BUSINESS

Hardware retailer Rona sees Q3 profits sink due to one-time costs, lower sales

11/07/2012 10:43 EST | Updated 01/07/2013 05:12 EST
MONTREAL - Rona Inc.'s saw its third-quarter net profit fall nearly 90 per cent due to more competition and some one-time costs, as the home improvement chain shifts some of its business to smaller, neighbourhood stores.

Net earnings at the Quebec-based retailer sank to $5.1 million, down from $47.8 million in the same period last year.

"The main drivers of our industry were flat or down during the quarter, whether we look at consumer confidence, housing starts or resales of homes or average resale price of homes," chief executive Robert Dutton said on a conference call.

Rona faced increased competition for contractors' business and Dutton said competitors increased their promotions, some of which were "very aggressive."

It also had costs totalling $25.7 million related to its program of shrinking the number of big-box stores it has and adding smaller stores.

Diluted earnings per share dropped to four cents from 36 cents year-over-year, Rona said.

Rona (TSX:RON) stressed in its earnings announcement Wednesday that unusual and non-recurring items had been a major reason for the lower profit.

Excluding those items, Rona had an income of $33.1 million, or 27 cents per share — still well below analyst estimates.

Consolidated revenues for the third quarter were fairly steady at $1.34 billion, down $10.6 million or less than one per cent from the third quarter of 2011.

Rona was expected to earn 40 cents per share in adjusted profits on $1.35 billion in revenues in the third quarter, according to a consensus estimate compiled by Thomson Reuters.

The non-recurring costs included severance payments due to head office layoffs in July, the temporary increase in advertising expense for the 2012 Summer Olympics campaign and expenses related to a hostile takeover bid by Lowe's.

Chief financial officer Dominque Boies said the special and one-time items accounted for more than 70 per cent of the decrease in Rona's quarterly earnings per share.

Same-store sales in retail and commercial segments, which includes stores that have been open for at least one year, were down 1.2 per cent partly due to consumers being more cautious in their spending, Rona said.

Dutton said Rona has closed four of the 10 big box stores slated for closure in 2012 — three in Ontario and one in Alberta.

Rona has deliberately postponed the closure of five big-box stores to help minimize the financial impact on the company.

"This postponement decreases the annual recurring benefit to $6 million for 2012 and to $25 million for 2013. We are, however, still in a good position to achieve anticipated annualized benefits of $40 million in 2014," Boies said.

During the quarter Rona, headquartered on Montreal's south shore in Boucherville, was fending off an unsolicited takeover by the U.S.-based Lowe's chain — which later backed off and dropped the $1.76-billion attempt.

RBC Capital Markets analyst Irene Nattel said Rona's financial results were weaker than expected and described the quarter as "under the hammer."

Nattel said the results were well below analysts' expectations, excluding restructuring and non-recurring expenses.

"As anticipated, the slowing Canadian housing market is negatively impacting consumer willingness to spend on big-ticket renovation projects," Nattel said in a research note.

After positive same-store sales in the first two quarters of fiscal 2012, they turned negative in the third quarter and margins were under pressure, she said.

"Rona is doing a good job on controllable costs, but macro headwinds continue to impact financial performance."

Lowe's (NYSE:LOW) abandoned its bid for Rona in September after Rona's board rejected the offer and Quebec politicians objected to a foreign takeover of such a large Quebec-based retailer and employer.

Only 31 of Lowe's stores are in Canada, out of 1,745 across North America. Rona has Canada's biggest network of home improvement stores of various sizes and formats.

Analysts said Lowe's may still have designs for Rona, if not by acquisition of the whole chain, then perhaps by adding big box stores as Rona expands the number of smaller, proximity stores.

Some suggested a hostile bid could be launched before Rona closes or shrinks the size of 20 more big box stores outside Quebec.

Rona has more than 30,000 employees operating a network of about 830 company and affiliate-owned home improvement locations in Canada under its banner, but only about 80 in the large store format. It also has a division geared to the professional contractor market.

Home Depot currently has 180 stores across Canada.

Shares in Rona were off 31 cents, or about three per cent, to $9.84 in early afternoon trading on the Toronto Stock Exchange.