2020 Ace Retail Financial Report

An analysis based on single store financial information.

2020 Retai l F inanc ial Report

An analys is based on s ing le store f inancial informat ion

Prepared by Profit Planning Group

Contents

Introduction......................................................................................................................................................................1

Executive Summary

Overview Of Results..........................................................................................................................................................3

Summary Of Financial Ratios.............................................................................................................................................4

Financial Statements and Ratios by Store Format

Return On Investment.......................................................................................................................................................5

Graphical Analysis.............................................................................................................................................................7

Income Statement ............................................................................................................................................................9

Balance Sheet .................................................................................................................................................................10

Financial Ratios ...............................................................................................................................................................11

Inventory Productivity Ratios ..........................................................................................................................................12

Operating Productivity Ratios .........................................................................................................................................13

Employee Productivity Ratios..........................................................................................................................................14

Format Analysis: High Profit, Sales Volume, Density, and Performance Trend

Convenience Hardware Stores ........................................................................................................................................15

Core Hardware Stores .....................................................................................................................................................19

Super Hardware Stores ...................................................................................................................................................23

Home Centers.................................................................................................................................................................27

Contractor-Oriented Supply (COS) ....................................................................................................................................31

Ace vs. Industry Performance..........................................................................................................................................35

Ratio Definitions .............................................................................................................................................................37

Prepared By

Prepared For

Profit Planning Group, Inc. www.profitplanninggroup.com

Ace Hardware Corporation 2200 Kensington Ct. Oak Brook, IL 60523 630.990.6600 ar@acehardware.com

303.444.6212

 2021 Ace Hardware Corporation

Introduction

The 2020 Ace Retail Financial Report presents a detailed analysis of the financial performance of Ace retail stores. This report is designed to provide a straightforward yet comprehensive analysis of profitability among individual stores . The study collected data for single store operations. The analysis used financial and operating data provided by 747 stores. Note that results may fluctuate from year to year simply due to changes in the pool of participating stores.

Report Overview The report is organized into sections designed to assist management in a specific area of inquiry.

The Executive Summary provides an overview of study results. It highlights the differences between typical and high profit Ace Hardware stores and the typical industry hardware store. The High Profit samples consist of stores with a pre-tax return on asset value (ROA) in the top 25% of all ROA values reported by hardware format stores. Financial Statements and Ratios presents a detailed examination of return on investment, the income statement and balance sheet, and important financial and productivity ratios. The accompanying commentary focuses on the importance of these statistics. Results are also presented for primary retail formats in the Format Analysis section. Ace stores are compared with other hardware stores in the Ace vs. Industry Performance section.

The Ratio Definition section provides a summary of calculations used in this analysis.

Statistics Ratios

Most of the figures in this report are ratios. A ratio is simply a fraction meaning “there are X units of the top component for every Y units of the bottom component.” A 30% gross margin is the fraction 30/100 with gross profit on top and sales on the bottom meaning “there is $30 of gross profit for every $100 of sales.” Medians The ratios presented in this report are based on medians. Medians are the preferred statistic for the basis of this analysis. A median is the middle value in the sorted list of all reported values. Unlike averages, medians are not influenced by extreme values and, therefore, best represent a typical result.

The N/A Label Throughout this report, “N/A” designates results that are not available due to insufficient data.

Rounding Calculations for the analysis are done at high precision then rounded to one decimal for this report. These rounded figures are accurate but sums of rounded figures may differ from the rounded totals due to the lower precision.

Classifications

For this analysis, Ace retailers were classified into groups based on retail format and urban density.

Retai l Classif ications Ace retailers were classified into the following retail format classifications.

Hardware Store Formats Hardware stores cater to Do-It-Yourself consumers, focusing on repair, replacement, and small projects. Hardware stores are separated into three different categories by hardware square footage.  Convenience Hardware Selling space up to 6,000 square feet  Core Hardware Selling space of 6,001 to 12,000 square feet  Super Hardware Selling space of 12,001 square feet or more Home Centers serve the small contractor as well as the Do-It-Yourself consumer, carrying basic hardware plus expanded millwork, windows and doors, lumber and building materials, and kitchen and bath lines. Contractor-Oriented Supply caters primarily to building and remodeling contractors, featuring lumber and building materials as well as essential core hardware items. Other Retail Classifications The columns labeled "Typical Non-Ace" present results for non-Ace single store operations from the NRHA Cost of Doing Business Study. NRHA is solely responsible for these results.

Density Classif ications Ace retailers were also classified into the following retail format classifications.

A store’s density classification is based on density ratings assigned by the United States Census Bureau to the census block groups surrounding the store. Census block groups are geographic units defined by the Census Bureau. They combine individual census blocks into over 211,000 groups. Individual blocks generally contain 600 and 3,000 people. Their physical size depends on geography. In urban areas, blocks are typically city blocks bound by streets. In rural areas, blocks may include many square miles. The density rating of a census block group is based on (1) the numbers of people living in the group and (2) the size/area of the group. Ratings range from zero for uninhabited to five for dense urban areas like Manhattan, N.Y. A store's density score is the average of the density ratings of the census block groups within the radius of a seven minute drive. Based on the score, stores are assigned one of four density classifications.



Rural Scores from 0.0 to 1.2 which is, on average, a population of 169 per square mile. Suburban Fringe Scores from 1.3 to 2.2 which is, on average, a population of 1,182 per square mile. Suburban Scores from 2.3 to 3.2 which is, on average, a population of 6,077 per square mile. Urban Scores from 3.3 to 5.0 which is, on average, a population of 39,847 per square mile.



