After years of building a national presence, hardware specialist Rona Inc. has a new blueprint: downsizing itself to profitability.
“As we grew very rapidly, we also grew in complexity. Now, we need to take a step back and simplify our business model,” says Dominique Boies, Rona’s chief financial officer and acting CEO since Robert Dutton was ousted in early November.
“We don’t have a choice,” Mr. Boies added. Rona is under intense pressure from disgruntled shareholders such as Invesco Trimark Ltd., which is campaigning to replace Rona’s entire board of directors after the company turned down Lowe’s Cos. Inc.’s $1.8-billion takeover proposal and reported disappointing results.
Pursuing its new strategic outlook, Rona will exit any business where the Boucherville, Que.-based retailer and distributor lacks scale or an edge on competition. “With the exception of distribution, our core business, there are no sacred cows,” Mr. Boies said in a press conference in Montreal.
No final decision has been made on divestitures; they should be identified when the company releases its fourth-quarter results in February. However, Mr. Boies is openly questioning the big-box format. While these stores are successful in Quebec, they are underperforming in Ontario. On the commercial and industrial side, Mr. Boies also has an eye on ventilation and heating, as well as plumbing, businesses that are profitable but have insufficient scale.
Mr. Boies predicts significant divestitures, greater than the sale of $115-million in unused real estate now under way. Proceeds will be reinvested in Rona’s best-performing businesses or in new information technology systems.
“We could even redistribute excess capital to shareholders,” Mr. Boies added, giving a share buyback as an example.
Asked why Rona didn’t undertake such a turnaround before, Mr. Boies said investors previously applauded the retailer’s national expansion. Now, with slower economic growth and a crowded hardware market, the shareholders’ message is “markedly different.”
Mr. Boies believes the business strategy he pitched to Rona’s board, which aims at increasing the gross profit margin to 8 per cent from its year-to-date 4.7 per cent, will withstand the nomination of a new CEO – whose search lead by Korn Ferry is still under way. The 40-year old executive who joined Rona a little more than a year ago is himself applying for the top job.
Mr. Boies holds a master in finance degree from Université du Québec à Montréal. Prior to joining Rona, he worked in the financial sector for 17 years, lastly at the Caisse de dépôt et placement du Québec and previously at Royal Bank of Canada. He has no retail experience.
According to Mr. Boies, whoever gets the position should be bilingual, given Rona’s national network.
Mr. Boies will now meet with Rona’s institutional investors to sell the company’s new strategic outlook. “We want to turn the situation around, but investors can’t expect to have their money back in their pockets tomorrow morning,” he said.
“You can’t build a company like Rona just by focusing on the next trimester, he added. “This is a long-term vision.”
Rona’s two biggest institutional investors, the Caisse de dépôt and Invesco, which together own about one-quarter of the company, both declined to comment on the retailer’s new strategic outlook.
Mr. Boies intends to reach out once again to Invesco even if the Toronto fund manager turned down Rona’s last invitation. But he said he has no plans to entertain a conversation with Lowe’s in the near future, even if Rona might eventually have some big box stores to sell.
Lowe’s still has its sights set on Canada, its chairman and CEO, Robert Niblock, reiterated at an investor conference on Wednesday.
“While we will queue our proposal to acquire Rona, there are other ways to obtain scale in Canada, including opening additional big-box stores, the introduction of alternative formats and the acquisition of other companies. We’re evaluating all of these options,” Mr. Niblock said.