Rona says smaller stores doing better

Rona says its shift to smaller neighbourhood stores is paying off as they outperformed big box stores in the second quarter that ended with a return of cautious consumer spending, the company said Wednesday.

Canada's largest chain of home-improvement stores,which is fending off an unwanted takeover proposal from Lowe's, is continuing to open that it calls "proximity" stores that carry a smaller variety of products.

The first of its "new generation" of these retail outlets opened Wednesday in Edmonton West, not far from a big box store that closed.

"The main objective of this plan is to get closer to Canadian consumers and redefine the customer experience," president and CEO Robert Dutton said during a conference call.

Rona offers several store concepts and sizes, along with a revamped website and distribution network.

The Quebec-based company said it expects the changes will generate $10 million of additional pre-tax operating earningsthis year, $30 million in 2013 and more than $40 million thereafter.

"The unique multi-format ownership business model we have been building with our stakeholders in the past 73 years is perfectly suited from ongoing changes happening in our industry," he told analysts.

Shift expected to continue

Chief financial officer Dominque Boies said the trend of sales shifting to smaller stores has been happening for a few quarters.

"And we believe that it will continue and it's really one of the reasons that we're going into the direction with the redeployment of our network," he added.

Ronasaid its second-quarter results were in line with its own targets, although the impact of one-time items drove the retailer's earnings lower.

The company earned $34.1 million for the quarter, down from $37 million in the second quarter of 2011. Including $2.3 million in dividends paid to preferred shareholders, the company earned $36.4 million for the quarter, compared with $39.5 million a year ago.

After adjustments to exclude $9.5 million in unusual items and other factors, Rona's profit rose to $43.6 million or 36 cents per share.

That's up from $37 million or 28 cents per share a year earlier but a penny per share below analyst estimates compiled by Thomson Reuters.

Revenue was in line with estimates, rising by 3.4 per cent from a year ago to $1.4 billion.

Same store sales increased by one per cent, after reductions in each of the past three periods.

However, the company has changed how it calculates sales for operations open at least a year by adding commercial and distribution revenues which account for about 25 per cent of overall sales to retail sales.

Distribution same-store sales grew by 11.4 per cent in the quarter helped by strong lumber sales, meanwhile network retail sales decreased by 0.9 per cent.

Western Canada was most affected by weak consumer spending that surfaced at the end of May. Ontario and Quebec did well, while Atlantic Canada was the strongest region in the country.

Rona sold $9.4 million worth of non-core assets in the quarter. Over the last year it has divested closed to $60 million of assets and expects to unload another $60 million worth over the next 18 months.

The company, which has its headquarters in Boucherville, Que., near Montreal, said the unusual items recognized part of the cost of moving some of its sales volume out of Rona's big-box stores and into smaller locations.

That strategic shift, which will have a total estimated cost of $110 million, was announced earlier this year.

Since Rona's second quarter ended on June 24, the company received and rejected an offer of $14.50 per share from Lowe's, the second-largest home-improvement retailer in the United States.

The Lowe's offer, just days before Premier Jean Charest announced Quebec will go to the polls on Sept. 4, was also denounced by the provincial government.

The Lowe's offer comes as both it and Rona look for ways to grow revenue. Rona refused to discuss to takeover offer on Wednesday's conference call.

Rona has said it intends to maintain its strategy, which includes using a variety of store formats to meet different market conditions throughout Canada.

Headquartered in Mooresville, N.C., Lowe's has a small presence in Canada with only about 31 stores. Overall, Lowe's has 1,745 stores in North America, mostly in the United States.

The first Canadian Lowe's store was opened in 2007, several years after fellow American retailer Home Depotalready established a significant presence in Canada. Home Depot currently has 180 stores across Canada.

By contrast, Rona has more than 30,000 employees operating a network of nearly 800 stores under several banners as well as 14 hardware and construction distribution centres.