RONA Sees First Signs of Recovery in Third Quarter 2009
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BOUCHERVILLE, QUEBEC--(Marketwire - Nov. 10, 2009) - RONA inc. (TSX: RON)
THIRD-QUARTER HIGHLIGHTS
- Sales down 4.4% largely due to a 5.3% decline in corporate and franchise same-store sales and a 1.6% decline in distribution sector sales
- Major increase in applications for the RONAdvantage program - over 10,000 signed up across the RONA network to date, representing renovation projects worth over $100 million
- Increased RONA private brand and controlled-label penetration - over 19% in the third quarter, compared to 17% in 2008
- Ongoing cost reductions and efficiency improvements under the PEP program, resulting in only 13 basis points lost on EBITDA margin, despite a 5.3% decline in same-store sales
- Comparable inventories cut by $51 million or 6.0%
- 18.0% reduction in interest expenses on long-term debt and bank loans
- Unusual items mainly related to store closures totalling $4.1 million after taxes in third quarter 2009 versus $6.4 million in third quarter 2008
- Net earnings, including unusual items, of $49.1 million in third quarter 2009, or $0.38 per share (diluted), versus $52.5 million or $0.45 per share (diluted) in 2008
- Net earnings, excluding unusual items, of $53.3 million in third quarter 2009, or $0.41 per share (diluted), versus $58.9 million or $0.50 per share (diluted) in 2008
- Ongoing expansion with two new 52,000-square-foot proximity stores opened: one TOTEM Building Supplies store in Strathmore, Alberta, and a RONA store in Saint-Georges, Quebec. These are the first two RONA stores to seek LEED certification (Leadership in Energy and Environmental Design), an environmental evaluation system for new buildings.
RONA inc. (TSX: RON), Canada's largest retailer and distributor of home renovation, hardware and gardening products, today reported consolidated sales of $1,320.5 million in third quarter 2009, $61.2 million or 4.4% less than the $1,381.7 million posted in 2008, despite higher sales to commercial and professional customers in Ontario and a slight decrease in sales to Canadian consumers. The decline is the result of a 5.3% reduction in same-store sales in the corporate and franchise store sector, while sales in the distribution sector were down 1.6%.
This decline in same-store sales is due mainly to a drop in housing starts in recent quarters, putting downward pressure on sales by building materials specialists and also on home renovation spending, as home buyers generally undertake major improvements in the months and years following the purchase of a new property. The decline can also be attributed to low confidence among Canadian consumers - still lagging behind last year, despite some recent improvement. Finally, weather conditions once again were particularly unfavourable for the sale of seasonal products at the beginning of the quarter. Over 80% of the same-store sales decline is due to lower sales of forest products, building materials and seasonal items. Paint, lighting fixtures, hardware, kitchen and installation services posted very good sales performance this quarter, reflecting caution on the part of consumers in choosing smaller renovation projects, but also sales increases associated with our complementary RONAdvantage renovation tax credit incentive program as well as the success of our different promotions.
Operating income, including unusual items, amounted to $105.8 million in third quarter 2009, down $6.7 million or 6.0% compared to $112.5 million posted in 2008. Excluding unusual items, operating income was $111.8 million in third quarter 2009, down $9.3 million or 7.7% from 2008. The EBITDA margin declined from 8.76% in 2008 to 8.46% in 2009. Numerous efficiency improvements under the PEP program (productivity, efficiency, profitability) in Phase 1 of the 2008-2011 strategic plan helped offset the negative impact of this continued downward pressure on sales in the renovation-construction industry caused by low consumer confidence and the results of recently opened stores that have not yet reached their full potential. In the third quarter, the PEP program helped reduce inventory levels, optimize the existing store network and reduce transportation and logistics costs.
Net earnings, including unusual items in third quarter 2009, were down $3.4 million or 6.4%, at $49.1 million, or $0.38 per share (diluted), compared to $52.5 million or $0.45 per share (diluted) in 2008. Excluding unusual items, net earnings were $53.3 million in third quarter 2009, or $0.41 per share (diluted), compared to $58.9 million or $0.50 per share (diluted) in 2008, down $5.6 million or 9.6%. The average number of shares increased by 13.8 million or 11.9% compared to third quarter 2008 following a share issue completed in June. Given this increase in the average number of shares, the diluted earnings per share declined by 18.0% over the quarter. The dilution effect on earnings per share related to the higher average number of shares is $0.04 per share.
