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Rona’s major renovation too late for some investors

A Rona store is seen in this file photo.

Chris Young/The Globe and Mail

It will take two years before Rona Inc. investors see the results of the hardware specialist's newest restructuring plan, which is starting with 200 administrative layoffs across Canada.

Rona plans to refit itself into a smaller albeit more profitable retailer. Management aims to increase operating earnings by $35-million to $45-million within two years.

"There are no quick fixes," said Dominique Boies, Rona's acting chief executive officer and chief financial officer.

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While some initiatives look familiar, Rona contends that its latest plan is far-reaching with divestitures and an ambitious review of the company's merchandising and pricing.

"This is a major renovation of the company, not a maintenance project," Mr. Boies explained.

"We have tried putting Band-Aids on our problems before, but that won't stop the hemorrhage," he emphasized.

But some investors are already abandoning the patient.

Irwin Michael, manager of the ABC Funds, sold the last of his more than 2.5 million Rona shares this month.

While he respects Robert Chevrier, Rona's new chairman, he pointed to the "very tough retailing environment," which is reflected in the company's disappointing year-end results. Mr. Michael also deplored that the Parti Québécois government is intent on helping Quebec companies fend off unsolicited takeovers, such as Lowe's Cos. Inc. $1.8-billion unsuccessful bid. "In terms of the company being bought out, it's very difficult," Mr. Michael said.

It is an open secret that Rona hopes to sell its commercial and professional business units, though Mr. Boies says no offer has landed on his desk. The question is what Rona will do with the 30 big-box stores it owns outside Quebec – as the Boucherville retailer has no intent to divest the profitable big-boxes in its home province. Every option is on the table.

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The problematic stores are in Ontario. Rona has closed three and was about to close five more around Toronto when it put its plan on hold. It may make more sense, Mr. Boies explained, to sell all 20 Ontario stores along with the big-box stores that would be left stranded out West in a single deal. This could spur the interest of Lowe's, which hasn't given up on its Canadian ambitions. However, Mr. Boies said that Lowe's has not approached Rona in recent weeks.

Decisions on how extensive the divestitures will be will likely wait until Rona's board picks a new CEO. The new chairman was "disappointed" when he found out in January that the executive search was still unsuccessful. "The evaluation of potential candidates is well under way and a decision should be announced shortly," Mr. Chevrier said in a release.

While transactions can be settled quickly, reviewing Rona's merchandising and pricing strategy is another matter. Over all, the chain has too many products stuffed in its store shelves, Mr. Boies said.

Rona is also known to be more expensive than its competitors in many product categories, notably in hardware. This perception is so ingrained many customers think some of Rona`s prices are higher even when they aren`t, its studies have shown. It plans to reduce the prices of the products consumers pay the most attention to, while maintaining or even raising the prices of merchandises clients care little about. The company hopes to mitigate the effect on its margins through a more effective supply chain and optimized IT systems.

Rona's profit may also be affected if the company pays more for its merchandise after losing some of its purchasing power through divestitures. "Of course you're losing some volume rebates from suppliers, Mr. Boies said. The question is: 'How can you compensate otherwise?'"

Wayne Hood, retail analyst at Bank of Montreal, believes Rona is now moving in the right direction. "They should have headed down this path eight years ago," he noted.

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Rona's performance has improved somewhat under the business plan it implemented last February, when Robert Dutton still headed the company – the board ousted him in November. Rona generated $10.5-million in recurring annual savings through the store closings and the transformation of its Totem banner into proximity stores.

But this didn't transpire in Rona's latest financial results. Sales for the quarter reached $1.2-billion, a 2.2-per-cent increase over 2011. However, this growth is mostly explained by the recording of an extra week. Sales at stores that have been open for a year or more, a key metric in retail, were down 0.7 per cent when the additional week is excluded. Comparable distribution sales were up 5.2 per cent by that same measure.

Profit before unusual and non-recurring items fell to $6.6-million or 5 cents a share in the quarter from $19.7-million a year ago. On average, analysts sounded out by Bloomberg were expecting 12 cents in adjusted earnings.

Canada's biggest hardware retailer incurred $62-million in costs (after tax) in 2012 as it fended off Lowe's takeover proposal and as it reorganized itself.

Before unexpected expenses, profit totalled $70-million or 57 cents a share for the year on sales of $4.9-billion. Rona explained the almost 20-per-cent year-over-year decrease in adjusted earnings by the stiffer competition it faced in large urban areas.

Rona employs 30,000 people and operates over 800 corporate, franchise and affiliate retail stores as well as a network of 14 distribution centres.

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About the Authors
Chief Quebec correspondent

Sophie Cousineau is The Globe and Mail’s chief Quebec correspondent. She has been working as a journalist for more than 20 years, and was La Presse’s business columnist prior to joining the Globe in 2012. Ms. Cousineau earned a master’s degree in journalism from the University of Illinois and a bachelor’s degree in economics and political science from McGill University. More

Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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