2013. Wholesale merchandise revenues to new domestic stores activated in the 2012 and 2013 fiscal year periods contributed $22.0 million in incremental revenues during the quarter, while wholesale merchandise revenues decreased $8.2 million due to cancelled stores. Wholesale service revenues were up $8.2 million primarily due to the timing of advertising revenues.
Wholesale revenues by Ace’s international business increased $4.1 million, or 6.9 percent, in the third quarter as compared to the prior year as a result of higher revenues to retailers in the Middle East and Latin America markets.
Retail revenues were $54.5 million in the third quarter of 2013 as a result of the December 2012 acquisition of WHI. Same store sales at these 86 stores were up 6.5 percent primarily due to an increase in the lawn and garden category.
Ace added 36 new domestic stores and cancelled 21 domestic stores in the third quarter of 2013 for a net increase in store count of 15. This brought the company’s total domestic store count to 4,136 at the end of third quarter 2013, an increase of 58 stores from the third quarter of 2012.
Gross Profit
Wholesale gross profit for the three months ended September 28, 2013 was $124.8 million, an increase of $1.0 million from the three months ended September 29, 2012. Gross margin percentage was 12.7 percent of wholesale revenues in the third quarter, down from 13.0 percent in the prior year quarter. The decrease in the wholesale gross margin percentage was primarily driven by the timing of vendor income, partially offset by LIFO income recognized during the quarter.
Retail gross profit was $24.0 million and the retail gross margin percentage was 44.0 percent of retail revenues in the third quarter of 2013. Retail gross profit as reported in the Ace financial statements is based on the Ace wholesale acquisition cost of product rather than the WHI acquisition cost which includes Ace’s normal markup from cost.
Expenses
Wholesale operating expenses increased $2.1 million, or 2.4 percent, during the third quarter of 2013 as compared to 2012. Despite the higher wholesale sales volume, both distribution operating expenses and SG&A expenses were down versus the prior year. The increase in retailer success and development expenses was primarily due to the planned increase in advertising spending.
The addition of retail operating expenses of $22.9 million in the third 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 $1.0 million, or 23.8 percent, in the third quarter of 2013 as compared with 2012. The decline primarily resulted from lower average balances outstanding and lower interest rates.
Income tax expense increased $1.2 million primarily as a result of an increase in the annual effective tax rate resulting from the acquisition of WHI.
Balance Sheet
The Company reduced wholesale inventory levels by $79.5 million, or 14.1 percent, to $484.7 million at September 28, 2013 from $564.2 million at September 29, 2012. Despite this significant decline, service levels remained in excess of 97 percent during the third quarter of 2013.
The decrease in wholesale inventory levels, along with cash generated from operating activities net of capital spending, resulted in a corresponding decrease in third party debt. Total debt, excluding the $23.9 million WHI line-of-credit, was down $99.6 million from $325.3 million at September 29, 2012 to $225.7 million at September 28, 2013.
Paint Studio Initiative
We estimate $75 million will be spent by May 1, 2014 remodeling and re-equipping the paint departments at over 3,000 Ace stores. This includes new Ace Paint and Valspar product assortments, color merchandising palettes, state-of-the-art tinting machines, signage and décor that are all part of new paint department floor plan. Since starting the rollout in early September over 550 stores have had their paint departments remodeled. The Company expects to have over 3,000 stores completed by the time of the grand reopening of the paint business in May 2014.
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.
