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An exterior view of a Rona Inc. store in Brossard, Que., on Jan. 30, 2013. The home renovation retailer’s third-quarter revenues took a hit amid weaker home starts, particularly in Quebec. (Christinne Muschi For The Globe and Mail)
An exterior view of a Rona Inc. store in Brossard, Que., on Jan. 30, 2013. The home renovation retailer’s third-quarter revenues took a hit amid weaker home starts, particularly in Quebec. (Christinne Muschi For The Globe and Mail)

Rona profit pinched by Quebec housing slowdown Add to ...

Rona Inc. continued to feel the pressure from a weakened economy over the summer as it posted lower adjusted earnings that missed analyst expectations while also reporting its 13th consecutive quarter of declining same-store sales.

The Quebec-based home renovation retailer earned $30-million or 25 cents a share in the period ended Sept. 29 compared with $5.5-million – or 5 cents a year earlier – but down from $33.5-million or 28 cents when excluding one-time items.

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Revenue for the summer quarter decreased 4.3 per cent to $1.17-billion from $1.22-billion because of store closings and a 2.4-per-cent decrease in same-store sales, a key metric involving stores open at least a year.

Rona said the decrease in same-store sales was affected by a sharp drop in Canadian single-family housing starts, particularly in Quebec, which declined 31 per cent. The chain earns nearly half its revenue in Quebec.

Store closings cut $18.2-million in sales while openings added $3.5-million.

The retailer was expected to earn $39.2-million or 30 cents a share, in adjusted profit on $1.25-billion of revenue, according to analysts polled by Thomson Reuters.

The company said it has achieved $63-million of its $110-million in planned cost reductions this year. The savings are mainly related to job cuts, the renegotiation of major administrative service contracts and the closing of 11 underperforming stores in Ontario and B.C.

About 30 per cent, or $33-million, is to be reinvested in the company.

It generated $151.3-million of free cash flow in the quarter and inventories have decreased $114.4-million from a year earlier. Selling, general and administrative expenses were cut by $21-million in the quarter, raising the total for the year to $28.5-million. However, the savings were offset by a reduction in prices and gross margins that ate away at overall profitability.

“The $63-million in annualized cost-savings achieved year-to-date has allowed us to quickly roll out measures that will have an ongoing impact on Rona’s financial performance,” said president and CEO Robert Sawyer.

Rona said it increased promotional activities during the quarter. The move reduced adjusted pretax earnings to $70.7-million, from $75.7-million in the prior year.

Mr. Sawyer said the free cash generated in the quarter and $214-million of proceeds from the sale of its commercial and professional market division put the company in “an excellent financial position” to repurchase up to 8.6 million common shares, or 10 per cent of its stock over the next year.

Analysts have suggested Rona shareholders need to be patient about a recovery for the Quebec-based company.

“Over all, a very tough quarter,” said Derek Dley of Canaccord Genuity, who highlighted the weakened same-store sales numbers.

“I think the market likes the share buyback that the company announced … but I still think the company’s facing a lot of headwinds here going forward and we’re going to see a few more quarters that look like this,” he said in an interview.

Mr. Dley said Rona continues to struggle amid tough consumer spending in Canada and increasing competition from U.S. players Home Depot Inc. and Lowe’s Cos. Inc. While Rona’s same-store sales are in decline, Home Depot recently said its Canadian store numbers have improved.

Irene Nattel of RBC Capital Markets said the results “underscore the challenging macro environment and the challenge facing Rona as it works to rebuild its foundation.” She said 2013 was best viewed as transitional year for the new management team as it realigns the company’s offerings, pricing and cost structure.”

As a consequence of constrained consumer spending, the analyst cut her earnings forecast for 2013 and 2014. But her 2015 outlook of $1.03 per adjusted share would be 13 per cent higher than the 91 cents expected next year and 83 per cent higher than 2013.

Rona is the largest Canadian home renovation retailer with a network of more than 530 stores, 13 distribution centres and about 25,000 employees.

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