Rona misses expectations as weak economy, housing starts hurt 2013 results

MONTREAL - Canadian home renovation retailer Rona says internal improvements made over the last year were masked by the impact of lower housing starts and a weak economy in Quebec.

The chain's home base in Quebec accounts for half of overall sales but single family housing starts were down 24 per cent last year, including a decrease of 13 per cent in the fourth quarter. Ontario housing starts were also off — down 13 per cent for the year.

New housing construction is a major driver of consumer spending, especially for lumber and other building materials. Resales are also down in Quebec and cash-squeezed buyers are taking longer to complete major upgrades after they move in.

"So the environment is still difficult from that front and until this changes, it doesn't help," chief financial officer Dominique Boies said Tuesday during a conference call to discuss Rona's 2013 results.

Poor weather in Ontario and Quebec also hurt results in the fourth quarter, with more pain expected after the year got off to a "rough start" in January.

Rona fell far short of analyst expectations in the fourth quarter as revenues decreased 12 per cent to $941.1 million from $1.07 billion in the year-ago period, which included an extra week of business.

Adjusted profit dropped 28 per cent to $4.6 million or four cents per share for the period ended Dec. 29, one cent less than the prior year and six cents per share below the average estimate.

Same-store sales fell 3.5 per cent due to poor weather in Ontario and Quebec in December, although the key sales measure turned positive in Ontario and Western Canada following Rona's decision to close 11 underperforming stores in Ontario and B.C.

Rona chief executive Robert Sawyer, who was brought in from Metro Inc. (TSX:MRU) last April, said he was satisfied with Rona's progress after a transformational year in which it achieved its goal of $110 million of annualized cost savings through closures and the elimination of 1,000 front-line and management positions. The move is expected to improve pre-tax operating income by up to $50 million in 2014.

"It has also been a very exciting year as we put in place the foundation to become a more efficient and focused organization with a culture centred on performance, efficiency and accountability," he told analysts.

Including one-time items, the company's net loss for the quarter from continuing operations was $1.1 million or one cent per share. That compared with a net loss of $17.3 million or 14 cents per share a year earlier.

Rona's (TSX:RON) shares closed down 79 cents or 7.36 per cent at $11.58 Tuesday on the Toronto Stock Exchange.

For the full year, the retailer's net loss from continuing operations was $45.9 million or 38 cents per share, compared with a profit of $12.3 million or 10 cents per share in 2012. Adjusted profits plummeted to $49.9 million or 41 cents per share from $73.5 million or 60 cents per share a year earlier.

Revenues were down 5.7 per cent to $4.19 billion on a 1.9 per cent decrease in sales for stores open at least a year.

Sawyer said the company begins 2014 as a more focused organization that will reposition some store banners and stabilize profit margins after lowering prices and selling excess inventory.

"This year, our main priorities are the improvement of the customer experience across our different type of stores and the increase in bottom-line results and returns to our shareholders."

He said Rona is making progress in overhauling its big-box format in Quebec ahead of expanding the new concept to the rest of the country "in due time."

The early impact on sales has been "encouraging," he said.

Several Montreal stores will be updated with the new concept in the coming month before completing changes at all 16 Reno-Depot stores by late 2014.

The new concept store has a redesigned shopping experience and a new procurement policy to ensure the right amount of merchandise is always in stock.

Rona received $214 million in cash from the sale of its commercial and professional market division in the quarter. The proceeds were earmarked for its credit facility, whose balance was reduced to $45 million. Its net debt was reduced to $167.2 million from nearly $300 million at the end of 2012.

Irene Nattel of RBC Capital Markets said the fourth-quarter results "underscore yet again the challenging macro environment facing Rona as it works to rebuild its foundation."

In recent years, Rona has struggled with slower home construction, weak Canadian economic growth in many markets and competition from U.S. big-box retailers Home Depot and Lowes.

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