Executive Summary

Overv i ew of Resul ts

Note: In this summary the figures for Typical Non-Ace Hardware present results reported by NRHA in their Cost of Doing Business Study for single store operations. NRHA is solely responsible for these results. Financial performance varies widely within Ace. The typical Ace Hardware store had sales of $3,004,134 and a pre-tax profit of 9.6%. In contrast, the high-profit Ace store had sales of $3,482,541 and profit of 15.3%. Of greatest consequence, the high profit Ace Hardware store produced pre-tax return on assets (profit before taxes expressed as a percentage of total assets) of 44.4% while the typical Ace store generated only 22.1%. A number of factors led to these differences in performance. The differences can be summarized by examining with what are commonly called the Critical Profit Variables (CPVs). The following table compares CPVs for the typical and high profit Ace Hardware store and for the typical industry hardware store.

Compar i son of Cr i t i ca l Prof i t Var i abl es

Typical Ace Hardware

High

Typical

Profit Ace Hardware

Non-Ace Hardware

Store

Sales Per FTE Employee Measures employee productivity.

$237,560

$248,392

$213,772

Gross Margin Percentage Ability to sell at prices that cover expenses and earn profit. Operating Expense Percentage Expense control is crucial in achieving adequate profit. Inventory Turnover The most common measure of inventory utilization.

40.9%

42.2%

39.4%

32.5%

28.4%

34.1%

3.2

3.6

2.4

The high profit store seldom performs better in all of the CPVs but their combined CPV performance produces better overall results. The nature of the differences and their underlying causes need to be understood by every Ace retailer. The typical and the high profit Ace Hardware stores have different sales volumes and CPVs. These differences produce a dramatic improvement in overall performance. The following table shows the impact of the CPVs on the typical Ace store, the high profit Ace store, and the typical industry hardware store.

Over v i ew of F i nanc i a l Resul t s

Typical Ace Hardware

High

Profit Ace Hardware $3,482,541 2,054,699 1,427,842

Store

Net Sales

$3,004,134 1,814,497 1,189,637

Cost Of Goods Sold

Gross Margin Before Patronage Dividend

Patronage Dividend

39,054

41,790

Gross Margin

1,228,691 976,344 252,347 36,050 $288,397

1,469,632 989,042 480,591 52,238 $532,829

Operating Expenses Operating Profit

Other Income/Expenses

Profit Before Taxes

Profit Before Taxes (%)

9.6%

15.3%

Total Assets

$1,306,145

$1,200,876

Return On Assets (%)

22.1%

44.4%

Executive Summary

Summary of Fi nanci al Rat i os

Typical Ace Hardware

High

Typical

Profit Ace Hardware

Non-Ace Hardware

Store

Typical Sales Volume ($)

3,004,134

3,482,541

1,923,952

Strategic Profit Model

Profit Margin Asset Turnover

9.6 2.3

15.3

8.6 2.0

2.9

Return On Assets (Pre-Tax %)

22.1

44.4

17.2

Financial Leverage

1.5

1.4

1.5

Return On Net Worth (Pre-Tax %)

33.1

62.2

25.8

Income Statement (% of sales)

Net Sales

100.0

Cost Of Goods Sold

60.4 39.6

59.0 41.0

61.6 38.4

Gross Margin Before Patronage Div.

Patronage Dividend

1.3

1.2

1.0

Gross Margin

40.9

42.2

39.4

Operating Expenses Payroll Expenses Occupancy Expenses

17.9

15.5

20.8

4.7 9.9

4.8 8.1

5.1 8.2

Other Operating Expenses Total Operating Expenses

32.5

28.4

34.1

Operating Profit

8.4 1.2 9.6

13.8

5.3 3.3 8.6

Other Income/Expenses

1.5

Profit Before Taxes

15.3

Financial Ratios

Current Ratio Quick Ratio

6.5 1.8

6.7 2.1 9.6

6.9 2.2

Accounts Payable To Inventory

10.5 12.9

11.2 16.8

Accounts Payable Payout Period (Days)

10.1

Debt To Equity

0.4

0.3

0.5

Inventory Productivity

Inventory Turnover

3.2

3.6

2.4

Inventory Holding Period (Days) Gross Margin Return On Inventory

113.3 212.5

102.5 253.0

150.0 158.2

EBITDA (% Of Sales)

11.3 10.0

16.2 15.5

N/A N/A

EBIT (% Of Sales)

Operating Productivity

Square Feet Of Retail Selling Space Sales $ Per Retail Square Foot Gross Profit $ Per Retail Square Foot

10,000 289.10 116.30

10,300 323.90 135.00

10,000 192.00

76.00

Employee Productivity

Number Of Full-Time Employees Number Of Part-Time Employees

7 6

8 6

N/A N/A

Sales $ Per FTE Employee

237,560 97,382 39,104

248,392 104,270 39,200

213,772 84,226 44,465

Gross Profit $ Per FTE Employee Payroll $ Per FTE Employee Personnel Productivity Ratio ( %)

43.8

36.7

N/A

Financial Statements & Ratios

Return On Investment

Return on investment is the most meaningful way to evaluate overall business profitability. It is important to understand how return on investment is calculated and how it can be improved. There are two distinct return on investment measures: Return on Assets and Return on Net Worth. Return on Assets looks at the economic viability of the store. Return on Net Worth , or return on owner equity, examines the return being generated for the store’s owners. Both have their own value in analyzing performance. These two return on investment ratios are driven by three performance ratios: Profit Margin, Asset Turnover and Financial Leverage . These represents a different strategy, or profitability pathway, to improve return on investment. These five ratios can be presented in the Strategic Profit Model . The model is simply a graphical representation of return on investment. The model for the typical core hardware store is shown below.

