A message from the President & CEO

John Venhuizen, President & CEO

Dear Ace Shareholders,

The name of our long-term retail growth strategy is a double entendre. That is to say, Higher Ground has a double meaning. We aspire to achieve higher ground both financially — and — culturally. Being the best, most helpful hardware stores on the planet requires us to deliver superior financial returns — and — to make a distinctive impact on those with whom we interact, including the least, the little and the lonely, in the communities we serve.

I’d like to use this letter to humbly make the argument that the Ace enterprise delivered — big time — on both accounts in 2021.

Financial Performance

The chief aim of "management" is to deliver a strong return on the investment Ace shareholders have in both the ownership of their stores and the ownership of their company. With respect to your ownership in Ace Hardware Corporation, I’m genuinely delighted to report a remarkable 42.7% pre-tax return on the equity that shareholders have in Ace.

Our consolidated revenue increased 11% to $8.6 billion. This is on top of 2020’s revenue increase of 28%. Consolidated net income increased 4% to $330 million, a better than anticipated figure given the 126% income increase in 2020. And patronage dividend distributions will be the largest in the history of Ace Hardware at $314 million, a 7% increase on top of the previous year’s 61% pop.

We invested heavily in 2021 to: (i) expand our distribution capacity; (ii) strengthen our supply chain; (iii) expand our footprint and improve the retail store model; and (iv) further accelerate and enhance our digital ecosystem. We’re further investing in all four of these areas in 2022. In fact, our capital expenditures in ’22 will exceed that of our last three years combined. Why? Because we believe strongly in, and are betting heavily on, the scale of a globally trusted brand coupled with the skill of the locally embraced entrepreneur. Your company’s balance sheet has never been in a stronger position to do so.

Charitable Performance

In business, we keep score with money. But business isn’t about money — it’s about people. And people long for something way bigger than just money. I’m so proud and thankful to be on a team with associates and owners who continue to use their business success as a springboard to be significant in their communities.

I honestly do not know of any other business on earth who does this more effectively and with a bigger servant heart than you. As but one symbol of that generosity is the $20.8 million in enterprise contributions (Stores, RSCs, Field, Corporate and Suppliers) to the Ace Foundation to support CMN Hospitals, the Red Cross, and the Helpful Fund which aids Ace employees in need.

Our Primary Business Units

Ace Hardware Domestic (AHD) increased revenue by 11.5% and net income by 3.6%. These increases come despite significant supply disruption and are on the heels of the previous year’s 30% and 66% increase in revenue and net income, respectively. While same-store retail transactions declined 1.7%, same-store sales growth and new store development catapulted us to become the 4th largest franchise in the world, with system-wide retail revenue of $22.4 billion. Additional retail highlights include:

• Shareholder dividend distributions of $314 million. Ace owners have received over $1.7 billion in patronage payments over the last 10 years.
• Same-store retail sales grew 7.5%, and same-store retail gross profit increased 6.8%
• The average Ace store in the hardware format achieved revenue of $3.4 million, an increase of $800,000 from 2019, with an estimated increase in cash flow of over $200,000
• We opened 206 stores globally and 182 domestically, which brings our worldwide store count to 5,583
• Acehardware.com attracted over 216 million visitors, produced two-year stacked growth of 296%, and directly impacted nearly $1 billion of digital and physical store revenue in 2021
• We lost our run of increased customer transactions; however, we have four other impressive "streaks" for which we can take great pride:
  • 10 Years in a row of new domestic store growth
  • 12 years in a row of increased same-store sales and retail gross profit
  • 14 years in a row of increased average transaction size
  • 14 out of 15 years as Highest in Customer Satisfaction, according to JD Power

Ace Retail Holdings had another incredible year. After a 53% and 794% increase in revenue and operating income in 2020, our retail business increased another 10.5% to $789 million. Operating income before management fees and a PPE write-down (EBITM) increased 11% to $77 million.

Westlake Ace grew same-store sales 3.3% and EBITM was 9% of revenue. Great Lakes Ace grew same-store sales 4.8% with EBITM at 12% of revenue. In addition to their strong financial performance, ARH continues to bring strategic value to Ace via: (i) development of better, smarter, more operationally elegant initiatives, (ii) testing of new ideas and initiatives, and (iii) a capable entity that offers hardware store owners the ability to monetize their life’s work when other Ace owners are uninterested or incapable.

In 2020 I surmised that Emery Jensen Distribution (EJD) had staged perhaps the greatest comeback in wholesale distribution history with an 89% improvement to operating income. Well, they certainly didn’t get complacent. Total revenue grew 9.3% to $445 million while operating income increased another 354% to $6.9 million. EJD not only (i) helps us in the fight for supply, (ii) increases our importance to suppliers and (iii) provides greater scale for our cost-of-goods sold advantage but also (iv) delivered over $20 million to your patronage dividend.

Ace International Holdings produced record revenue of $272 million, a 25% increase from 2020 (excluding the PPE equipment they sourced and "sold" to domestic in 2020). EBIT, however, was a loss of $2.4 million as we restructured our distribution centers in Panama and Dubai while furthering our investments in Mexico.

Tucked within these four primary business units are The Grommet and Ace Handyman Services. While the Grommet improved operating income by $1.2 million, sales and the overall business remain disappointing. We’re exploring options for this business. Ace Handyman Services, on the other hand, is a small but phenomenal business thus far. Revenue increased 94% to $9 million while operating income increased 133%. On a cash basis, the operating company is throwing off EBIT of 19% while the franchise business is at 17.3% of revenue. This business is now the largest handyman service in the U.S., with nearly 270 franchise locations…and growing!

Sixty-eight percent of our hardware same-store sales growth came from less than 2% of our transactions in 2021. At first blush, that might sound both astounding and a bit discouraging. I see it differently. I take great encouragement in this stunning statistic because it quantifiably underscores the combination of two strategic imperatives at Ace. First are the three battles we must wage to win the retail war: Service, Convenience, and Quality. And second is our desire to become Famous for Four. The amalgamation of these two imperatives drove the 2%. These transactions are the ones over $200 and are primarily driven by three of our four "famous" categories: namely, Paint, Power, & BBQ.

Home preservation is our core. We’ll defend that turf with everything we have, and we’ll remain relentless in our pursuit of product supply and customer footsteps — both of which remain a disrupting challenge at present. Paint, Power, & BBQ, however, are arguably among the most aspirational categories in our stores. They are the ones with which we are placing disproportionate investments. And they are the ones fueling a disproportionate share of our growth in what was (and is) a very difficult retail environment. Few other categories in our stores more aptly bring together our purpose with our products.

Remember, it’s not only about the award-winning customer service. It’s not about the grill! It’s not even about the fuel (though that is critical). It’s about gathering family and friends around fire to forge a more flavorful life! Why? Because we exist to serve others.

Many companies talk about step-change, transformational growth. There’s a long line of people in business who promise terrific customer service and a wonderful culture in which to operate. But the troops thin out a bit when it comes time to actually deliver it. Ace…thank you for operating in the thin line. I’m ever so proud and grateful to be a part of the Ace team.

John Venhuizen
President & CEO