2018 Annual Report $$ $ $ $ acehardware.com/annualreport $$ $ $ $ A Message from the President & CEO Dear Ace Shareholders, Transparency is not always attractive – but we believe it is The Future: Microscopes and Telescopes And finally, we will be required to develop a compellingly beneficial. Ace is your company, and we will always candidly persuasive proposition to recruit, train and inspire the top On behalf of the Ace enterprise, I want to extend my sincere Microscopes are designed to make small things appear bigger communicate to you as the shareholders you are. At the same talent the retail world has to offer. For in the end, our brand gratitude to and appreciation for Jim Ackroyd as his term expires than they are. They are useful scrutiny tools when dissecting time, we are well aware that your primary investment resides in proposition will always be most notably predicated on our and he steps down as Chairman in May. I can say enthusiastically past performance. But they are misleading instruments when your retail store(s). We estimate consolidated operating income ability to offer irrationally amazing customer service! and without reservation that Jim’s steady hand and effective attempting to gaze into the future; for – by design – they make from your retail stores approached $1 billion in 2018. Fueling the leadership contributed mightily to a fully functioning board, a more small things look bigger than they are. Telescopes, on the other investment you have in your stores remains the passion of this I believe Ace is the hope of the hardware industry, and our future effective management team and a bigger, better Ace. It was a hand, are designed to make things that are far away – look as big company. To that end, we continue to have much for which we lies primarily in the hands of our local leaders. I’ve been around the blessing for me to serve under Jim’s leadership. as they actually are. As we attempt the risky business of peering can be proud and thankful. Ace retailers have enjoyed: smart, humble, exceptional people of Ace long enough to know into our telescopes to surmise about Ace’s very bright future, I Jim ends his tenure with Ace having achieved record revenue this: I’d never bet against them. believe there are four Totalstrategic Revenue imperatives we must embrace to of $5.7 billion in 2018, an increase of 6.1 percent from last year. 5 out of 6 years in a row of increased customer traffic capitalize on the tongue-wagging opportunity for Ace all around Consolidated net income declined 13 percent to $128.2 million. Sincerely, the globe. The majority of the income decline came from non-patronage $ $ $ $ $ $ based businesses. As a result, patronage distributions to 7 years in a row of net new store growth For Ace4.2 to be successful4.7 in5.0 the future:5.1 5.4 5.7 shareholders remain an industry-leading $141.8 million. We must have greater access to and better utilization of I view management’s chief responsibility as delivering to consumer data. The retailer with the most and best use of shareholders a return on the investment they have in both their 9 years in a row of increased same-store sales and consumer intelligence shall win. With Rewards data on over stores and in their corporation. To that end, I’m pleased to report same-store gross profit 46 million households and an increasingly robust digital that your 2018 patronage distribution yielded a 25.6 percent return initiative, I like our chances. John Venhuizen on the investment you have in Ace. President & CEO 11 out of 12 years being ranked “Highest in Customer We must become either: (a) an optimized logistical machine Our ambition is to increase the bottom line at a rate that exceeds Satisfaction” by J.D. Power or (b) an ultra, hyper-convenient shopping experience or… our topline growth. That did not happen in 2018, and you (c)‛13 both! Once‛14 again my‛15 optimism‛16 flows ‛17over. With‛18 three deserve an explanation for it. Despite strong growth, both our quarters of America’s homes and businesses located consolidated net income and our patronage distribution dipped Same-store sales increasedTotal 2.3 Revenue percent overall, 3.7 percent for our within 15 minutes of speedy-sized Ace stores – we have from the previous year. This is primarily the result of three items. 