Co-op calculations

Ace Hardware announced last month that an investigation by outside agencies has determined the company’s $152 million shortfall was not there sult of missing inventory, missing money or fraud—but of discrepancies between its general ledger and its inventory records.

The Oak Brook, Ill.-based company determined that its finance department relied too heavily on one method to reconcile the books and failed to catch mistakes by a former “mid-level” employee. Ace expects to restate financial reports for 2004, 2005 and 2006 by the end of February and is looking into updating its IT systems to ensure something like this will not happen again.

This news at least partly closed the book on months of speculation about the company’s loss of equity, letting Ace get on with the business of recovering funds through dealer repayment over the next few years.

“I would say there were no big surprises,” Ace CEO Ray Griffith told HCN of the investigation conducted in conjunction with audit firm Protiviti, and legal firm Skadden, Arps, Slate, Meagher & Flom. “It’s embarrassing; it’s difficult to read; it’s revealing. But no surprises from our ongoing findings.”

To many industry observers, Ace’s financial crisis strikes an eerie resemblance to events at True Value (then known as TruServ) right around the turn of the 21st century. Both co-ops found shortfalls in their accounting books—for Ace, $152 million; for True Value, $131 million—and both developed plans to restore equity in order to right the ship.

But while the basic situations appear similar, the events leading up to the shortfalls—as well as the way each company chose to handle the situation—differ significantly. For TruServ, the crisis was the culmination of a turbulent time that represented a breaking point for many members, while Ace’s predicament followed a good run for the company and was more like a bolt from the blue.

TruServ’s problems can be traced to its roots: the company was formed in 1997 by the merger of Cotter & Co. and ServiStar—the latter of which had merged with Denver-based Coast to Coast in 1990. By many accounts, the merger was anything but smooth, leaving the co-op with three different inventory tracking systems and leading to many unfilled orders.

“True Value’s big challenge was putting together 20 distribution centers and three operating systems. A gallon of anti-freeze had three different stock numbers,” said Bryan Ableidinger, co-owner of Portland, Ore.-based Park rose Hardware and a former member of True Value’s board of directors. “What led up to our situation came from a much more broken distribution system, where—from my outside perspective—it appears that Ace’s distribution system was working smoothly.”

The discovery of the shortfall at TruServ in 2000 proved to be the last straw for many members. The co-op imposed a moratorium on dealers redeeming stock in the company until April 2001, by which time the stock had lost 65 percent of its value. By the end of that year, more than 2,100 stores had left TruServ.

Griffith told HCN in January that only four retailers had left Ace because of the shortfall, with about 50 more “upset over the accounting issue” to the point where leaving is a possibility.

“At True Value, probably the loss was the straw that broke the camel’s back, because we had fill rate issues before that. Then, when people heard they were taking a 65 percent hit to their stock value, many said, ‘I’m out of here,’” Ableidinger said. “Ace had been doing very well, with good sales growth, store growth, etc. That will minimize the loss compared to the old TruServ issues.”

One former TruServ member who preferred to remain anonymous, said he lost most of his stock investment due to the shortfall. He noted big differences in the two situations.

“True Value ruined their business model by duplicating warehousing, doubling the payroll, keeping all the brand names alive, which bloated inventory, and making terrible business decisions. They ran the business into the ground with expenses. They were losing money hand over fist,” he said. “Ace, on the otherhand, has a working business model and can be profitable if it wants to be… They will recover instantly.”

As poorly as things were handled at TruServ following the 1997 merger, however, the co-op turned over a new leaf in the years following the 1999 debacle. When TruServ tapped Pamela Forbes Lieberman as CEO in 2001, things started looking up, according to Russ Woodmansee, owner of Florence True Value and Gilbert True Value in Arizona.

“She went in and cleaned house,” he said of Lieberman. “She started the new True Value Co. in the most positive attitude turnaround imaginable.”

Ableidinger also admires the way TruServ handled the transitional period. He said the company started doing full wall-to-wall inventories of all distribution centers and continues to closely audit the distribution process for errors. He also pointed out that, ironically, Ace is probably benefiting from TruServ’s earlier problems because “lenders now see that it is possible to recover from a situation like that.”

But recovery will come with a cost for Ace dealers. As previously reported, the co-op will turn to members to restore its equity to the $320 million level, setting up variance allocation accounts that will be based on each store’s proportionate share of warehouse dividend pool purchases from 2002 through 2006.

Griffith said he is confident the co-op can move forward, but when asked about the tone of various postings on Internet bulletin boards from critical dealers, he said, “I ’m not so naive to think we still don’t have challenges. We do.”