Rona seeks consolidation

Rona is fighting to protect its long-term profitability while Canada’s hardware and home renovations leader expects to endure months of pain from a sluggish economy and waning consumer confidence.

MONTREAL — Rona is fighting to protect its long-term profitability while Canada’s hardware and home renovations leader expects to endure months of pain from a sluggish economy and waning consumer confidence.

The Quebec-based company is pinning its hopes on a series of acquisitions and efforts to consolidate the fragmented Canadian renovation market that includes more than 5,000 independent dealers.

At its spring show next week in Calgary, Rona will announce what it bills is a major drive to recruit independent dealers.

Its efforts so far have added more than $500 million in annualized sales.

“For Rona, the recession means consolidation,” CEO Robert Dutton said Wednesday during a conference call, after the company reported higher profits but reduced sales for its latest quarter.

“These strategic transactions focused on the commercial and professional and distribution markets will enable us to reduce the cyclical nature of our operations while providing strong growth potential and synergies.”

Repeatedly pressed by analysts to outline its plans to survive the coming six to nine months of hardship, Dutton conceded he can only control areas of his business like costs and quality of service.

“I don’t control the economy, I don’t control the level of confidence of the consumers.”

Weakness in those areas caused Rona to miss expectations as sales slipped in the sluggish economy.

Revenues slipped 0.5 per cent to $1.31 billion, linked to a 2.25 per cent decrease in sales for stores open at least a year.

The lower same-store sales were due to a 0.2 per cent decrease in retail sales and a 1.7 per cent decrease in distribution segment sales.

Rona (TSX:RON) said sales were affected by the continued decline in consumer confidence, lower housing activity, unfavourable weather particularly in Western Canada and the expiry of tax credits.

Sales growth related to acquisitions in its professional and commercial division partially offset the decreases.

While total sales were lower, especially in the paint, flooring and kitchen departments, those who shopped bought more.

“While consumer malaise is affecting all regions, it was more evident in Western Canada where economic conditions are still tougher than in the rest of Canada,” he told analysts.

“Consumers are being very prudent and selective in their spending; they are more careful managing their debt level and therefore reducing the size of their renovation projects.”

Rona said its net earnings grew by 2.2 per cent to $50.2 million for the period ended Sept. 26, but were unchanged at 38 cents on a per share basis.

Excluding unusual contributions from its distribution segment last year, profits fell 5.8 per cent or $3.1 million and were 35 cents per share.

Analysts polled by Thomson Reuters had expected earnings to decrease a penny per share to 40 cents.

Revenues were forecast to slightly increase to $1.34 billion on a boost from higher lumber prices.

Dutton said the slower economic recovery will delay the achievement of its financial objectives. But the chain plans to take short-term steps to minimize the financial impact while pursuing development initiatives.

Rona said its recently announced acquisitions boosted its market share by 1.5 percentage points to 19 per cent, just short of its 20 per cent target by the end of 2011.

The retailer is scouting opportunities to enter the U.S. professional and commercial market as it grows its Canadian base. Rona’s Noble subsidiary recently announced the purchase B.C. plumbing distributor MPH Supply Limited and retailer Better Bathrooms Limited for an undisclosed price.

Keith Howlett of Desjardins Securities said the retail home improvement market has excess capacity that will take time to resolve.

“While Rona is expanding into related segments with better near-term prospects, earnings are still primarily dependent on the health of the retail home improvement market,” he said in a report.

“The shares are inexpensive, but we are unable to identify a near-term catalyst.”

Irene Nattel of RBC Capital Markets trimmed her 12-month share price target to $16 from $18 as a result of the negative trend. She also lowered her earnings forecast for fiscal 2010 and 2011.

Rona is the largest Canadian retailer and distributor of hardware, home renovation and gardening products. Its 700 stores employ more than 29,000 employees across Canada and generate in excess of $6 billion on annual sales.

On the Toronto Stock Exchange, its shares closed at $13.25, down 18 cents or 1.34 per cent in Wednesday trading.

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