"As anticipated, we glimpsed the first signs of recovery in our industry during the third quarter. Same-store sales in our store network continued to decline, but more slowly than at the beginning of the year. Our industry has noted some encouraging statistics in the last few months, including home resales and average home prices. As predicted, our PEP program (productivity, efficiency, profitability) has continued to produce very good results, allowing us to limit shrinkage in our EBITDA margin to just 13 basis points, despite a 5.3% decline in same-store sales this quarter," RONA president and CEO Robert Dutton said.
"The business environment is increasingly favourable to real estate activity overall. Very low mortgage rates and the popularity of the renovation tax credits should continue to stimulate renovation activity across the country. We should point out, however, that the sharp decrease in housing starts during the last few quarters will continue to put downward pressure on sales by building materials specialists and on home renovation spending, since new home buyers generally undertake major improvements in the months and years following their purchase of a new property. In this economic context, we will continue for the next few quarters to pursue the numerous optimization measures under the PEP program. Given the major gains in efficiency we've achieved to date under the PEP program and the Company's increased financial flexibility in the wake of our issue of common shares in June, we believe the Company is in an excellent position to commence Phase 2 of our 2008-2011 strategic plan. We're currently finalizing plans for this phase, which will focus on the re-acceleration of RONA's development activities. New initiatives will be launched in late 2009, including the launch, on November 12, of a new concept for a highly innovative interior design and paint store," Dutton concluded.
ANALYSIS OF CONSOLIDATED RESULTS FOR THE THIRD QUARTER 2009
NEW ACCOUNTING STANDARD
Readers of this Press Release will note the adoption of a new accounting standard in the first quarter of 2009, which restated the results presented in 2008. At the beginning of 2009 the Company retroactively adopted Section 3064 of the Canadian Institute of Chartered Accountants' (CICA) Handbook, Goodwill and intangible assets, which replaces Section 3062 of the same title. This section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets, including internally generated intangible assets. Pre-opening expenses for stores and distribution centres (previously included in Other Assets), advertising costs, including those related to store openings, and costs incurred for Olympic and Paralympic sponsorship (previously included in Prepaid Expenses) no longer meet the requirements of the new section. The balances in these asset accounts as at December 31, 2007 - that is, at the beginning of first quarter 2008 - were restated and included in Retained Earnings and the results of operations in 2008 were also restated to conform to the 2009 presentation.
In summary, operating income for third quarter 2008 has been reduced by $3.0 million, amortization and depreciation by $1.8 million and net earnings by $0.9 million, a total reduction of $0.01 per share. For the nine-month period ended September 28, 2008, operating income was reduced by $16.8 million, amortization and depreciation by $5.6 million and net earnings by $7.8 million, a total reduction of $0.06 per share.
Prepaid expenses were also reduced by $36.2 million, other assets by $2.8 million and opening retained earnings by $20.5 million. The detailed impact of applying these new recommendations during the first period of application of Section 3064 is explained on page 15 of the Management's Discussion and Analysis and in Note 2 of the Consolidated Financial Statements.
UPDATE ON THE COMPANY'S STRATEGIC ORIENTATION
RONA's 2008-2011 strategic plan was presented to the financial community during Investors Day on February 27, 2008 in Montreal. A news release outlining the issues and objectives of the plan was also published that day. RONA management made a commitment to provide quarterly updates of the plan's progress in its management report and an annual update in its annual report and at its annual general meeting.
Achievements in third quarter 2009
The following section highlights quarterly achievements related to the implementation of various initiatives under Phase 1 of the plan - that is, the PEP program (productivity, efficiency, profitability) - grouped into four main projects.