Return on Owner Equity

Path 1 Profit Margin

Path 2 Asset Turnover

Path 3 Financial Leverage

Return on Assets

33.1 %

9.6%

2.3

22.1%

1.5

Profit Before Taxes Net Revenue

Net Revenue Total Assets

Profit Before Taxes Total Assets

Total Assets Net Worth

Profit Before Taxes Net Worth

The Strategic Profit Model for the Typical Core Hardware Store

Path 1 : Profit Margin = Profit Before Taxes ÷ Net Sales x 100 The first, and most important, profitability pathway is profit margin management. In the figure above, a profit margin of 9.6 percent means that for every $1.00 of sales the business was able to produce 9.6¢ in profit before taxes. Profit margin focuses on sales productivity, gross margin management and operating expense control. Path 2 : Asset Turnover = Net Sales ÷ Total Assets Asset turnover reflects the sales the store produces per dollar invested in assets. The ratio of 2.3 means that the store is able to generate $2.30 in sales for every $1.00 in assets. If a store's cash, accounts receivable, inventory, property, equipment, and all other assets can be used as efficiently as possible, then a maximum amount of sales can be generated from a given asset investment. Return On Assets = Profit Before Taxes ÷ Total Assets x 100 Return on assets (ROA) is the direct result of the first two pathways; profit margin multiplied by asset turnover. This measure of performance is a good indicator of the store's ability to survive and prosper. The pre-tax return on assets ratio should at least equal the cost of capital. For the typical core hardware store ROA is 22.1 percent. Path 3 : Financial Leverage = Total Assets ÷ Net Worth Financial leverage measures the total dollars of assets per dollar of net worth. The ratio measures the extent to which the store uses outside (non-owner) financing. The higher the ratio, the more the store relies on outside financing. The ratio of 1.5 times suggests that for every $1.00 in net worth, the store had $1.50 in total assets. Return On Net Worth = Profit Before Taxes ÷ Net Worth x 100 The end result of the three profitability pathways is return on net worth. It is seldom possible to generate an adequate rate of return on net worth by emphasizing just one profitability pathway. Each pathway should be examined carefully for improvement opportunities and then trade-offs made in order to increase overall profitability. An improvement plan should not be based upon any single measure of performance, but be developed with the complete picture in mind, i.e., the impact on return on net worth. The typical core hardware store has a return on net worth of 33.1 percent; that is, for every $1.00 of net worth, the store produced 33.1¢ of profit before taxes.

Financial Statements & Ratios

Return On Investment

Companies should earn an adequate return on investment to satisfy the owners’ needs. The following table provides Profit Planning Group’s recommended guidelines for return on assets.

Pr imar y F i nanc i a l Obj ec t i ve

Return On Asset s %

E f fec t On Bus i ness Per formance

Mi nimum

4 - 5

Minimum long-term return needed to ensure survival

Tar get

8 - 10

Satisfies basic owner needs but does not allow for growth or inflation

Top Per formance

15 - 20

Would make the store one of the top profit producers

The following ratios take into account funds owners receive as salary in addition to profit.

Owners' Discretionary Profit = Profit Before Taxes + Owner & Officer Salary & Bonus This figure adds salary and bonuses paid to owners and officers to profits to reflect in one figure the funds flowing to owners.

Owners’ Discretionary Profit Margin = Owners’ Discretionary Profit ÷ Net Sales Simply Owners’ Discretionary Profit as a percentage of sales. Owners’ Discretionary Return on Assets = Owners’ Discretionary Profit ÷ Total Assets The return generated by each dollar of asset investment. Owners’ Discretionary Return on Net Worth = Owners’ Discretionary Profit ÷ Net Worth The return the owner receives on their personal investment.

Conven-

Contractor

ience

Core

Super

Home Center

Oriented

Hardware

Supply

Sample Size

132

358

188

Strategic Profit Model

Profit Margin Asset Turnover

7.3 2.2

9.6 2.3

10.4

8.4 2.3

6.3 2.0

2.3

Return On Assets (Pre-Tax %)

16.1

22.1

23.9

19.3

12.6

Financial Leverage

1.4

1.5

1.3

1.2

Return On Net Worth (Pre-Tax %)

22.5

33.1

35.8

25.1

15.1

Owners' Return

Owners' Discretionary Profit Margin Owners' Discretionary Return On Assets

11.8 26.8 42.0

13.1 32.4 50.2

12.5 32.2 51.4

11.8 28.2 35.6

9.2

15.3 24.2

Owners' Discretionary RONW

Graphical Analysis

Profit Margin (%)

Profit Margin Owners' Disc. PM

14.0

12.0

10.0

8.0

6.0

4.0

2.0

7.3

11.7

9.6

13.0

10.4

13.0

8.4

11.8

6.2

9.1

0.0

Convenience Hardware

Core Hardware

Super Hardware

Home Center

Contractor Oriented Supply

Return on Assets (%)

