Executive Summary / Key Takeaways

• Q3 2025 delivered record EBITDA margins of 20.7%—a 420 basis point expansion—demonstrating exceptional pricing power and operational leverage despite a 17% assumed decline in market volumes, validating the defensive moat of Hillman's essential hardware business.
• The company reached its long-term leverage target of 2.5x net debt/EBITDA and initiated its first $100 million share repurchase program, signaling a decisive strategic pivot from balance sheet defense to offensive capital deployment through M&A and buybacks.
• The MinuteKey 3.5 rollout across over 3,000 kiosks represents a capital-intensive investment cycle peaking in 2025, but management expects this to generate approximately $50 million in annualized free cash flow by 2026, transforming RDS into a high-margin growth engine.
• Hillman's "Dual Faucet" supply chain strategy will reduce China sourcing from 50% in 2018 to approximately 20% by year-end 2025, creating a structural competitive advantage as major retailers seek to de-risk their own supply chains from tariff exposure.
• Trading at 10.0x EV/EBITDA versus industrial peers at 16-27x, the stock embeds a significant discount despite superior near-term execution, defensive growth characteristics, and a clear path to $2 billion in sales within three to five years.

Setting the Scene: Essential Hardware at a Cyclical Trough

Hillman Solutions Corp., founded in 1964 and headquartered in Cincinnati, Ohio, has spent six decades building what management calls an "unmatched moat" in the retail hardware industry. The company supplies over 112,000 SKUs of essential fasteners, anchors, rope, chain, personal protective equipment, and accessories to nearly 30,000 retail locations annually. Unlike discretionary home improvement products tied to new construction, Hillman's portfolio focuses on everyday repair, maintenance, and small-scale projects that persist even when housing markets collapse. This positioning explains why the company can grow through a 30-year low in existing home sales.

The business model hinges on deep, embedded partnerships with America's largest home improvement retailers. Hillman employs 1,200 dedicated sales and service representatives who work directly inside customer stores, managing inventory, merchandising displays, and ensuring best-in-class direct-to-store delivery. These relationships are remarkably sticky—the top five customers have partnered with Hillman for an average of nearly 30 years. In 2024, this earned Hillman the unprecedented distinction of winning Vendor of the Year awards from both Home Depot (HD) and Lowe's (LOW) simultaneously, a feat no other supplier has achieved.

Industry structure favors specialists over generalists. The hardware market is fragmented, with Hillman holding an estimated 10-15% share in specialty retail hardware, competing against industrial distributors like Fastenal (FAST) and W.W. Grainger (GWW) and manufacturers like Illinois Tool Works (ITW) and Stanley Black & Decker (SWK). Hillman's differentiation lies not in manufacturing scale but in its end-to-end retail ecosystem—combining category management expertise, in-store service, and proprietary technology that drives foot traffic and sales for its retail partners. This moat becomes more valuable during downturns, when retailers cut marginal suppliers and consolidate around proven partners.

The current environment represents a cyclical trough. Existing home sales hover around 4 million annually, 20% below the ten-year average of over 5 million. Market volumes for hardware products declined 5.5% in Q3 and management prudently assumes a 17% drop in the second half of 2025. Yet Hillman grew net sales 8% and EBITDA 36% in Q3, demonstrating that its service moat and essential product mix create defensive growth characteristics rare in the industrial sector.

Technology, Products, and Strategic Differentiation

The Robotics and Digital Solutions segment, anchored by the MinuteKey 3.5 platform, represents Hillman's most significant technology investment and future earnings driver. These self-service key duplication kiosks have evolved far beyond traditional metal cutting. The 3.5 generation duplicates smart auto fobs, transponders, RFID fobs, and offers an "endless aisle" of products through integrated credit card readers that enable instant transactions without retailer capital or labor. As of Q3 2025, over 3,000 machines are deployed in the field, with more than 800 added in just the last three months.

This rollout is a classic capital cycle story. RDS-related CapEx peaks in 2025 and will decline by approximately $20 million in 2026 as deployment to Hillman's two largest customers finalizes by year-end 2026. Once complete, management expects the segment to generate roughly $50 million in annualized free cash flow—nearly double the segment's current $26 million annual EBITDA run rate. The machines already demonstrate a healthy revenue lift versus prior generation 3.0 units, and the addressable market expands dramatically as smart keys and fobs replace traditional metal keys.