1. Improve the profitability of our corporate store network:
- Consolidated gross margin decreased by 21 basis points in the third quarter due to a greater proportion of distribution sales, which generate lower margins than retail activities. Given better terms and conditions from our suppliers and the resulting supportive effect on growth of the network, the adjusted gross margin shrank by 6 basis points. Excluding the unfavourable effect related to the higher proportion of distribution sales, the adjusted gross margin improved by 11 basis points. Margin increases achieved through regular retail activities were reduced by the impact of liquidating seasonal products, which explains why the increase in the adjusted margin is lower than in previous quarters. The liquidation served, however, to reduce inventory levels, increase stock rotation rates and improve inventory quality.
- Our turnaround plan for underperforming stores has produced very good results, as these stores have posted relatively higher increases in sales and operating income than the network as a whole during this quarter.
2. Optimize the supply chain:
- Same-store and distribution centre inventories were reduced by $51 million or 6.0% in third quarter 2009 (excluding acquisitions and new stores) compared to third quarter 2008, resulting in lower operating costs and financing charges. Including acquisitions and new stores, inventories were reduced by $38 million.
- Reduced transportation costs and ongoing improvements in demand management resulted in a reduction of nearly $1 million in logistics costs in third quarter 2009.
3. Accelerate recruitment of independent dealer-owners:
- Since the beginning of the year, a total of 12 dealer-owners have been recruited, representing estimated annual retail sales of over $30 million.
- RONA dealer-owners have been very busy this year, completing 42 expansion and renovation projects totalling nearly $40 million in investments.
- Jean-Luc Meunier was appointed senior vice president, affiliate dealer-owner network development. Mr. Meunier reports directly to the Company's president and CEO, Robert Dutton, and sits on the executive committee. At RONA, Mr. Meunier's team is in charge of recruitment and development of the affiliate dealer-owner network and dealer support.
4. Improve sales and increase customer loyalty across the RONA network:
- A major increase in applications for the RONAdvantage program, which provides rebates in the form of gift certificates to a maximum of $1,000 as a complementary incentive under the new renovation tax credit programs. Over 10,000 applications representing renovation projects worth more than $100 million have been received to date across the RONA network. RONA estimates that close to 75% of these projects have been completed. RONAdvantage is the industry's only ongoing complementary incentive program to the renovation tax credits.
- The success of RONAdvantage has also had a major positive effect on the number of new RONA VISA Desjardins credit cards issued since the beginning of the year (over 15% growth), on the volume of financing (over 50% growth), on installation services (over 15% growth) and on the use of the RONA Project Guides to help carry out these renovation projects.
- Increased penetration by RONA private brand and controlled-label products to over 19% in the third quarter, despite a slight decrease in sales.
- Launch of RONA ECO paint, a line of recovered/recycled paint available in 16 fashion colours throughout the RONA store network in Canada.
- Over 15% growth in commercial and professional sales for big-box stores in Ontario, thanks to close cooperation with the specialized sales team in our Commercial and Professional Market Division.
- Same-store sales growth for Noble Trade Plumbing Supplies, despite a declining market.
- Opening of two new 52,000-square-foot proximity stores, one under the TOTEM Building Supplies banner in Strathmore, Alberta, and one under the RONA banner in Saint-Georges, Quebec. These concepts, which are improved with each new opening, are highly promising as vehicles for growth in the years ahead. They offer a very good balance between the product variety of the big-box stores and the expertise of smaller stores. These are the first two RONA stores to seek LEED certification (Leadership in Energy and Environmental Design). LEED is an environmental evaluation system for new buildings.
- Signature of an exclusive partnership agreement with Maple Leaf Sports & Entertainment Ltd. that includes permanent, camera-visible RONA branding during these teams' home games at Air Canada Centre and Ricoh Coliseum, including on-ice RONA logos. Under this agreement, RONA will also enjoy exclusive opportunities to offer customers in our stores a chance to win tickets to Leafs, Raptors and Marlies games.
- Launch of a new English-language reality TV show, My RONA Home. The first episode of the 10-show series was broadcast on Citytv on Sunday, October 4.
- Launch of a new multi-platform advertising campaign for RONA's 70th anniversary, including major discounts on selected items, thousands of Air Miles(TM) rewards, draws for trips to the 2010 Winter Olympic Games in Vancouver and a variety of other prizes.