Return on Assets Owners' Disc. ROA

35.0

30.0

25.0

20.0

15.0

10.0

5.0

16.1

26.8

22.1

32.4

25.0

32.2

19.3

28.2

12.4

15.3

0.0

Convenience Hardware

Core Hardware

Super Hardware

Home Center

Contractor Oriented Supply

Return on Net Worth (%)

Return on Net Worth Owners' Disc. RONW

60.0

50.0

40.0

30.0

20.0

10.0

22.5

42.0

33.1

49.2

37.5

51.4

25.1

35.6

14.9

24.2

0.0

Convenience Hardware

Core Hardware

Super Hardware

Home Center

Contractor Oriented Supply

Graphical Analysis

Gross Margin % Operating Expense %

Gross Margin & Operating Expenses (%)

45.0

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

41.0

34.8

41.1

32.6

40.3

31.3

33.4

27.0

29.3

24.0

0.0

Convenience Hardware

Core Hardware

Super Hardware

Home Center

Contractor Oriented Supply

Inventory Turnover (turns)

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

3.3

3.2

3.3

3.9

3.5

0.0

Convenience Hardware

Core Hardware

Super Hardware

Home Center

Contractor Oriented Supply

Sales $ per Employee GP $ per Employee

Net Sales & Gross Margin per FTE Employee ($)

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

Convenience Hardware

Core Hardware

Super Hardware

Home Center

Contractor Oriented Supply

Financial Statements & Ratios

Income Statement

The income statement reflects the ability of management to generate sales, produce a reasonable margin on those sales, control expenses and earn an equitable profit. Thus, it serves as the primary scorecard of management’s effectiveness. The level of performance depends primarily upon control of two areas: Gross Margin The first measure of profitability, gross margin, considers all expenses related to the cost of buying and pricing the products sold. To be successful a business must earn enough gross margin to cover all of the other business expenses and earn a reasonable profit as well. Operating Expenses Operating expenses are difficult to control, particularly for the smaller store. Expense management is frequently referred to as a survival issue—poor expense management may jeopardize the business’ future.

Conven-

Contractor

ience

Core

Super

Home Center

Oriented

Hardware

Supply

Typical Sales Volume ($)

1,869,036

2,723,613

4,625,571

5,606,107

6,447,582

Income Statement (% of sales)

Net Sales

100.0

Cost Of Goods Sold

60.3 39.7

60.1 39.9

60.8 39.2

67.7 32.3

71.0 29.0

Gross Margin Before Patronage Dividend

Patronage Dividend

1.5

1.3

1.1

0.3

Gross Margin

41.2

40.3

33.4

29.3

Payroll Expenses Owners/Officers Salaries & Bonuses All Other Employee Wages & Bonuses Total Salaries, Wages & Bonuses Payroll Taxes (FICA, Workers’ Comp., Unemp.) Group Insurance (Hospital/Medical/Life) Benefit Plans (Pension, Profit Sharing, etc.)

4.5

3.5

2.1

3.4

2.9 9.8

12.6 17.1

12.4 15.9

12.2 14.3

11.0 14.4

12.7

1.5 0.6 0.2

1.3 0.5 0.2

1.3 0.6 0.2

1.3 0.9 0.2

1.2 0.3 0.4

Total Payroll Expenses

19.4

17.9

16.4

16.8

14.6

Occupancy Expenses Utilities (Heat, Light, Power, Water) Building Repairs & Maintenance Rent Or Ownership In Real Estate*

0.8 0.3 3.6 4.7 1.2 0.4 1.0 0.2 0.2 0.5 0.0 7.4

0.7 0.3 3.6 4.6 1.6 0.3 0.6 0.2 0.1 0.5 0.0 6.8

0.8 0.3 3.9 5.0 1.6 0.2 0.4 0.2 0.1 0.6 0.0 6.8 9.9

0.6 0.4 1.1 2.1 0.7 0.2 0.6 0.1 0.1 1.2 0.0 4.8 7.7

0.3 0.4 0.8 1.5 0.3 0.2 0.7 0.0 0.1 0.6 0.2 5.8 7.9

Total Occupancy Expenses

Other Operating Expenses Advertising & Promotion

Telephone

Insurance (Business Liability & Casualty)

Interest Expense

Taxes (Personal Prop., Use, Licenses, Permits)

Depreciation

Bad Debt Losses

All Other Operating Expenses Total Other Operating Expenses

10.9

10.2

Total Operating Expenses

35.0

32.7

31.3

26.6

24.0

Operating Profit

6.2 1.1 7.3

8.5 1.1 9.6

9.0 1.4

6.8 1.6 8.4

5.3 1.0 6.3

Other Income/Expenses

Profit Before Taxes

10.4

Owners' Discretionary Profit

11.8

13.1

12.5

11.8

9.2

*includes rent, mortgage interest, building depreciation, real estate insurance and real estate taxes

