Rona expects slowing economy to produce weak earnings growth until 2010

MONTREAL — Canadian home improvement retailer Rona Inc. (TSX:RON) expects a U.S. slowdown and a sluggish Canadian economy will have repercussions on its earnings until 2010.

MONTREAL — Canadian home improvement retailer Rona Inc. (TSX:RON) expects a U.S. slowdown and a sluggish Canadian economy will have repercussions on its earnings until 2010.

“The economic situation in 2008 will not be conducive to spectacular growth,” president and CEO Robert Dutton told shareholders Wednesday at the company’s annual meeting in Boucherville, Que.

Results should begin to recover in 2010, allowing it to boost its market share in 2011 to 20 per cent, he said. Rona’s share stands at 17 per cent, up from 11.5 per cent five years ago.

Although the Canadian economy remains robust for the time being, the U.S. slackening will be felt around the world, Dutton said.

In 2007, Rona broke 18 years of continually increasing profitability when net earnings dropped 2.9 per cent to $185.1 million.

Despite the economic challenges, Rona plans to stick to its expansion strategy, Dutton said.

“Even though the short-term economic situation will undoubtedly affect our results, it cannot determine our strategic approach because our planning horizon extends well beyond the next few quarters.”

The economy is expected to slowly pick up next year, although some analysts don’t expect the U.S. housing market to rebound much before 2010.

Dutton told shareholders Rona plans to make the most of the slowdown by focusing on internal improvements and changes to prepare for the upturn.

Rona’s recently unveiled strategic plan calls for it to raise the profitability of its corporate store network, improve its supply chain and information systems, and to invest in employee training and mobilization.

It also plans to increase the percentage of Asian products from five to about nine per cent, and will complete the integration of recent acquisitions, by consolidating banners of Lansing and Cashway stores.

Analyst Anthony Zicha of Scotia Capital said he expects Rona will face a challenging 2008 as consumer spending slows. He recently wrote that earnings will be flat this year, with growth of six per cent in 2009.

Over the past few years, Rona has expanded its operations in Ontario and Western Canada, added more than 3,000 new employees, completed six major acquisitions, recruited more than 60 dealer-owners and opened 18 new stores.

It did so largely ahead of the entry of Lowe’s into the Canadian market last fall. Lowe’s joining Rona and Home Depot in what has been a highly fragmented market made up of numerous local and regional chains.

Dutton said he’s not overly concerned about the arrival of Lowe’s in Ontario. Rona plans to compete by offering consumers improved service, including expert advisers who can guide renovators through their projects. On the TSX, Rona shares gained 38 cents or 2.86 per cent to $13.68 Wednesday. Over the past year, its shares have lost nearly half their value, falling from $25 to $13 in March.

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