> 

2) Patronage Dividends

> The Company operates as a cooperative organization and will pay patronage dividends to 
> consenting member dealers based on the earnings derived from business done with such 
>   dealers.  It has been the practice of the Company to distribute substantially all 
>   patronage sourced earnings in the form of patronage dividends.
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 
> Net earnings and patronage dividends will normally be similar since patronage sourced 
> net earnings are paid to consenting member dealers.  International operations and 
> dealers signed under a Retail Merchant Agreement are not eligible for patronage 
> dividends and related earnings or losses are not included in patronage sourced 
> earnings.

> Certain financial statement reclassifications have been made to prior year and prior 
> quarter amounts to conform to comparable classifications followed in 2001.



> 

> 

> 

ACE HARDWARE CORPORATION







PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF







FINANCIAL CONDITION AND RESULTS OF OPERATIONS







Thirteen Weeks Ended September 29, 2001 compared to Thirteen Weeks Ended September 30, 2000.











Results of Operations



Consolidated sales decreased 1.5%. Domestic sales increased 1.1% primarily due to 
conversions of new stores to the Ace program. Sales to our existing retailer base were flat 
due to the soft economy and inventory reductions at retail. The decline in international 
sales was affected by a sale of Ace stores and reduced sales in Canada.







Gross profit increased $1.0 million and increased as a percent of total sales from 9.78% in 
2000 to 10.08% in 2001. The increase, as a percent of sales,
results primarily from higher margin from Company-owned retail locations.  Excluding company-owned stores, gross
profit was 9.42% of sales in 2001.







Warehouse and distribution expenses increased $52,000 over 2000 and increased slightly as a percent of total handled sales from 1.33% in 2000 to 1.34% in 2001. Increased utilities and distribution expenses associated with the new Loxley, Alabama distribution facility and the start-up of the Prince George, Virginia facility drove the higher expenses.







Selling, general and administrative expenses decreased $975,000 over 2000 and decreased as a percent of total sales from 3.01% in 2000 to 2.91% in 2001 due to continued cost control 
measures put in place.







Retail success and development expenses increased $1.2 million primarily due to investments 
made at retail to support our Vision 21 strategy, the timing of advertising expenditures and 
costs associated with operating additional company-owned retail locations.
Increases in this category are directly related to retail support of the Ace retailer as the Company
continues to make investments in our dealer base.







Interest expense decreased $127,000 due to a decline in interest rates partially offset by 
higher average borrowings. The higher borrowing levels result from the issuance of
long-term debt earlier in the year to support the expansion of our distribution network
(including the completion of the Loxley, Alabama and Prince George, Virginia distribution
centers and the expansion of the LaCrosse, Wisconsin facility) and increased retailer
dating programs.







Income taxes increased $472,000 primarily due to lower tax benefits from
non-patronage activities.

> 

Liquidity and Capital Resources









The Company expects that existing and internally generated funds, along with new and 
established lines of credit and long-term financing, will continue to be sufficient in the 
foreseeable future to finance the Company's working capital requirements and patronage 
dividend and capital expenditures programs.








Item 3. Quantitative and Qualitative Disclosures About Market Risk

> There have been no material changes in the Company's market risk during 
> the thirty-nine week period ended September 29, 2001. For additional 
> information, refer to Item 7a in the Company's Annual Report on Form
> 10-K for the year ended December 30, 2000.

> 

> 



Item 1.    Legal Proceedings







None.







Item 2.    Changes in Securities and Use of Proceeds







None.







Item 3.    Defaults Upon Senior Securities







None.







Item 4.    Submission of Matters to a Vote of Security Holders









None.









Item 5.    Other Information









None.









Item 6.    Exhibits and Reports on Form 8-K









None.