Financial Statements & Ratios

Bal ance Sheet

The balance sheet is an under-utilized financial statement. If properly analyzed, it provides significant insight into the financial structure of the store. This page examines the composition of the balance sheet while the pages that follow derive some key ratios from the balance sheet information. Both the assets and liabilities sides of the balance sheet offer insight into the investment posture of the business. The assets side reflects where investments are made and the liquidity of the firm. The liabilities side identifies which business stakeholders made the investment and where the debt lies. Assets Many stores tend to be cash short. Ideally cash balances should equal at least two to three percent of total assets. For stores below that level, the potential for cash flow problems continually exists. The bulk of the asset investment for most companies is in accounts receivable and inventory. For the typical Core Hardware store, these two items are 3.2 percent of assets and 49.2 percent of assets, respectively. The importance of these two factors in maintaining financial liquidity cannot be overstated. Several sets of subsequent ratios will focus on how well these two asset categories are utilized. Liabilities and Net Worth Liabilities and net worth represent the two methods of funding assets. Two items are of special significance on this side of the balance sheet. These items involve the ability of the store to make use of interest-free financing and the level of financial conservatism employed. Accounts payable represents an interest-free source of capital for the store. In most cases stores are trying to use accounts payable to finance a major portion of their inventory investment. This involves both efforts to turn the inventory faster and efforts to negotiate longer credit terms. The amount of net worth or owner equity on the balance sheet indicates the financial conservatism of the store. Net worth is the sum of the owners' paid-in capital, plus loans from owners, plus all earnings retained in the business. For financially conservative companies, net worth is typically fifty percent of total assets, or higher. If net worth is less than one-third of total assets, the store is exceptionally aggressive in its use of debt. In this case, some degree of caution in future expansion would be suggested.

Conven-

Contractor

ience

Core

Super

Home Center

Oriented

Hardware

Supply

Assets (% of assets)

Cash & Marketable Securities

19.6

21.9

21.0

18.0 10.2 43.0

19.5 16.0 42.6

Accounts Receivable

5.4

3.2

3.3

Inventory

50.0

49.2

50.5

Other Current Assets Total Current Assets

3.0

3.5

4.2

1.1

3.3

77.9 22.1

77.8 22.2

79.0 21.0

72.3 27.7

81.4 18.6

Fixed & Noncurrent Assets

Total Assets

100.0

Liabilities & Net Worth (% of assets)

Accounts Payable

8.6 0.0 8.9

8.6 0.0 7.4

9.2 0.0 9.5

6.8 2.4 5.8

9.4 0.0 5.1

Notes Payable

Other Current Liabilities Total Current Liabilities Long Term Liabilities Loans From Stockholders Net Worth or Owner Equity Total Liabilities & Net Worth

17.6 12.9

16.0 17.0

18.7 16.5

14.9

14.5

7.9 0.0

5.0 0.0

0.0

69.5

67.0

64.7

77.2

80.5

100.0

Financial Statements & Ratios

Fi nanci al Rat i os

Suppliers, bankers and outside creditors have a wide range of financial ratios at their disposal to measure the overall financial integrity of the store. The specific ratios most commonly used in this process are covered on this page. Current Ratio = Current Assets ÷ Current Liabilities The current ratio measures the margin of safety that management maintains in order to allow for the inevitable unevenness in the flow of funds through the current assets and current liabilities accounts. A business needs a supply of current funds to be assured of being able to pay its bills when they come due. As a general rule, the current ratio should be 2.0 or higher. Quick Ratio = (Cash + Accounts Receivable) ÷ Current Liabilities Quick assets include cash, marketable securities, and current accounts receivable. Presumably, these items can be converted into cash quickly at approximately their stated amounts, unlike inventory which is the principal current asset excluded from this calculation. The quick ratio is, therefore, a measure of the extent to which liquid resources are readily available to meet current obligations. A guideline for the quick ratio is 1.0 or higher. Accounts Payable To Inventory = Accounts Payable ÷ Average Inventory x 100 This ratio measures the extent to which a business' inventory is financed by the suppliers of that inventory. Increasingly, stores are looking to finance a major portion of their inventory via supplier financing. Accounts Payable Payout Period = Accounts Payable ÷ (Cost Of Goods Sold ÷ 365 Days) The accounts payable payout period measures the timeliness of paying suppliers. This figure is related directly to the normal credit terms of the business' purchases. Debt To Equity = Total Liabilities ÷ Net Worth The greater the proportion of its financing that is obtained from owners, the less worry the business has in meeting its fixed obligations. At the same time excessive reliance on owner financing slows the rate at which the store can grow. The debt to equity ratio shows the balance that management has struck between debt and owners' equity. A mix of $1.00 debt to $1.00 equity is usually considered prudent. EBITDA (% Of Sales) = Earnings Before Interest & Taxes + Depreciation & Amortization ÷ Net Sales x 100 EBITDA is a profitability figure based on earnings before interest, taxes, depreciation and amortization. Since it incorporates depreciation and amortization, it represents the best estimate of the firm’s operating cash margin.

EBIT (% Of Sales) = (Profit Before Taxes + Interest) ÷ Net Sales x 100 EBIT is a profitability figure based on earnings before interest and taxes.

Interest Coverage = (Profit Before Taxes + Interest) ÷ Interest This ratio measures the number of times earnings before interest and taxes will cover interest payments on debt. It also shows the level to which income can decline before a firm is unable to meet its interest obligations.

