Despite an aggressive plan to rebuild its business, Rona Inc. remains a fixer-upper stock.
Shares in Canada’s largest home-improvement chain fell 3.7 per cent on Wednesday after the company missed second-quarter earnings expectations. It blamed lower sales on bad weather, soft housing starts, a Quebec construction strike and the loss of revenue from store closures as it revamps its outlets.
The Boucherville, Que.-based company is in the middle of an aggressive turnaround plan to meet competition from U.S. giants, such as Home Depot Inc. and Lowe’s Cos. Inc.
Robert Sawyer, who stepped into the chief executive’s job in April, calls 2013 “a year of transition,” as Rona works to slice $110-million in costs by year end through moves that include shutting 11 stores, cutting 320 jobs and taking a tough line on other costs.
It plans to put 30 per cent of the savings back in the business and is trying to reposition the brand to compete with big box stores during a time when it says, “market conditions are difficult.”
While Mr. Sawyer told investors during a conference call on Wednesday that Rona is “done with the bad news” around restructuring, observers are advising investors to remain on the sidelines. All nine analysts who follow the stock have it as a “hold” or equivalent.
Some suggest that investors should look to similar retailing stocks, such as Canadian Tire Corp., if they want to invest in the Canadian home improvement sector.
“I’m not ready to get constructive on [Rona stock] quite yet. I still think we are a few quarters away,” said Canaccord Genuity analyst Derek Dley.
While Rona’s shares are trading below their book value – usually considered bargain territory – and offer a 1.3 per cent dividend yield, the latest results offer little reason for investors to think a turnaround in the share price is imminent.
Mr. Dley said Wednesday that the April-June period was the 12th consecutive quarter of same-store sales declines in the company’s retail division.
“Although Rona appears to be making headway in reducing a portion of its operating costs, top-line challenges will outweigh expense reductions, and we are not yet ready to become more positive on the name,” he said in a note.
On Wednesday, Rona reported adjusted earnings per share of 28 cents in the second quarter, which was below the 33-cent estimate from analysts surveyed by Bloomberg, and down from 37 cents last year.
Revenue fell 4.6 per cent to $1.25-billion and same-store sales fell 1 per cent. Analysts were expecting revenues of $1.39-billion, according to Thomson Reuters I/B/E/S.
Rona’s net loss from continuing operations was $38.7-million for the quarter ended June 30, compared with a profit of $35.6-million a year earlier. The drop includes $62.8-million in expenses related to the restructuring.
Rona shares closed down 42 cents to $10.84 on the Toronto Stock Exchange Wednesday. It has dropped 22 per cent from its 52-week high of $14 a year ago.
By comparison, shares in Canadian Tire Corp. Ltd. have risen 33 per cent over the past year. Analysts say the company is in a better position to compete in the industry given its more diversified offerings, which span sporting goods and an automotive division, as well as a profitable financial services segment and a recent move to turn its real estate assets into a real estate investment trust.
“[Canadian Tire] is clearly serious about shareholder value,” RBC Dominion Securities analyst Irene Nattel said in a recent note.
When it comes to Rona, Ms. Nattel said Canada’s slowing housing market and constrained consumer spending will continue to pose challenges to the home improvement retailer.
“Given the strong correlation between Canadian residential investment and [Rona] same-store sales, RBC CM forecasts suggest Rona could struggle to generate a meaningful recovery in same-store sales growth until the latter half of 2014,” Ms. Nattel said in a recent note.
Spending on home renovations was forecast to remain flat in 2013 as a result of Canada's softening housing market, according to a report released this year by the Bank of Nova Scotia. The report also said renovation spending increased by less than 3 per cent annually between 2008 and 2012, down from a robust 9 per cent average annual gain between 2000 and 2007.