Ace Hardware 2005 Annual Report Download - page 37

12 ACE HARDWARE CORP. NEW FRONTIERS. NEW OPPORTUNITIES.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Operations – 2005 Compared to 2004
Consolidated sales for the year ended December 31, 2005 totaled
$3.47 billion, an increase of 5.4% or $177.3 million, as compared
to 2004. Domestic sales were up 5.1% or $162.5 million and
International sales increased 11.9% or $14.8 million. The increase
in domestic sales is primarily due to higher sales to our existing
retailer base and sales to newly affiliated retailers. Consolidated
sales increased across all core categories and most significantly
in the plumbing, housewares and lawn and garden categories.
The Company added 131 newly affiliated stores in 2005 which
increased sales by $63.4 million. The Company also experienced
retailer terminations of 258 stores which negatively impacted
sales by $50.0 million in 2005. International sales increased
primarily in the Caribbean, Middle East and Central America
regions. Warehouse sales represented 77.6% of the volume in
2005 vs. 76.8% in 2004 while direct ship sales declined to 22.4%
from 23.2%.
Gross profit for the year ended December 31, 2005 increased
$17.2 million and was up slightly as a percent of total sales to
9.38%. Comparisons of gross profit between 2005 and 2004 are
impacted by the implementation of EITF 02-16, “Accounting
by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor” in 2004. Excluding the effect of
EITF 02-16, Gross Profit increased $5.6 million but decreased
as a percent of sales to 9.38% from 9.72% in 2005 as compared
to 2004. The decrease in gross profit rate in 2005 was driven
by an increase in the inventory purchase price index resulting
in higher LIFO expense, lower paint margins on higher raw
material costs and lower margins on import products primarily
in support of promotional events. These decreases were partially
offset by increased handling and shipping charges due to higher
warehouse sales.
Distribution operations expenses decreased $6.7 million and
decreased as a percent of handled sales to 1.92% in 2005 from
2.31% in 2004 primarily due to lower freight related expenses
resulting from additional consolidation of freight, improved
labor productivity and the avoidance of approximately $3.6
million of non-recurring start-up/shut-down costs for the West
Coast distribution network that had been incurred in 2004.
Selling, general and administrative expenses decreased $3.5
million and decreased as a percent of sales to 1.87% in 2005 from
2.08% in 2004 primarily due to shut-down expenses associated
with the closure of the Company’s print facility in 2004, lower
expenses related to the 2005 conventions and continued cost
control measures.
Retail success and development expenses increased $23.1 million
and increased as a percent of sales to 2.84% in 2005 from 2.29%
in 2004 primarily due to a $2.8 million increase in retailer
incentive expenses under the Company’s growth strategy (Vision 21
achievement award), a $3.1 million increase in retail technology
investments and increased expenses of $10.9 million related to
Company-owned retail locations. Retail success and development
expenses consist primarily of field personnel and expenses of
Company-owned retail locations. Ace continues to make
investments in retail initiatives under its growth strategy to
support Ace retailers.
Interest expense increased $3.1 million due to the rising interest
rate environment and increased interest related to the $25.0
million long-term debt issuance in May 2004. The average interest
rate on short-term borrowings increased by 1.79 percentage points
from that experienced during the comparable prior year period.
Other income increased $1.1 million primarily due to lower
insurance premiums as a result of favorable loss reserve adjustments
and decreased net bankcard expenses. The increase was partially
offset by reduced income from non-controlling investments in
retail joint ventures.
Income tax benefit decreased $3.4 million primarily due to
adjustments to the balances of deferred tax assets and liabilities in
2004. Excluding the impact of the revaluation of deferred tax
assets and liabilities in 2004 of $8.1 million, income tax expense
decreased $4.7 million primarily due to realizing previous capital
losses and lower non-patronage income compared to the prior year.
Net earnings decreased $1.5 million compared to the prior
year driven by increased retail investments and costs related to
Company-owned retail locations. As announced in 2004,
the Company has established a pool of funds equal to 1% of
handled purchases, to be available to retailers achieving all of the
Vision 21 brand initiatives for reimbursement of retail investments.
Excluding the increased retail investments, net earnings increased
$1.3 million or 1.1% as outlined below:
December 31, January 1,
Periods ended 2005 2005
(In thousands)
Net earnings .................................. $ 100,419 $ 101,947
Vision 21 achievement award ........ 16,865 14,054
Net earnings before effect of
Vision 21 achievement award .... $ 117,284 $ 116,001