Conven-

Contractor

ience

Core

Super

Home Center

Oriented

Hardware

Supply

Financial Ratios

Current Ratio Quick Ratio

6.6 1.8 9.8

6.9 2.2 9.2

5.3 1.6

5.5 2.0

6.3 3.6

Accounts Payable To Inventory (%) Accounts Payable Payout Period (Days)

13.4 14.7

14.4 12.8

10.2 13.8

11.5

12.2

Debt To Equity EBITDA (% Of Sales)

0.3 9.2 8.3

0.4

0.5

0.3 9.9 8.5

0.2 8.6 6.5 8.9

11.4 10.2 26.9

11.8 10.7 33.6

EBIT (% Of Sales)

Interest Coverage

24.1

28.3

Financial Statements & Ratios

Inventory Product i v i ty Rat i os

Given the significance of inventory, it is important to measure the productivity of these asset investments using the ratios on this page. The objective is not necessarily to minimize the inventory value. Rather, the objective is to utilize the investment for maximum profitability. Inventory Turnover = Cost Of Goods Sold ÷ Average Inventory Inventory turnover is an indication of the velocity with which merchandise dollars move through the business. In the case of the typical Ace Core Hardware store, the turnover figure of 3.2 means that the store sells out the equivalent of its inventory value 3.2 times per year. Inventory Holding Period = 365 Days ÷ Inventory Turnover The inventory holding period reflects how many days of inventory are on hand. That is, it shows how long it should take to sell off the existing inventory. Business managers and owners must be concerned with a holding period that is longer than necessary due to the high costs of capital tied up in excess inventory. On the other hand, reducing inventory levels too much could result in lost sales if certain products are not available when the customer wants them. The cost of carrying inventory has to be balanced against the profit opportunities lost by not having product in stock ready for sale. Sales To Inventory Ratio = Net Sales ÷ Average Inventory At Cost The sales to inventory ratio is another method for measuring how quickly inventory turns over in the business. It demonstrates how much sales volume is produced per dollar of inventory investment. The figure of 5.4 for the typical Core Hardware store indicates that the store generates $5.40 of sales annually for each dollar tied up in inventory. Gross Margin Return On Inventory = Gross Profit Before Patronage Dividend ÷ Average Inventory x 100 The basic objective of Gross Margin Return On Inventory (GMROI) is to view the inventory from a return on investment perspective. Consequently, the ratio measures how many gross profit dollars are produced from each dollar tied up in inventory. GMROI facilitates the evaluation of products with widely varying gross margin and inventory utilization rates.

Conven-

Contractor

ience

Core

Super

Home Center

Oriented

Hardware

Supply

Inventory Productivity

Inventory Turnover

3.3

3.2

3.3

3.9

3.5

Inventory Holding Period (Days)

109.9

115.3

110.3

93.8

103.7

Sales To Inventory Ratio

5.2

5.4

5.5

5.9

4.9

Gross Margin Return On Inventory (%)

202.5

213.9

213.5

191.8

171.2

Financial Statements & Ratios

Operat i ng Product i v i ty Rat i os

Operational issues are frequently overlooked as determinants of profitability. However, the ability to increase the store’s average transaction or to produce a higher level of sales per square foot has a dramatic impact on financial results. The following ratios are the most commonly measured ones in evaluating operational performance. Customer Mix For many stores, an inordinate amount of time and effort is spent serving unprofitable customers. The customer mix should be reviewed periodically in light of the sales being generated for the business. In most instances stores attempt to support too large of a customer base rather than maximizing potential with their most profitable customers.

Conven-

Contractor

ience

Core

Super

Home Center

Oriented

Hardware

Supply

Selling Space

Square Feet Of Retail Selling Space Sales $ Per Retail Square Foot Gross Profit $ Per Retail Square Foot Inventory $ Per Retail Square Foot

5,327

9,456

16,717 267.50 108.80

12,000 462.90 152.90

7,583

349.80 129.80

292.60 117.80

721.70 262.40 133.80

67.10

54.80

50.30

81.00

Transactions

Number Of Transactions (Annually)

64,894

100,837

146,801

78,698

42,745

Sales $ Per Transaction

27.90

27.00

30.70

62.40

83.80

Customers (% of sales)

DIY Customers

75.0 15.0 10.0

84.5 10.0

85.0 10.0

46.1 41.9 10.0

25.9 58.0 15.5

Contractors

Commercial/Industrial Accounts

5.5 0.0

5.0 0.0

Other Customer Types

0.0

2.0

0.6

Total Sales

100.0

Business Hours

Monday Tuesday

10.0 10.0 10.0 10.0 10.0

11.0 11.0 11.0 11.0 11.0 10.0

12.0 12.0 12.0 12.0 12.0 10.8

10.5 10.5 10.5 10.5 10.5

9.5 9.5 9.5 9.5 9.5 7.0 0.0

Wednesday

Thursday

Friday

Saturday

9.0 5.0

9.0 0.0

Sunday

7.0

8.0

Total Hours Open Per Week

64.0

72.0

78.8

61.5

54.5

Financial Statements & Ratios

Empl oyee Product i v i ty Rat i os

Employees are the lifeblood of the organization. Without a properly motivated and compensated workforce, few stores can produce much more than basic levels of performance. Employee payroll costs make up the single largest expense category on the income statement. In controlling employee payroll, the key to success is not the absolute level of compensation, but rather the productivity of employees. The two key employee productivity ratios presented in this report are sales per employee and the personnel productivity ratio. Both ratios are measures of employee output. Sales Per FTE Employee = Net Sales ÷ Total Full-Time Equivalent Employees This is simply the level of sales generated per full-time equivalent (FTE) employee. In calculating the ratio, two part-time employees are considered the equivalent of one full-time employee. The ratio provides a means to estimate how many additional employees will be required as the store expands its sales base. Personnel Productivity Ratio = Payroll Expense ÷ Gross Margin x 100 The personnel productivity ratio expresses payroll expense (salaries, wages, payroll taxes and benefits) as a percentage of gross margin. The ratio measures the portion of each gross margin dollar that must be committed to payroll. This is one of the few productivity ratios where a lower figure is desirable.

