Ace Hardware Reports 2008 First Quarter Financial Results

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• Total revenues of $872.1 million in the first quarter of 2008


• Reported net income of $10.8 million


• Adjusted EBITDA of $31.2 million increased $2.1 million over 2007


• Ace successfully completed new senior debt facilities

May 29, 2008 // Franchising.com // Oak Brook, Ill. – Ace Hardware Corporation, the world's largest retailer-owned hardware cooperative, today reported net income of $10.8 million for the first quarter of 2008, which was a decrease of $3.3 million, as compared to the $14.1 million for the first quarter of 2007. After excluding certain non-recurring and unusual items, the company also reported Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization expenses) of $31.2 million in the first quarter of 2008 as compared to $29.2 million in the first quarter of 2007.

Revenues

Total revenues for the first quarter of 2008 decreased $67.8 million, or 7.2 percent, to $872.1 million. Total continuing merchandise sales in the first quarter of 2008 declined 6.4 percent while retail service revenues declined 13.1 percent.

Merchandise sales to comparable domestic stores in the first quarter of 2008 accounted for $72.9 million of the sales decline. However, merchandise sales to net domestic stores opened in the 2007 and 2008 fiscal year periods contributed $10.9 million in incremental sales. Ace added 27 new stores and cancelled 41 stores in the first quarter which brought the company's total store count to 4,616 at the end of the first quarter in 2008 as compared to 4,630 at the end of fiscal year 2007. Despite the decline in store count, Ace experienced incremental sales benefits from new store openings as the new stores that are being opened are more productive from a sales perspective than the stores that are cancelling.

"Our first quarter revenues were challenged by a very difficult environment overall at retail and a delay in the transition to spring weather in many parts of the country," said Ace President and Chief Executive Officer Ray A. Griffith. "We are hopeful that the current economic stimulus efforts will boost consumer confidence and drive improved selling conditions at retail."

Merchandise sales from Ace's international business continued to be strong and contributed $7.8 million in incremental sales, up 22.4 percent over 2007, driven by increased sales to existing stores in the Middle East, sales to new stores in the Caribbean and sales growth from foreign-to-foreign wholesale operations located in Shanghai, China.

Gross Profit

Ace's gross profit decreased $15.5 million and gross profit as a percentage of total revenues decreased 88 basis points to 10.62 percent in the first quarter of 2008 from 11.50 percent in the comparable 2007 period. Gross profit decreased $8.3 million due to the decline in the gross profit percentage and decreased $7.2 million as a result of the decline in merchandise sales.

Approximately $5.6 million of the overall gross profit decrease was attributable to lower retailer advertising reimbursement revenues resulting from reduced national advertising. In addition, $1.4 million of the gross profit decline was attributable to the exit of company-owned stores which was completed at the end of the first quarter of 2007.

Operating Expenses

Reported operating expenses declined $13.3 million, or 14.8 percent, to $76.8 million in the first quarter of 2008 and, as a percentage of revenues, decreased from 9.6 percent to 8.8 percent. The decrease in reported operating expense was primarily a result of a reduction in incentive compensation and profit sharing expense accruals of approximately $7.8 million and lower national advertising expenses of $6.7 million. Additionally, operating expenses declined $2.7 million due to lower retail pilot store expenses, a $1.8 million decrease in expenses associated with the exit from company-owned stores and a $1.6 million decline in expenses associated with the discontinuation of Ace's Vision 21 achievement award program. The declines in reported operating expenses were partially offset by $5.6 million of incremental expenses in 2008 related to the restatement, remediation and debt restructuring activities associated with the inventory accounting error announced in 2007 and severance expenses of $1.4 million in the first quarter of 2008. Reported operating expenses in 2007 also include an offset of $1.2 million from a gain on the sale of a parcel of land in Aurora, Ill., which negatively impacts quarter to quarter comparisons.

"In light of the current economic conditions, we are aggressively taking action to focus on expense controls given the difficult sales trends that we are experiencing," said Griffith. "We are prudently reviewing our cost structure and making the necessary changes that will help us maintain strong profitability without sacrificing our ability to drive continued long-term growth."

Adjusted EBITDA

After excluding certain non-recurring and non-comparable items, Ace's Adjusted EBITDA increased $2.1 million, or 7.0 percent to $31.2 million in the first quarter of 2008. Adjustments to EBITDA for the first quarter of 2008 aggregated $5.3 million, net, and consisted primarily of debt restructuring expenses, restatement related expenses, and inventory accounting remediation expenses. Adjustments to EBITDA for the first quarter of 2007 aggregated $1.3 million, net, and consisted primarily of adjustments to discretionary profit sharing expenses and Vision 21 achievement award expense, partially offset by the gain on the sale of real estate discussed above.

Balance Sheet Trends

Inventories decreased $22.5 million, or 4.3 percent, to $501.4 million at the end of the first quarter of 2008 when compared to the first quarter of 2007 and reflected a reduction in merchandise purchases in reaction to the lower level of first quarter 2008 sales. Inventory turnover at Ace's Retail Support Centers (RSCs) on an annualized basis was 4.75 at the end of the first quarter of 2008, a decrease from 5.09 for the first quarter of 2007. Service levels (fill rates) improved to 96.8 percent in 2008 compared to 96.4 percent for the prior year first quarter.

Ace's net receivables decreased $16.3 million, or 4.2 percent, to $374.2 million at the end of the first quarter in 2008 driven by the sales decline in the first quarter of 2008. Capital expenditures for the first quarter of 2008 decreased $2.9 million to $5.8 million primarily due to a decrease in general RSC capital expenditures of $1.7 million and a decrease in supply chain expenditures of $1.0 million.

Ace Successfully Completed New Senior Debt Facilities

On May 15, 2008, Ace completed its new senior debt facilities. The new financing includes a $300 million senior secured revolving credit facility with a group of banks maturing May 15, 2013 that includes $150 million available for letters of credit. Borrowings under this facility will initially bear interest at a spread of 225 basis points over LIBOR. In addition, Ace issued $300 million of senior secured notes maturing June 1, 2016 and bearing an interest coupon of 9.125 percent. Interest is payable semi-annually commencing on December 1, 2008.

About Ace Hardware

Throughout its 84-year history, Ace Hardware has been known as the helpful hardware store by both customers and communities. With 4,600 hardware, home center and building materials stores, Ace Hardware is the largest retailer-owned hardware cooperative in the industry. Headquartered in Oak Brook, Ill., Ace currently operates 14 distribution centers in the U.S. and its retailers' stores are located in all 50 states and 63 countries. More information about Ace can be found at www.acehardware.com.

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