08/14/2013 09:39 EDT | Updated 10/14/2013 05:12 EDT

Rona to cull private label offering as it seeks to restore profitability

MONTREAL - Rona plans to revamp its private label offering as it continues to demolish failed strategies of the past that continue to hurt the home renovation retailer's profitability.

The Quebec-based company recently began a review of the house brands it imports from China as part of its efforts to initially cut about $100 million in surplus inventories, of which $47 million has been achieved this fiscal year.

"With our new structure, we need to revisit completely our private brands and to revise the categories we want stay in and the ones that we want to pull out," chief executive Robert Sawyer said Wednesday during a conference call about the company's second-quarter results.

Rona (TSX:RON) lost $38.7 million from continuing operations in the three months ended June 30, reversing a profit in the same period last year as it recognized restructuring costs and impairment charges related to its recovery plan.

Canada's largest home improvement retailer said sales fell to $1.25 billion from $1.3 billion — missing analyst estimates.

Rona said about $35.1 million of the revenue decline was due to store closures while the remaining $24.5 million drop was due to a decline in same-store sales.

Sales were also affected by a difficult market, poor weather, reduced construction of single-unit homes in Canada and a construction strike in Quebec.

Rona sells thousands of private label items accounting for 28 to 30 per cent of offerings in categories where the company has a house brand, but the private label products represent only a small portion of overall inventory.

The company introduced its first private label in 1993 and now sells products under 12 product lines such as the Rona, Rona Eco, Rona Collection (paint), Vitalium (lawn fertilizers), along with Uberhaus and Haussmann brands.

Chief financial officer Dominique Boies said private label is successful if it generates incremental margins.

"So if they're there, they should bring more profitability to Rona and our dealers. And if not, we're out of there," he told analysts.

The company said it has to be careful about cutting excess inventory to avoid shortages.

"We're starting with $100 million. It should help release some capital and make us more efficient," Boies added.

The home renovation chain said the quarter's loss included $53.7-million in restructuring costs, impairment of non-financial assets and other charges, as well as an adjustment of $9.1 million for other costs related to its recovery plan.

The net loss amounted to $1.19 per share, which was deeper than analysts expected, while Rona's adjusted earnings and revenue also missed expectations by a wide margin.

Rona's adjusted net income attributable to participating shares amounted to $33.6 million, compared to $45.1 million a year earlier. That equalled to 28 cents per share, down from 37 cents a year before and five cents below estimates.

Analysts had estimated 33 cents per share of adjusted earnings and a net loss of $1.30 per share, including one-time items.

Sawyer acknowledged the disappointing results but said it is building a new Rona by changing the culture to make it a leaner and more efficient organization.

"We are managing the business to make sure that we are gradually improving our first-time and mid-term results, but our objective is to rebuild Rona's foundation and unlock its full value and it takes more than one quarter to achieve," he said.

Its plan calls for $110 million in cost savings by year-end. About $30 million has been achieved to date by reducing administrative, marketing and distribution costs, cutting 325 jobs at its four administrative centres and closing 11 unprofitable stores by the end of the year.

Same-store sales for Rona's overall network were down one per cent, due to a decrease of 2.7 per cent in the distribution segment and 0.7 per cent in the retail segment.

The decrease was partially offset by new store openings, which added $7.7 million to the quarter's consolidated revenues.

The distribution segment recorded revenues of $349.7 million, down 4.9 per cent from $367.9 million last year, while the retail segment posted sales of $899.3 million, down 4.4 per cent from $940.7 million in 2012.

Irene Nattel of RBC Capital Markets called Rona's efforts a "work in progress."

One of Rona's problems is that it has too many items or SKUs for sale, including too many slow-moving products that end up staying on shelves longer than the industry average.

On the Toronto Stock Exchange, Rona's shares closed at $10.84, down 42 cents or 3.73 per cent in Wednesday trading.