Conven-

Contractor

ience

Core

Super

Home Center

Oriented

Hardware

Supply

Employee Productivity

Number Of Full-Time Employees Number Of Part-Time Employees

4 3

6 6

12 10

Sales $ Per FTE Employee

218,818 88,561

237,778 96,038

239,693 103,151

304,906 96,826

379,870 117,256

Gross Profit $ Per FTE Employee

Payroll $ Per FTE Employee Payroll Expense (% Of Sales) Personnel Productivity Ratio (%)

40,019

37,933

40,960

43,266

53,511

19.4 47.1

17.9 43.4

16.4 40.7

16.8 50.3

14.6 49.8

Wage $ Per Hour

19.20

18.20

19.70

20.80

25.70

Sales $ Per Payroll Dollar Sales $ Per Payroll Hour

5.40

5.80

5.90

6.40

6.50

105.20

114.30

115.20

146.60

182.60

Number Of Stores

Employees Per 1000 Sq. Ft.

Sales $ Per Sq. Ft.

Gross Profit $ Per Sq. Ft.

Profit Before Taxes $ Per Sq. Ft.

Employees Per 1000 Square Feet

Convenience Hardware Under 1.3

30 15 21

0.9 1.5 2.9

226.10 363.20 558.30

89.80

20.20 23.40 52.60

1.3 To 2.0 Over 2.0

137.70 257.90

Core Hardware Under 1.3

93 61 30

0.9 1.6 2.5

231.00 362.90 509.50

92.70

25.10 41.90 50.60

1.3 To 2.0 Over 2.0

153.80 203.50

Super Hardware Under 1.3

76 24

1.0 1.5 2.8

247.60 351.50 600.20

106.50 146.50 256.40

26.90 38.10 68.90

1.3 To 2.0 Over 2.0

Format Analysis

Conveni ence Hardware Stores

Conven-

High

Conv Hdwe Conv Hdwe Conv Hdwe Conv Hdwe

ience

Profit

Under

$800,000-

$1.25 - $2 Over $2

Hardware Conv Hdwe $800,000 $1.25 Million Million

Million

Sample Size

132

Typical Sales Volume ($)

1,869,036 2,768,217 589,104

992,963 1,530,321 3,179,787

Income Statement (% of sales)

Net Sales

100.0

Cost Of Goods Sold

60.3 39.7

58.8 41.2

54.8 45.2

58.8 41.2

62.7 37.3

62.9 37.1

Gross Margin Before Patronage Div.

Patronage Dividend

1.5

1.6

1.9

1.3

2.1

0.4

Gross Margin

41.2

42.8

47.1

42.5

39.4

37.5

Payroll Expenses Owners/Officers Salaries & Bonuses All Other Employee Wages & Bonuses Total Salaries, Wages & Bonuses Payroll Taxes (FICA, Worker Comp., Unemp.) Group Insurance (Hospital, Medical, Life) Benefit Plans (Pension, Profit Sharing, etc.)

4.5

2.9

N/A N/A 26.9

3.3

3.6

4.0

12.6 17.1

13.0 15.9

12.9 16.2

12.6 16.2

12.5 16.5

1.5 0.6 0.2

1.2 0.6 0.2

1.6 0.1 0.2

1.4 0.7 0.2

1.5 0.7 0.1

1.6 0.7 0.3

Total Payroll Expenses

19.4

17.9

28.8

18.5

19.1

Occupancy Expenses Utilities (Heat, Light, Power, Water) Building Repairs & Maintenance Rent Or Ownership In Real Estate*

0.8 0.3 3.6 4.7 1.2 0.4 1.0 0.2 0.2 0.5 0.0 7.4

0.6 0.3 3.5 4.4 1.2 0.2 0.4 0.1 0.0 0.3 0.0 4.3 6.5

1.6 0.4 3.9 5.9 1.9 0.7 0.6 1.9 0.0 0.0 0.0 8.6

0.9 0.3 3.4 4.6 1.1 0.5 1.0 0.8 0.1 0.6 0.0 6.5

1.0 0.4 2.7 4.1 1.3 0.4 0.9 0.3 0.2 0.7 0.0 6.7

0.6 0.3 2.5 3.4 1.2 0.3 0.7 0.1 0.2 0.4 0.0 6.0 8.8

Total Occupancy Expenses Other Operating Expenses Advertising & Promotion

Telephone

Insurance (Business Liability & Casualty)

Interest Expense

Taxes (Pers. Property, Use, Licenses, Permits)

Depreciation

Bad Debt Losses

All Other Operating Expenses Total Other Operating Expenses

10.9 35.0

13.7 48.4 -1.3

10.6 33.7

10.6 33.2

Total Operating Expenses

28.8 14.0

31.3

Operating Profit

6.2 1.1 7.3

8.8 1.1 9.9

6.2 1.0 7.2

6.2 1.1 7.3

Other Income/Expenses

2.1

1.6 0.3

Profit Before Taxes

16.1

Balance Sheet (% of assets)

