Ace turns the page on ’07, but story lingers

Ace Hardware officially closed the boo k on 2007 last month when the Oak Brook, Ill. - based co-op released its year-end results, reporting wholesale revenues of $3.97 billion, which was a $39.4 million—or 1 percent—increase over wholesale revenues of $3.93 billion in 2006.

Ace said the revenue increase was driven, in part, by 171 new Ace store s worldwide, as well as an increase in international revenues of $24.1 million, or 14.4 percent. Ace currently operates stores in all 50 states and in 63 countries.

At the same time, Ace net income for 2007 dropped 8 percent to $86.9 million from $94.5 million in 2006. The co-op attributed the decline to higher costs for retail initiatives, expenses related to the opening of a new distribution center and the expense of investigating and restating three years of financial statements (2004 to 2006).

“Our operations are solid, and we’re making investments in both our retail and wholesale infrastructure for the benefit of both the short and long term,” said Ace president and CEO Ray Griffith. “We are pleased to have the audit of our 2007 financial statements complete and are encouraged by our 2007 results, especially in light of the economic pressures on our sales and overall operating expenses.”

Although this was the sixth consecutive year of positive revenue growth for Ace, it was also a year that Ace management and many members will be glad to put behind them. It started with the discovery in August of accounting errors that put Ace’s equity—previously reported at $320 million—at $168 million. This news, which sent shock waves through the ranks, led to a decision by management that Ace dealers, who had received excessive patron age dividends from 2002 to 2006, would have to pay that money back through variance allocation accounts over a multi-year period.

As a result, when the 2007 patron age dividends—valued at $81.2 million—are mailed out in mid-May, dealers will receive 20 percent in cash and 80 percent in Class C stock, the latter portion being first applied against the variance account.

Meanwhile, Griffith said Ace continues to focus on re-engineering its supply chain and enhancing software for better efficiencies in distribution, merchandising and inventory control systems. He also highlighted the retail roll out of a program to improve the customer experience at Ace stores, as well as efforts to have both investors and existing Ace retailers open new stores. Ace anticipates 125 new stores will open in 2008.

“Along with the sluggish economy and waning consumer confidence, we’ve been faced with many challenges this past year,” Griffith said. “We’ve had to look at our business differently and make some difficult strategic decisions to operate smarter and leaner.”

But an upcoming board election reveals some simmering unrest in the Ace ranks. While Ace has proposed a corporate-endorsed slate to fill four empty seats on the board, an opposition group called Concerned Ace Owners—whose members tend to be smaller, single-store owners—has submitted its own list of candidates for the June 3 election.

The opposition candidates are Charlie Huff, C J’s Home Center in Omaha, Neb.; Brian Odell, Arlington Ace Hardware in Kensington, Calif.; Larry Perry, Wood s tock Home & Hardware in Wood stock, Vt.; and Patrick Smith, Dunn Hardware in Lyndhurst, Ohio.

Ace has maintained that its corporate-nominated slate of candidates reflects a carefully chosen group of committed members, representing diverse member interests.

Last month, an internal memo from Ace vp-operations Ken Nichols was sent to his field staff, urging them to call on Ace dealers regarding proxy instructions. The memo stated: “Our objective is to get as many proxies as possible signed and returned that support the board’s endorsed candidates.”

The memo also said, “Identify the retailers in your area that you believe WILL vote for the board-endorsed candidates and plan out your schedule to get to these folks as you can with out dropping everything else.”

Randy Bever, owner of Bever’s Ace Hardware in Gentry, Ark., said he had seen Nichols’ memo but had not yet had a visit from his Ace field representative. “They actually had proxies on the tables at the spring market and presented the four Ace candidates to us, which they had not done before,” he said. “I can tell they’re concerned, but I haven’t been pressured.”

Regarding the alternate slate, Bever said, “I think they have a real chance. That’s why Ace is supposedly putting pressure on members—because they’re concerned about the Concerned Ace Owners.”