The economic model is compelling. RDS reported 74.2% gross margins and 31.4% EBITDA margins in Q3, both near historic norms. This profitability stems from revenue-sharing arrangements where retailers collect payments while Hillman owns and maintains the assets, creating a capital-light model for partners but a high-margin, recurring revenue stream for Hillman. The technology also drives retailer stickiness—once a MinuteKey kiosk is installed and generating passive income, removing it becomes economically irrational for the store.

In the Hardware and Protective Solutions segment, technology manifests differently. Hillman's "Dual Faucet" supply chain strategy leverages proprietary systems to source identical products from multiple suppliers across multiple countries. This isn't merely procurement diversification—it's a competitive weapon. By reducing China-based sourcing from nearly 50% in 2018 to approximately 20% by end of 2025, Hillman can offer retailers tariff-free alternatives while competitors scramble to reconfigure supply chains. The company held its annual supplier conference in Vietnam, strengthening relationships in low-tariff countries and creating a flexible network that delivers quality at best value.

The "so what" of these technological investments is profound. MinuteKey transforms RDS from a stagnant segment into a growth engine with software-like margins. Dual Faucet transforms a cost center (supply chain) into a revenue driver by enabling Hillman to capture market share when competitors face margin pressure from tariffs. Together, they support management's $2 billion sales target within three to five years by expanding both addressable markets and win rates.

Financial Performance & Segment Dynamics

Q3 2025 marked the highest net sales and adjusted EBITDA in Hillman's 61-year history, providing clear evidence that strategic investments are converging with favorable execution. Net sales rose 8% to $424.9 million, driven by a 10-point contribution from price increases, 2 points from the Intex acquisition, and 2 points from new business wins, partially offset by a 6-point headwind from market volumes. This pricing power—raising prices while competitors struggle to pass through costs—validates the moat.

Adjusted EBITDA surged 36% to $88 million, expanding margins by 420 basis points to 20.7%. Adjusted gross margin jumped 350 basis points year-over-year to 51.7%, with management explicitly attributing the largest portion to the price-cost dynamic. Rocky Kraft noted that RDS contributed approximately 100 basis points to the improvement, demonstrating that technology investments are translating to margin expansion. However, this is explicitly a temporary windfall—Q4 margins are expected to step down to Q2 levels as tariff costs fully flow through cost of goods sold while price increases remain in effect.

Segment performance reveals the underlying health. Hardware and Protective Solutions grew sales 10% to $329 million despite a 5.5% decline in market volume, with adjusted EBITDA soaring 57% to $65.8 million and margins expanding to 20.0%. The Intex acquisition contributed $8.7 million in sales while price increases of $28.6 million more than offset $7.6 million in volume declines. This ability to grow EBITDA nearly six times faster than sales demonstrates powerful operating leverage when fixed costs are spread across a stable store base.

RDS returned to growth with 3.3% sales increase and maintained 31.4% EBITDA margins, marking three consecutive growth quarters. The segment's 74.2% gross margin reflects the asset-light revenue model. Canada remains challenged with sales down 0.2% and EBITDA down 15.8%, but management successfully maintained margins above 10% despite a 12% decline in Canadian existing home sales and industrial pressure.

The balance sheet transformation is complete. Net debt to trailing twelve-month adjusted EBITDA improved to 2.5x, hitting the long-term target. Liquidity stands at $277 million, comprising $239 million in credit facility availability and $38 million in cash. Over the past four years, Hillman reduced debt by more than $900 million while growing EBITDA to record levels.

This deleveraging enables the newly authorized $100 million share repurchase program, with $3.2 million deployed in Q3 at an average price of $9.72. Management expects annual repurchases of $20-25 million to offset dilution while opportunistically buying at discounts to intrinsic value.

Free cash flow generation reflects the tariff impact. Q3 free cash flow was $9.1 million, constrained by approximately $30 million in tariff-related costs. The company holds about $60 million of new tariffs in inventory that will flow through in Q4. Despite this headwind, the underlying business generates solid cash flow, and management expects working capital normalization once tariff rates stabilize.