Consolidated sales
Consolidated sales for third quarter 2009 were $1,320.5 million, down $61.2 million or 4.4% from the $1,381.7 million posted in 2008. This decline is largely the result of a 5.3% decrease in same-store sales in the corporate and franchise sector, while sales in the distribution sector were down 1.6%.
This decline in same-store sales is due mainly to a drop in housing starts in recent quarters, putting downward pressure on sales by building materials specialists and on home renovation spending, since new home buyers generally undertake major improvements in the months and years following their purchase of a new property. The decline can also be attributed to low confidence among Canadian consumers - still lagging behind last year, despite some recent improvement. Finally, weather conditions once again were particularly unfavourable for the sale of seasonal products at the beginning of the quarter. Over 80% of the same-store sales decline is due to lower sales of forest products, building materials and seasonal items. Paint, lighting fixtures, hardware, kitchen and installation services posted very good sales performance this quarter, reflecting caution on the part of consumers in choosing smaller renovation projects, but also the success of our promotion of pre-assembled kitchen cabinets and sales increases associated with our complementary RONAdvantage renovation tax credit incentive program.
Gross margin
In third quarter 2009, the Company's gross margin decreased from 26.97% in 2008 to 26.76% in 2009, a decline of 21 basis points, due to a higher proportion of distribution sales, which generate lower margins than retail activity. Given better terms and conditions from our suppliers and the resulting supportive effect on the growth of the network, the adjusted gross margin declined by 6 basis points, from 29.38% in 2008 to 29.32% in 2009. Excluding the unfavourable effect related to the higher proportion of distribution sales, the adjusted gross margin nevertheless improved by 11 basis points this quarter.
Margin improvements achieved through regular retail activities were reduced by the impact of seasonal product liquidations, which explains why the increase in the adjusted margin is lower than in previous quarters. These liquidations served however to reduce inventory levels, increase stock turnover and improve inventory quality.
Cost of store closures (unusual items)
As part of our extensive efficiency improvement and optimization program for the network of existing RONA stores, the Company decided in second quarter 2008 to close four underperforming stores and transfer the business volume from these stores to other nearby RONA corporate and affiliate stores. Two of these are big-box stores: one in Richmond, British Columbia, the other in Scarborough, Ontario. The two other stores are smaller stores operating under the Cashway banner in Ontario.
In total for third quarter 2009, operating income was affected by unusual items amounting to $6.0 million, mainly from the re-evaluation of commitments related to the above-mentioned closures. After taxes, unusual items for the third quarter totalled $4.1 million. In third quarter 2008, unusual costs of $9.3 million were posted, of which $8.5 million affected operating income and $0.8 million affected amortization, depreciation and financing charges. After taxes, unusual costs for third quarter 2008 were $6.4 million.
This decision allowed the Company to eliminate operating losses and transfer business volume to other corporate and affiliate stores in better locations with higher growth potential and much stronger performance.
Consolidated operating income
Operating income, including the unusual items mentioned above, amounted to $105.8 million in third quarter 2009, down $6.7 million or 6.0% from the $112.5 million posted in 2008. The EBITDA margin declined from 8.14% in 2008 to 8.01% in 2009, a drop of 13 basis points, stemming mainly from downward pressure on same-store sales.
Excluding unusual items, operating income was $111.8 million in third quarter 2009, down $9.3 million or 7.7% from the same period in 2008. The EBITDA margin declined from 8.76% in 2008 to 8.46% in 2009, a decrease of only 30 basis points despite a 5.3% decline in same-store sales.
The numerous efficiency improvements introduced under the PEP program in Phase 1 of the 2008-2011 strategic plan have helped offset the negative impact of weaker sales in the renovation-construction industry caused by low levels of consumer confidence and the results of recently opened stores that have not yet reached their full potential. In the third quarter, the PEP program helped reduce inventory levels, optimize our existing store network and reduce transportation and logistics costs.
Net earnings
Net earnings, including unusual items, for third quarter 2009 were down $3.4 million or 6.4%, at $49.1 million or $0.38 per share (diluted), compared to $52.5 million or $0.45 per share (diluted) in 2008. The factors that affected operating income also affected net earnings.
