An exterior view of a hardware store Rona Inc., in Brossard, Que., on Jan.30, 2013.Christinne Muschi/The Globe and Mail
Home improvement retailer Rona Inc. plans to expand next year after reporting net profit surged nearly 30 per cent on the first increase in same-store sales it has seen in four years.
The company's results have improved since it closed 11 unprofitable stores in Ontario and Western Canada, deriving $110-million in annualized cost savings and eliminating 1,000 front-line and management positions.
"Given the positive trend in sales and profitability, and Rona's solid financial situation, we are in a position to start expanding again," said Robert Sawyer.
Same-store sales increased 3 per cent in the most recent quarter, including a 2-per-cent gain in retail and 8.3 per cent in the distribution segment.
Rona, based in Boucherville, Que., said the sales were up despite the stagnant economy and sustained pressure on housing starts in Quebec and the Atlantic provinces.
Mr. Sawyer said the expansion will be "disciplined" and take place where it must protect its market share and where there is strong growth potential. The company plans on opening five stores in 2015, including two Réno-Dépôt big box stores outside Quebec.
The company has updated its 16 Quebec Réno-Dépôts by redesigning the shopping experience and adopting a procurement policy to ensure the right amount of merchandise is always in stock. The new locations weren't immediately identified.
Rona said it earned $38-million or 32 cents a share for the period ended Sept. 28 compared with $30-million or 25 cents a year earlier. Excluding one-time items, adjusted profit increased 28 per cent to $38.5-million or 33 cents a share, a penny below analyst estimates of 34 cents.
Revenue was $1.167-billion, mostly stable compared with $1.169-billion a year before, despite the closing of underperforming stores beginning in June, 2013.
"The third-quarter results demonstrate the positive impact of having our teams focused on optimizing store operations," said Mr. Sawyer, who took the reins of the troubled retailer in April, 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 Réno-Dépôt 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 closings over the past two years.
Adjusted pretax operating earnings (EBITDA) increased to nearly $84-million or a 7.2-per-cent margin, from $70.7-million or 6.1-per-cent margin a year earlier. 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. (EBITDA represents earnings before interest, taxes, depreciation and amortization.)
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 a share. The new buyback, starting Nov. 18, will give Rona permission – but not an obligation – to purchase up 9.2 million common shares.
Rona's net debt has fallen to $188.4-million from $347.8-million a year earlier.