Outlook, Management Guidance, and Execution Risk

Management's guidance for 2025 reflects both confidence and prudence. Net sales are reiterated at $1.535-1.575 billion, representing 4-7% growth over 2024. Adjusted EBITDA guidance was increased at the low end, now $270-275 million, implying 12.7-14% growth. The midpoint assumes market volumes decline 17% in the second half, a figure Rocky Kraft called "the worst market year we've seen since 2008 or 2009" if excluding COVID. This conservatism creates upside potential if volumes prove less dire.

The 2026 directional outlook assumes flat market volumes but projects high single to low double-digit net sales growth and low to mid-single digit adjusted EBITDA growth. The divergence between sales and EBITDA growth reflects the normalization of the tariff windfall that boosted 2025 margins. As Kraft explained, "the reason that we don't leverage in '26 like we normally do in the business is because of the kind of windfall we have for a short period of time in 2025 around tariffs." This transparency helps investors distinguish between one-time benefits and underlying earnings power.

Execution risks center on three variables. First, the RDS rollout must deliver the promised $50 million in annualized free cash flow by 2026. With CapEx peaking in 2025 and deployment on track for completion by end of 2026, the path appears clear, but any delays or underperformance on revenue lift would compress returns. Second, tariff management requires continued price discipline without destroying demand. Jon Adinolfi noted that "customer conversations have been challenging, but they've been balanced," and that larger projects are seeing pushback, particularly in categories tied to lumber. The company must navigate this elasticity risk carefully.

Third, M&A execution must be accretive. Management reports that inbound inquiries are "ticking up a bit" and targets two to three tuck-in acquisitions annually. The successful integration of Intex DIY, acquired for $34 million in August 2024, provides a template. Intex contributed $8.7 million in Q3 sales and is performing in line with expectations, demonstrating Hillman's ability to leverage its direct-to-store capabilities and service teams to accelerate acquired brands.

The $2 billion sales target over three to five years implies a 7-12% annual growth rate, with management expecting 2-3% from new business wins annually and another 2-3% when market volumes return to historical growth. Strategic acquisitions will fill the gap. This ambition is credible given the company's track record of growing EBITDA at a 10% CAGR over the past three years while reducing leverage by over two full turns.

Risks and Asymmetries

The most material risk to the thesis is margin normalization. Q3's 20.7% EBITDA margin benefited from a timing mismatch between price increases and tariff costs. Management explicitly expects Q4 gross margins to step down to Q2 levels around 48%, and 2026 EBITDA growth to lag sales growth as the windfall reverses. If investors mistake the temporary tariff benefit for structural improvement, they risk overpaying for peak earnings. The key monitor will be whether underlying operational improvements—RDS rollout, supply chain diversification, and fixed cost leverage—can sustain margins above historical 15-16% levels once tariffs normalize.

Demand elasticity presents a second risk. While Hillman's products are essential for repair and maintenance, the company raised prices by 10 points in Q3 to offset tariffs. Jon Adinolfi acknowledged that "the larger projects is where you're seeing some pushback," particularly in structural screws and drywall screws tied to lumber purchases. If price increases compress volumes more than the 5.5% decline already seen, revenue growth could stall even as margins hold. Rocky Kraft admitted it's "virtually impossible to figure out what's driving consumer impact," creating uncertainty around the true demand curve.

Retail concentration amplifies this risk. While long-term partnerships with Home Depot and Lowe's provide stability, they also create dependency. Any change in strategy at these retailers—whether shifting to direct import, insourcing merchandising, or consolidating suppliers—could materially impact Hillman's revenue base. The company's moat has historically protected against this, but the risk intensifies during retailer margin compression.

On the upside, several asymmetries could drive outperformance. If market volumes recover faster than the 17% decline assumed, Hillman's operating leverage would drive EBITDA growth well above the 12.7-14% guided range. The RDS rollout could exceed the $50 million free cash flow target if MinuteKey 3.5 machines generate higher-than-expected revenue lift or if the addressable market expands beyond the two largest customers. Supply chain diversification could create new business wins as competitors struggle with tariff exposure, accelerating the 2-3% annual contribution from new business.