518 Pinnacle performers, and Acehardware.com grew 43 percent a tremendous advantage.Net Income Going forward, we will need First, more inventory, lower productivity and higher warehouse with 82 million consumer visits. Globally, we opened 257 new Ace to increasingly redefine convenience with initiatives that employee turnover drove expenses in the RSCs up $31 million stores through the end of the year with a total store count of 5,253. include more frequent deliveries from Ace RSCs to stores – vs. prior year. Second, our EJD migration efforts on the east $ $ $ $ $ $ and more deliveries from stores to our neighbors. coast muted growth, drove up expenses and hurt their operating 2018 was4.2 also a watershed4.7 5.0year for Ace,5.1 our retailers5.4 and5.7 our $105.1 $141.3 $156.2 $161.2 $147.4 $128.2 suppliers as we collectively surpassed $100 million in lifetime income by 87 percent. And third, The Grommet was expected We will need to accelerate our fanatical devotion to high-quality, donations to Children’s Miracle Network Hospitals. Over $14 million to nearly breakeven; however, increased customer acquisition locally relevant, differentiated merchandise that consumers was raised in 2018 alone, a 26 percent increase from last year. The Chat with John costs and required accounting treatment for the amortization of demand – that you cannot purchase at some discount heart of Ace continues to beat strong in support of the least, the intangibles generated over an $8 million loss. While these last two store or another website. This remains a priority in all of the little and the lonely! Watch the video: acehardware.com/annualreport have no impact on your patronage distributions – they did hurt countries in which we operate. consolidated income. ‛13 ‛14 ‛15 ‛16 ‛17 ‛18 ‛13 ‛14 ‛15 ‛16 ‛17 ‛18 Total Revenue Total Revenue NetNet Income TotalTotal Shareholder Shareholder ReturnReturn $4.2 $4.7 $5.0 $5.1 $5.4 $5.7 $105.1 $141.3 $156.2 $161.2 $147.4 $128.2 $148 $183 $197 $210 $209 $195 2018 was also a watershed year for Ace, our retailers and our suppliers as we collectively surpassed $100 +6.1% million in lifetime donations to Children’s Miracle Network Hospitals.” ‛13 ‛14 ‛15 ‛16 ‛17 ‛18 ‛13 ‛14 ‛15 ‛16 ‛17 ‛18 ‛13 ‛14 ‛15 ‛16 ‛17 ‛18 Net Income Total Shareholder Return Debt-to-Equity Ratio $105.1 $141.3 $156.2 $161.2 $147.4 $128.2 $148 $183 $197 $210 $209 $195 0.58 0.72 0.64 0.53 0.55 0.45 ‛13 ‛14 ‛15 ‛16 ‛17 ‛18 ‛13 ‛14 ‛15 ‛16 ‛17 ‛18 ‛13 ‛14 ‛15 ‛16 ‛17 ‛18 Total Shareholder Return Debt-to-Equity Ratio $148 $183 $197 $210 $209 $195 0.58 0.72 0.64 0.53 0.55 0.45 ‛13 ‛14 ‛15 ‛16 ‛17 ‛18 ‛13 ‛14 ‛15 ‛16 ‛17 ‛18 Debt-to-Equity Ratio 0.58 0.72 0.64 0.53 0.55 0.45 ‛13 ‛14 ‛15 ‛16 ‛17 ‛18 A Look Back at 2018 TOTAL REVENUE NEW 257 STORES I believe Ace is the hope of around the world the hardware industry, and $ 5.7 NET INCOME our future lies primarily in BILLION $128.2 the hands of our local leaders. MILLION I’ve been around the smart, MILLION STORES 2.7 SQUARE FEET 2,229 BECAME humble, exceptional people of New Ace HELPFUL CERTIFIED Ace long enough to know this: Retail SAME-STORE SALES UP Space % FOR PINNACLE I’d never bet against them.” 3.7 RETAILERS BUSINESS TO BUSINESS STORES PATRONAGE John Venhuizen 2 President & CEO % AES DIVIDEND 5.2 ROWTH $142 MILLION %PRE-TAX RETURN 46.6M TOTAL 25.6 ON EQUITY ACE REWARDS MEMBERS A Message from the Chairman of the Board YOY Sales (2018 vs. 2017) 3.1% 3.0 As I retire from the Board in May, I want to take this opportunity As a proud shareholder of this co-op and the owner of Vision Stores that leverage trusted tools and resources, such as to say thank you. More specifically, I want to thank the Board Ace Hardware in Florida, we have embraced the programs and the Mango Report, gain helpful insights into their inventory % 2.0 1.96 of Directors for their continued support and guidance over the procedures Ace offers to grow our business. We have focused accuracy and can identify potential opportunities to refine years. I want to thank our dedicated Ace Corporate team and our our energy and efforts on localizing our stores to be a part of the their processes. We have focused our energy and efforts CEO for his steadfast leadership and being a true partner. Above communities we serve. As I visit successful chains and stores 1.0 to be all, I want to thank our amazing owners and their teams for around the country, I find the most successful of them follow the Many stores are also seizing the opportunity to accelerate on localizing our stores making Ace the most Helpful hardware stores on the planet! same philosophy. their revenue growth by focusing on their business to a part of the communities we serve.” business (B2B) sales.