Ace begins to move forward

DALLAS —Ace Hardware president and CEO Ray Griffith says his company is poised to move beyond a dark chapter in its history and get about the business of increasing market share, gaining customers and advancing the Ace brand.

“Admittedly, we’ve had our hands full, but I’m very optimistic about our future,” Griffith said, addressing the Ace membership March 6 at the spring market in Dallas. “That chapter is quickly coming to a close. Many of you want to move forward, so let’s do that.”

The chapter Griffith was referring to started with the discovery in August of an accounting error that put Ace’s equity—previously reported at $320 million—at $168 million. This was the first time Griffith addressed members since Ace announced in February that an independent investigation of the accounting problem had found no evidence of fraud, missing money or missing inventory.

Many members attending the market seemed to take Griffith’s word to heart. “Everyone has knocks in life, and you just have to move on,” said Cindy Boudreaux, an owner of Dan Boudreaux’s Ace Hardware in Napoleonville, La. “There are certain people who are going to keep complaining, but it’s not the majority of us.”

“The divisiveness is destructive to accelerating our strategic initiatives,” said Tony Tryba, owner of Dixon Hardware & Lumber in Dixon, Calif. “I’m ready to stop talking about it and to talk about the future.”

Not everyone was as positive. “I feel a lot of people should have resigned on their own,” said Vincent Costello, whose family owns 14 Ace stores on New York’s Long Island. “They should have changed the accounting firm, too. You’ve got to bite the bullet and get rid of what went on before.”

Griffith also said that 2007 financials are expected to be reported on time (by the end of April), and that the projection is an $85 million bottom line. This means Ace will be able to restore $70 million in equity—or 40 percent of the missing amount—according to Griffith.

He also focused on the “other 800-pound gorilla in the room”—the economy—reporting that Ace’s business is running 4.6 percent behind last year. He said the company has already reduced operating expenses by $30 million, or 10 percent, and that the co-op is now projecting a strong bottom line of $85 million for 2008 as well.

“I’m very confident we can expect improved profits and have opportunities to increase market share, gain customers and advance the brand,” he said, pointing to Ace’s Labor Optimization Program as a major opportunity to drive retail success.

Griffith also celebrated the news that in 2007, Ace beat Home Depot and Lowe’s in comp-store sales for the fourth time in five years and received recognition for “Highest Customer Satisfaction Among Major Home Improvement Retailers” by JD Power & Associates. In addition, Ace made Business Week’s recent list of Top Ten best customer service companies.

During the General Session, Ace members were also presented with the four board of director nominees, endorsed by officials of the co-op: members Jim Ackroyd, Jeffrey Schulein and Gina Schaefer, and non-member Jeffrey Girard. Attendees were encouraged to fill out their proxy cards in support of the proposed slate. Meanwhile a group of co-op members, who call themselves “Concerned Ace Owners,” held a meeting at the Golf Club of Dallas March 7 to discuss an alternate slate of Ace owners to fill the four open board spots that will be voted on in June.

Ace’s board selection process has been in place since 1976, and the current board spends about a year selecting what Ace spokesman Christopher Bonifica calls “a diverse group that represents Ace as a whole.”

Patrick Smith, president of Dunn Hardware & Home Center in Cleveland and one of the four alternate nominees, believes it’s time to change the way board members are selected. “Their vetting process got us people who didn’t know where half our equity was,” he said. “Now is the time to put people in place who are not part of the system.”

Smith said the Concerned Ace Owners slate, which also includes Ace members Brian Odell, Larry Perry and Charlie Huff, is more representative of the single-store Ace owners who make up about 75 percent of the co-op. About 150 members signed up to attend the off-site meeting.

“I don’t expect they’ll have much support,” Tryba said of the alternate board. “I think they’ve chosen to go after the root of the problem the wrong way and are turning a speed bump into a major thing.”

A week prior to the market, Ace had restated previously issued income and equity for fiscal years 2006, 2005 and 2004. There statement was primarily the result of the discovery of the $152 million short fall due to an inventory accounting error.

Net income for 2006 was restated as $94.5 million, previously reported as $107.4 million. The 2005 figures were adjusted to $79.5 million, down from $100.4 million. The 2004 net income was adjusted to $65.0 million, down from $101.9 million.

The inventory accounting error by itself reduced net earnings by $18.9 million in 2006, by $19.3 million in 2005 and by $33.5 million in 2004. These reductions combined with other relatively minor out-of-period adjustments and reclassifications in the restatements.

The Oak Brook, Ill.-based company restated equity for the same three years. Equity was restated as $174.0 million in 2006, $182.0 million in 2005 and 191.0 million in 2004. Those figures were downwardly revised from $319.9 million, $314.9 million and $303.0 million, respectively.