Assets Cash & Marketable Securities

19.6

18.2

6.9 3.4

17.9

19.0

22.0

Accounts Receivable

5.4

4.2

3.6

4.3

7.0

Inventory

50.0

50.6

66.0

56.9

51.7

46.1

Other Current Assets Total Current Assets

3.0

2.8

5.3

1.5

1.6

2.7

77.9 22.1

75.8 24.2

81.6 18.4

79.9 20.1

76.6 23.4

77.9 22.1

Fixed & Noncurrent Assets

Total Assets

100.0

Liabilities & Net Worth Accounts Payable

8.6 0.0 8.9

8.5 0.0 7.9

6.8 0.0

5.9 0.0 4.3

4.1 0.0 4.9 9.0 7.1 0.0

10.2

Notes Payable

0.0 8.5

Other Current Liabilities Total Current Liabilities Long Term Liabilities Loans From Stockholders Net Worth or Owner Equity Total Liabilities & Net Worth

36.3 43.1 14.7 30.0 12.2

17.6 12.9

16.4

10.2 26.2

18.7 10.2

9.0 0.0

0.0

69.5

74.5

63.7

83.9

71.1

100.0

Owners' Return (%)

Owners' Discretionary Profit Margin Owners' Discretionary Return On Assets

11.8 26.8 42.0

19.0 58.8

14.2 N/A N/A

13.2 33.5 76.9

10.8 18.8 34.3

11.3 27.3 49.2

Owners' Discretionary RONW

104.3

*includes rent, mortgage interest, building depreciation, real estate insurance and real estate taxes

Format Analysis

Conveni ence Hardware Stores

Conven-

High

Conv Hdwe Conv Hdwe Conv Hdwe Conv Hdwe

ience

Profit

Under

$800,000-

$1.25 - $2 Over $2

Hardware Conv Hdwe $800,000 $1.25 Million Million

Million

Strategic Profit Model

Profit Margin Asset Turnover

7.3 2.2

16.1

0.3 1.5 0.4 8.2 3.3 8.2 0.9 2.0 5.9 0.0 2.8 2.7 1.1

9.9 1.8

7.2 2.2

7.3 2.4

2.9

Return On Assets (Pre-Tax %)

16.1

46.7

17.8

15.8

17.5

Financial Leverage

1.4

1.3

1.6

1.2

1.4

Return On Net Worth (Pre-Tax %)

22.5

60.7

28.5

19.0

24.5

Financial Ratios

Current Ratio Quick Ratio

6.6 1.8 9.8

4.8 1.8

13.0

8.4 2.1 4.6 5.5 0.2 9.8 8.3

4.8 1.6

2.2 4.5 6.4 0.6

Accounts Payable To Inventory (%) Accounts Payable Payout Period (Days)

13.3 12.7

17.1 15.9

11.5

Debt To Equity EBITDA (% Of Sales)

0.3 9.2 8.3

0.3

0.4 9.0 7.5

16.4 16.1 95.4

13.1 11.6 17.3

EBIT (% Of Sales)

Interest Coverage

24.1

39.8

22.0

Inventory Productivity

Inventory Turnover

3.3

1.5

2.2

2.8

3.9

Inventory Holding Period (Days)

109.9

244.2

166.4

129.0

92.9

Sales To Inventory Ratio

5.2

5.6

2.7

3.7

4.4

6.6

Gross Margin Return On Inventory (%)

202.5

228.1

108.8

160.0

177.3

245.1

Operating Productivity

Square Feet Of Retail Selling Space Sales $ Per Retail Square Foot Gross Profit $ Per Retail Square Foot Inventory $ Per Retail Square Foot Number Of Annual Sales Transactions

5,327

5,500

5,364

5,135

5,100

5,488

349.80 129.80

461.40 180.50

109.70

203.60

307.80 114.70

617.90 239.50

43.60 42.60

85.30 53.50

67.10

70.10

63.10

85.80

64,894

114,427

25,961

44,382

55,986

100,381

Sales $ Per Transaction

27.90

27.60

19.40

22.60

27.50

31.80

Customers (% of sales)

DIY Customers

75.0 15.0 10.0

70.0 20.0 10.0

78.0

66.0 14.0 20.0

69.2 20.0 10.8

76.2 13.8 10.0

Contractors

5.0

Commercial/Industrial Accounts

16.0

Other Customer Types

0.0

1.0

0.0

Total Sales

100.0

Business Hours

Monday Tuesday

10.0 10.0 10.0 10.0 10.0

11.0 11.0 11.0 11.0 11.0 10.0

10.0 10.0 10.0 10.0 10.0

10.5 10.5 10.5 10.5 10.5

10.3 10.0 10.3 10.3 10.5

Wednesday

Thursday

Friday

Saturday

9.0 5.0

8.5 0.0

8.5 5.0

9.5 4.5

9.5 6.5

Sunday

7.0

Total Hours Open Per Week

64.0

72.0

58.5

63.5

66.5

67.4

Employee Productivity

Number Of Full-Time Employees Number Of Part-Time Employees

4 3

4 2

3 2

3 3

4 3

8 3

Sales $ Per FTE Employee

218,818 88,561 40,019

417,242 113,778 41,398

141,194 69,799 38,030

216,453 85,951 41,707

212,205 88,538 37,699

271,552 97,422 40,451

Gross Profit $ Per FTE Employee Payroll $ Per FTE Employee

Payroll Expense (% Of Sales)

19.4 47.1

17.9 41.8

28.8 61.1

18.5 43.5

18.5 47.0

19.1 50.9

Personnel Productivity Ratio (%)

Wage $ Per Hour

19.20

19.90

18.30

20.10

18.10

19.40

Sales $ Per Payroll Dollar Sales $ Per Payroll Hour

5.40

6.50

3.60

5.60

5.70

5.40

105.20

200.60

67.90

104.10

102.00

130.60

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