| ACE HARDWARE CORPORATION | ||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||||||
| (Unaudited, in millions) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 28, | September 29, | September 28, | September 29, | |||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| (13 Weeks) | (13 Weeks) | (39 Weeks) | (39 Weeks) | |||||||||||||
| Revenues: | ||||||||||||||||
| Wholesale revenues | $ | 979.8 | $ | 949.9 | $ | 2,959.8 | $ | 2,929.0 | ||||||||
| Retail revenues | 54.5 | - | 172.0 | - | ||||||||||||
| Total revenues | 1,034.3 | 949.9 | 3,131.8 | 2,929.0 | ||||||||||||
| Cost of revenues: | ||||||||||||||||
| Wholesale cost of revenues | 855.0 | 826.1 | 2,594.0 | 2,564.3 | ||||||||||||
| Retail cost of revenues | 30.5 | - | 96.9 | - | ||||||||||||
| Total cost of revenues | 885.5 | 826.1 | 2,690.9 | 2,564.3 | ||||||||||||
| Gross profit: | ||||||||||||||||
| Wholesale gross profit | 124.8 | 123.8 | 365.8 | 364.7 | ||||||||||||
| Retail gross profit | 24.0 | - | 75.1 | - | ||||||||||||
| Total gross profit | 148.8 | 123.8 | 440.9 | 364.7 | ||||||||||||
| Distribution operations expenses | 24.5 | 25.1 | 74.3 | 74.4 | ||||||||||||
| Selling, general and administrative expenses | 34.6 | 35.5 | 103.6 | 104.5 | ||||||||||||
| Retailer success and development expenses | 29.8 | 26.2 | 98.8 | 91.5 | ||||||||||||
| Retail operating expenses | 22.9 | - | 68.8 | - | ||||||||||||
| Retail support center closure costs | - | - | 6.2 | - | ||||||||||||
| Total operating expenses | 111.8 | 86.8 | 351.7 | 270.4 | ||||||||||||
| Operating income | 37.0 | 37.0 | 89.2 | 94.3 | ||||||||||||
| Interest expense | (3.2 | ) | (4.2 | ) | (11.0 | ) | (20.2 | ) | ||||||||
| Loss on early extinguishment of debt | - | - | - | (19.9 | ) | |||||||||||
| Interest income | 0.8 | 1.0 | 2.5 | 2.9 | ||||||||||||
| Other income, net | 2.1 | 1.7 | 5.9 | 5.0 | ||||||||||||
| Income tax expense | (2.1 | ) | (0.9 | ) | (5.0 | ) | (2.4 | ) | ||||||||
| Net income | 34.6 | 34.6 | 81.6 | 59.7 | ||||||||||||
| Less: net income attributable to noncontrolling interests | 0.2 | 0.3 | 0.5 | 0.3 | ||||||||||||
| Net income attributable to Ace Hardware Corporation | $ | 34.4 | $ | 34.3 | $ | 81.1 | $ | 59.4 | ||||||||
| Accrued patronage distributions to third party retailers | $ | 35.0 | $ | 33.3 | $ | 81.3 | $ | 57.0 | ||||||||
| ACE HARDWARE CORPORATION | ||||||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||||||
| (In millions, except share data) | ||||||||||||
| September 28, | December 29, | September 29, | ||||||||||
| 2013 | 2012 | 2012 | ||||||||||
| Assets | (Unaudited) | (Audited) | (Unaudited) | |||||||||
| Cash and cash equivalents | $ | 19.0 | $ | 13.1 | $ | 12.1 | ||||||
| Marketable securities | 54.8 | 54.1 | 53.8 | |||||||||
| Receivables, net of allowance for doubtful accounts of $9.4, $7.2 and $9.1, respectively | 328.2 | 296.7 | 335.4 | |||||||||
| Inventories | 552.4 | 557.7 | 564.2 | |||||||||
| Prepaid expenses and other current assets | 37.2 | 45.2 | 29.5 | |||||||||
| Total current assets | 991.6 | 966.8 | 995.0 | |||||||||
| Property and equipment, net | 318.6 | 320.0 | 308.5 | |||||||||
| Notes receivable, net of allowance for doubtful accounts of $13.3, $13.9 and $12.9, respectively | 25.1 | 32.4 | 33.5 | |||||||||
| Goodwill and other intangible assets | 23.9 | 24.2 | 0.9 | |||||||||
| Other assets | 61.3 | 69.6 | 63.9 | |||||||||
| Total assets | $ | 1,420.5 | $ | 1,413.0 | $ | 1,401.8 | ||||||
| Liabilities and Equity | ||||||||||||
| Current maturities of long-term debt | $ | 39.7 | $ | 49.5 | $ | 16.2 | ||||||
| Accounts payable | 518.5 | 505.5 | 497.2 | |||||||||
| Patronage distributions payable in cash | 33.5 | 30.0 | 23.8 | |||||||||
| Accrued expenses | 142.4 | 144.8 | 119.5 | |||||||||
| Total current liabilities | 734.1 | 729.8 | 656.7 | |||||||||
| Long-term debt | 209.9 | 240.7 | 309.1 | |||||||||
