Ben Stadelmann and Benj Gallander, known as The Contra Guys and co-publishers of the Contra the Heard investment letter, focus on finding turnaround situations and stocks that are currently unpopular but are likely to regain their lustre. They are now regular contributors to Globe Unlimited's Inside the Market in addition to Globe Investor Gold.
When most Canadians outside of Quebec think of iconic brands, Rona Inc. does not spring to mind. Yet this company traces its roots back to 1939 and is a leader in the building materials, hardware and home renovation fields with over 500 stores.
Rona has had difficulties over the last number of years. Competition has grown stiffer as Home Depot and Lowe's – huge American players – hone in on their turf. RON's stock price crested $25 a decade ago, fell to less than $9, and is now trading in the $13 range.
Big changes for the organization started towards the end of 2012, when Robert Dutton – who had been the CEO/president for 20 years – relinquished the position. He was a veritable lifer, having been with Rona for 35 years and a major designer of the company's expansion strategy as it bought up other players in the sector. However, as Dutton's time was coming to a close, it was Rona that was the subject of takeover talk when Lowe's expressed interest in buying it. While many thought this would be an excellent fit, the company insisted that it was not interested, and the Quebec government stated that it would block the sale to boot. The $14.50 per share offer dropped off the table.
Soon afterwards, Robert Chevrier, a gent known for his turnaround prowess came aboard as executive chairman and then in March 2013, eight new board members arrived. They quickly announced a new CEO/president, Robert Sawyer, who had successfully revamped Metro Inc. (MRU-TSX), a leader in the grocery field with over 800 stores in Ontario and Quebec.
Commencing a turnaround often begins with ugly numbers and fiscal 2013 at Rona was no exception. The 2012 revenues of $4.88-billion and profitability of $17.3-million slipped to $4.19-billion and a loss of $154-million respectively. Amid the carnage Benj saw potential and purchased the 5.25 per cent Rona preferred shares, which had been issued at $25, at prices ranging from $18.71 to $19.67. That proffered a yield of about 7 per cent, a pretty good place to park money as long as the payments were made. At the same time, Benj thought there was a good chance the prefs would appreciate and eventually trade closer to par. Currently they are around $22, but he has no intention of selling at this level.
Quarterly results reported this month showed that the turnaround is taking place. Same store corporate sales improved on a year over year basis for the first time since 2010. Revenues were down 4.4 per cent, but much of this was because of store closures. In addition, the wintery weather that lasted into spring cut sales in the Ontario and Quebec markets for building materials. However, Sawyer cut expenses and the bottom line showed a rosy profit of $42-million. With that, the semi-annual dividend of $0.07 was declared, payable next month.
It would not surprise us to see Rona's stock price double or better over the next few years. The preferred shares could also dance back towards their $25 issue price. If those happen, more people will likely consider Rona an iconic brand.