BUSINESS

Rona to expand in 2015 by opening Reno-Depot model in Alberta, Ontario

11/11/2014 09:35 EST | Updated 01/11/2015 05:59 EST
MONTREAL - Rona plans to reopen a couple of shuttered stores next year as the home renovation retailer, sporting improved results, begins to export its Quebec-based Reno-Depot big box banner to Ontario and Alberta.

A Rona store in Calgary North that closed two years ago will reopen as a Reno-Depot, making use of 6,300 square metres of space from the old store, with the remaining 1,350 square metres being sublet. The other Reno-Depot will open in Aurora, Ont., at a location closed last year.

Meanwhile, a former Rona regional store will open as a larger Reno-Depot in Drummondville, Que., and smaller Rona stores will open in Halifax and British Columbia. An new affiliated store will open in Rockland, Ont.

"We're excited because we are talking about expansion here...disciplined expansion," CEO Robert Sawyer said Tuesday during a conference call after reporting the company's first boost in traffic in eight years.

"We are also currently analyzing other opportunities in regions where we must protect and reinforce our market share or where the investment is justified by a strong growth potential and good return on invested capital."

Sawyer said the new Reno-Depot stores will offer everyday low prices and targeted promotions.

"We are not coming into these markets by trying to knock down everybody we just think that in these two places there's room for us," he told analysts.

"Our Reno-Depot is different than our competitors in these environments and hopefully we will attract customers in our stores."

The store openings end a couple of years of downsizing that saw the closing of 17 unprofitable stores since 2012, including 11 over the past year in Ontario and Western Canada. The closures have produced $110 million in annualized cost savings and eliminated 1,000 front-line and management positions.

Same-store sales increased three per cent in the most recent quarter, including a two per cent gain in retail and 8.3 per cent in the distribution segment.

Sawyer said store traffic and the size of purchases — or basket size — increased in the quarter, validating Rona's recovery strategy.

Rona said the sales were up despite the stagnant economy and sustained pressure on housing starts in Quebec and the Atlantic provinces.

The Reno-Depot expansion comes after the company updated its 16 big box stores by redesigning the shopping experience and adopting a procurement policy to ensure the right amount of merchandise is always in stock.

The company said its profit surged nearly 30 per cent to $38 million or 32 cents per share for the period ended Sept. 28. That compared with $30 million or 25 cents per share a year ago.

Excluding one-time items, adjusted profits increased 28 per cent to $38.5 million or 33 cents per share, a penny below analyst estimates of 34 cents per share.

Revenue for the national home-improvement chain was $1.167 billion, mostly stable compared with $1.169 billion a year before, despite the closure of underperforming stores that began in June 2013.

Derek Dley of Canaccord Genuity reiterated his sell rating with a $12 target price after the company resorted to lowering its gross margins to drive sales.

"The company's repositioning of Totem stores to Rona in the west and Reno-Depot stores in Quebec had a positive impact. However, the company experienced a highly competitive pricing environment, and elected to reduce gross margins to drive sales," he wrote in a report.

Gross margins as a percentage of revenue declined to 25.2 per cent from 27.2 per cent. That was more than offset by reductions in costs from store closures over the last two years.

Adjusted pre-tax operating earnings (EBITDA) increased to nearly $84 million or a 7.2 per cent margin, up from $70.7 million or 6.1 per cent margin a year ago. The increase includes $11.4 million from higher sales and lower costs at its operations, and $2.8 million from underperforming stores. Adjusted retail EBITDA increased to 8.6 per cent.

Rona is also renewing its share buyback program. It spent $77.4 million to purchase nearly 6.1 million shares in its previous normal course issuers bid, paying a volume weighted price of $12.69 per share. The new buyback program, starting Nov. 18, will give Rona permission — but not an obligation — to repurchase up 9.2 million common shares.

Rona's net debt has fallen to $188.4 million from $347.8 million a year earlier.

On the Toronto Stock Exchange, Rona's shares closed up 19 cents at $13.85 on Tuesday.

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