Most significantly, M&A could be transformative. With leverage at target and free cash flow generation improving, Hillman has the firepower to consolidate fragmented competitors. Management's comment that "we've seen some competitors that have seen some challenges operating in this environment" suggests opportunities to acquire market share at attractive valuations, particularly for tuck-ins in the DIY and Pro channels that complement the core business.

Valuation Context

Trading at $8.82 per share, Hillman carries a market capitalization of $1.74 billion and an enterprise value of $2.49 billion, implying 1.62x EV/Revenue and 10.0x EV/EBITDA based on trailing twelve-month figures. These multiples represent a substantial discount to direct competitors: Fastenal trades at 5.99x EV/Revenue and 26.7x EV/EBITDA, Illinois Tool Works at 5.09x and 17.6x, and W.W. Grainger at 2.75x and 16.4x. Only Stanley Black & Decker, with its own execution challenges, trades at a lower revenue multiple (1.19x) but still commands a higher EBITDA multiple (12.1x).

The discount appears misaligned with performance. Hillman's 8% sales growth in Q3 trailed Fastenal's 11.7% but exceeded ITW's 2% and SWK's flat growth. More importantly, Hillman's 36% EBITDA growth and 420 basis points of margin expansion significantly outpaced all peers. The 20.7% EBITDA margin remains below ITW's 27.7% and Fastenal's 20.7%, but the trajectory is upward while peers face pressure.

Cash flow metrics tell a similar story. The 42.5x price-to-free-cash-flow ratio appears elevated but reflects the temporary tariff impact and peak CapEx cycle. With RDS CapEx set to decline $20 million in 2026 and generate $50 million in incremental free cash flow, the ratio should compress meaningfully. The 14.8x price-to-operating-cash-flow ratio is more reasonable for a business with Hillman's defensive characteristics and growth prospects.

Balance sheet strength supports the valuation. Net debt/EBITDA at 2.5x is conservative, below the 3.0x typical for industrial distributors, and provides flexibility for M&A. The current ratio of 2.46x and quick ratio of 0.67x reflect the inventory-intensive nature of hardware distribution but remain within normal ranges for the sector. With no dividend and a modest buyback program, capital allocation is focused on growth.

The key valuation question is whether the market is correctly distinguishing between temporary tariff benefits and structural improvements. At 10x EBITDA, the stock prices in significant margin compression, yet management's 2026 guidance still implies mid-single digit EBITDA growth even after normalization. If the underlying business can sustain 15-16% EBITDA margins—well above historical levels due to RDS mix shift and supply chain advantages—the current valuation offers substantial upside as the market recognizes the durability of the earnings power.

Conclusion

Hillman Solutions stands at an inflection point where six decades of relationship-building and three years of strategic transformation are converging to create a more resilient, profitable, and growth-oriented business. The Q3 2025 record margins, while temporarily boosted by tariff timing, reflect underlying operational improvements in pricing power, cost structure, and segment mix that should persist. The completion of the debt reduction cycle and initiation of share repurchases signal a decisive shift from financial defense to strategic offense, with management now positioned to consolidate market share through accretive M&A.

The investment thesis hinges on three variables: successful execution of the RDS MinuteKey 3.5 rollout to deliver the promised $50 million in annualized free cash flow by 2026, disciplined navigation of the tariff environment without destroying demand, and timely deployment of capital into acquisitions that leverage Hillman's distribution moat. If management delivers on these fronts, the stock's 10x EBITDA valuation represents a compelling entry point for a business with defensive growth characteristics and a clear path to $2 billion in sales.

The asymmetry is favorable. Downside is cushioned by essential product demand, embedded retail partnerships, and conservative leverage. Upside could be driven by faster-than-expected market recovery, RDS outperformance, or transformative acquisitions. In a hardware industry where most players are struggling with cyclical headwinds, Hillman's ability to grow EBITDA 36% while reducing leverage and returning capital to shareholders stands out. The market's focus on temporary margin dynamics has created an opportunity for investors to own a durable compounder at a cyclical discount.