| Patronage refund certificates payable | 26.9 | 22.6 | 25.9 | |||||||||
| Other long-term liabilities | 67.2 | 64.8 | 61.0 | |||||||||
| Total liabilities | 1,038.1 | 1,057.9 | 1,052.7 | |||||||||
| Member Retailers’ Equity: | ||||||||||||
| Class A voting common stock, $1,000 par value, 10,000 shares authorized, 2,758; 2,736 and 2,745 issued and outstanding, respectively | 2.8 | 2.7 | 2.7 | |||||||||
| Class C nonvoting common stock, $100 par value, 4,000,000 shares authorized, 3,177,918; 3,008,903 and 3,109,458 issued and outstanding, respectively | 317.8 | 300.9 | 310.9 | |||||||||
| Class C nonvoting common stock, $100 par value, issuable to retailers for patronage distributions, 340,682; 257,613 and 156,013 shares issuable, respectively | 34.1 | 25.7 | 15.6 | |||||||||
| Contributed capital | 19.8 | 19.7 | 19.6 | |||||||||
| Accumulated deficit | - | (0.1 | ) | (4.1 | ) | |||||||
| Accumulated other comprehensive loss | (0.1 | ) | (1.2 | ) | (2.9 | ) | ||||||
| Equity attributable to Ace member retailers | 374.4 | 347.7 | 341.8 | |||||||||
| Equity attributable to noncontrolling interests | 8.0 | 7.4 | 7.3 | |||||||||
| Total equity | 382.4 | 355.1 | 349.1 | |||||||||
| Total liabilities and equity | $ | 1,420.5 | $ | 1,413.0 | $ | 1,401.8 | ||||||
| ACE HARDWARE CORPORATION | ||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| (Unaudited, in millions) | ||||||||
| Nine Months Ended | ||||||||
| September 28, | September 29, | |||||||
| 2013 | 2012 | |||||||
| (39 Weeks) | (39 Weeks) | |||||||
| Operating Activities | ||||||||
| Net income | $ | 81.6 | $ | 59.7 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 33.9 | 30.0 | ||||||
| Amortization of deferred gain on sale leaseback | (0.9 | ) | (0.9 | ) | ||||
| Amortization of deferred financing costs | 0.9 | 1.6 | ||||||
| Provision for doubtful accounts | 2.1 | 2.8 | ||||||
| Loss on early extinguishment of debt | - | 19.9 | ||||||
| Retail support center closure costs | 6.2 | - | ||||||
| Other, net | 0.2 | 0.2 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | (45.0 | ) | (43.2 | ) | ||||
| Inventories | 5.3 | (28.9 | ) | |||||
| Other current assets | 6.7 | (2.6 | ) | |||||
| Other long-term assets | 5.4 | (7.0 | ) | |||||
| Accounts payable and accrued expenses | 10.3 | 32.6 | ||||||
| Other long-term liabilities | (0.4 | ) | 6.0 | |||||
| Deferred taxes | 2.5 | 1.1 | ||||||
| Net cash provided by operating activities | 108.8 | 71.3 | ||||||
| Investing Activities | ||||||||
| Purchases of marketable securities | (9.5 | ) | (9.0 | ) | ||||
| Proceeds from sale of marketable securities | 8.5 | 8.6 | ||||||
| Purchases of property and equipment | (31.5 | ) | (31.2 | ) | ||||
| Decrease in notes receivable, net | 2.2 | 1.6 | ||||||
| Other | 0.1 | 0.1 | ||||||
| Net cash used in investing activities | (30.2 | ) | (29.9 | ) | ||||
| Financing Activities | ||||||||
| Net (payments) borrowings under revolving lines of credit | (33.3 | ) | 113.0 | |||||
| Proceeds from issuance of long-term debt | - | 200.0 | ||||||
| Redemption of senior notes | - | (301.3 | ) | |||||
| Principal payments on long-term debt | (12.2 | ) | (7.5 | ) | ||||
| Payments of deferred financing costs | (0.7 | ) | (5.2 | ) | ||||
| Payments of cash portion of patronage distribution | (27.1 | ) | (27.7 | ) | ||||
| Payments of patronage refund certificates | (0.1 | ) | (17.3 | ) | ||||
| Proceeds from sale of noncontrolling interests | 0.1 | 0.3 | ||||||
| Other | 0.6 | 0.6 | ||||||
| Net cash used in financing activities | (72.7 | ) | (45.1 | ) | ||||
| Increase (decrease) in cash and cash equivalents | 5.9 | (3.7 | ) | |||||
| Cash and cash equivalents at beginning of period | 13.1 | 15.8 | ||||||
| Cash and cash equivalents at end of period | $ | 19.0 | $ | 12.1 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Interest paid | $ | 9.7 | $ | 20.1 | ||||
| Income taxes paid | $ | 1.2 | $ | 0.9 | ||||
