Is it time for Rona Inc. and Lowe's Cos. to reconsider getting together?
As much as it has always made sense for the two to combine, they have never seemed keen on the idea. But with Rona slumping and Lowe's struggling in its home market of the U.S., the dynamic looks more favourable.
Lowe's has always said it wants to build rather than buy.
Rona has always downplayed the competition from Lowe's, which said in 2005 that it would enter Canada.
In fact, at a 2007 conference, Rona Inc. chief executive officer Robert Dutton told the audience that having Lowe's as a new competitor in Canada was "good for business."
Rona was already competing with one American giant in Home Depot, and Lowe's would only worsen the pressure.
But Mr. Dutton saw it differently. The spectre of the American giant coming created a reason for independent hardware dealers to want to join Rona, Mr. Dutton said.
Good for business? Hardly. In the intervening five years, Rona's earnings per share are down sharply.
In 2007, Rona earned $1.60 a share according to Bloomberg. In 2010 it was $1.06. This year, based on the company's guidance, the outlook is for about 68 cents a share.
Same store sales have been sliding at Rona's network of more than 600 outlets. it's no shock that the stock has struggled in that time, falling from almost $25 in mid-2007 to less than $10 today.
There's more than Lowe's at play. Canada's economy has struggled at times in the interim and home renovation intentions are sliding, perhaps because high home prices mean that buyers don't have much cash left over for a new bathroom. In 2011, a CMHC survey found that 34 per cent of homeowners planned a renovation, down from 2010's 42 per cent and 2009's 50 per cent.
Meantime, the Lowe's build in Canada has been slow. It has only opened about 30 stores in Canada, mostly clustered in Ontario. In 2007, with the U.S. economy booming, there was less impetus to get into Canada.
Now, with the U.S. housing market mired in a long slump, Canada's has to look inviting. Yes, renovations here have slowed, but our housing market is in vastly better shape and the economy has in general held up better.
Lowe's lack of penetration is both a threat and an opportunity for Rona. There's plenty of room for Lowe's to increase the pressure by opening more building centres.
But should Rona or its shareholders want to sell, that small Lowe's footprint means it might make sense for Lowe's to kickstart its Canadian invasion. There's little overlap at this point outside the southern Ontario market.
Lowe's has its own problems in the U.S., but it has still been a better performer than Rona in terms of same-store sales, stock price and earnings.
Lowe's shares are down from a 2007 high of about $35 (U.S.) to about $25 of late.
Lowe's could make a purchase accretive based on price-earnings ratios. Rona trades at a price-earnings ratio of 14.1, while Lowe's garners a 15.5 multiple.
To be clear, nobody's really talking about a Lowe's-Rona deal that Streetwise knows of. (In fact, last month RBC analyst Irene Nattel said that a "corporate development geared toward surfacing value" looked "fairly unlikely at this time.")
But maybe they should be.