Excluding the unusual items mentioned above, net earnings were $53.3 million in third quarter 2009, or $0.41 per share (diluted), compared to $58.9 million or $0.50 per share (diluted) in 2008 - a decrease of $5.6 million or 9.6%. The average number of shares increased by 13.8 million or 11.9% compared to third quarter 2008 following a share issue completed in June. Given this rise in the average number of shares, diluted earnings per share declined by 18.0% over the quarter. The dilution effect on earnings per share related to the higher average number of shares is $0.04 per share.
ANALYSIS OF CONSOLIDATED RESULTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 27, 2009
Consolidated sales
Consolidated sales for the nine-month period ended September 27, 2009, were $3,536.4 million, down $230.1 million or 6.1% from the $3,766.5 million recorded in 2008. This decline can be attributed to the decrease in same-store sales, especially at the beginning of the year, which were affected by a low confidence among Canadian consumers, a sharp decline in the number of housing starts for single-family homes, especially in the West, and weather conditions that have been especially poor for construction and renovation activities ever since the beginning of the year. The numerous sales stimulation and customer loyalty programs introduced over the last year helped offset the decrease in numbers of in-store transactions. Given the current economic conditions, however, consumers are noticeably cautious and have been limiting themselves to smaller renovation projects so far this year.
Gross margin
In the nine-month period ended September 27, 2009, the Company's gross margin improved by 7 basis points, from 27.22% in 2008 to 27.29% in 2009. Given better terms and conditions from our suppliers and the resulting supportive effect on growth of the store network, the adjusted gross margin rose by 31 basis points, from 29.77% in 2008 to 30.08% in 2009. This growth is due to better management of product categories, increased sales of private brand products, a reduction in in-store losses ("shrink"), and further improvements in terms and conditions from our suppliers.
Cost of store closures (unusual items)
As mentioned in the analysis of our third-quarter results, as part of our extensive efficiency improvement and optimization program for the network of existing RONA stores, the Company decided in second quarter 2008 to close four underperforming stores and transfer the business volume from these stores to other nearby RONA corporate and affiliate stores. The closure of these stores led to unusual costs in the following quarters.
For the nine-month period ended September 27, 2009, operating income was affected by unusual costs totalling $14.2 million, largely related to the re-evaluation of commitments related to the closures mentioned above. After taxes, the unusual costs amounted to $9.8 million. For the corresponding period in 2008, unusual costs totalling $15.1 million were posted, of which $11.4 million affected operating income and $3.7 million affected amortization, depreciation and financing charges. After taxes, unusual costs amounted to $10.4 million in 2008.
This decision allowed the Company to eliminate operating losses and transfer business volume to other corporate and affiliate stores in better locations with higher growth potential and much stronger performance.
Consolidated operating income
Operating income, including unusual items, was $254.2 million in the nine-month period ended September 27, 2009, down $35.2 million or 12.2% from the $289.4 million recorded in 2008. The EBITDA margin declined from 7.68% in 2008 to 7.19% in 2009, a drop of 49 basis points, due largely to unusual items and downward pressure on same-store sales.
Excluding unusual items, operating income was $268.4 million in the nine-month period ended September 27, 2009, down $32.4 million or 10.8% from 2008. The EBITDA margin declined from 7.99% in 2008 to 7.59% in 2009, a drop of 40 basis points.
This decrease stems largely from current downward pressure on sales in the renovation-construction industry, due to a significant reduction in housing starts since the beginning of the year and the decline in consumer confidence. As mentioned in the analysis of third-quarter results, the numerous efficiency improvements introduced under the PEP program in Phase 1 of the 2008-2011 strategic plan have helped offset the negative impact of these factors. In the nine-month period ended September 27, 2009, the PEP program helped improve the adjusted gross margin by 31 basis points, reduce inventory levels, excluding acquisitions and new stores, by $51 million, and optimize our existing store network and distribution centres.
Net earnings
Net earnings, including unusual items for the nine-month period ended September 27, 2009, declined by 15.2% to $107.4 million or $0.88 per share (diluted), compared to $126.7 million or $1.09 per share (diluted) in 2008. The factors affecting operating income also affected net earnings. To these factors can be added higher fixed costs related to the growth of the network, including amortization related to recent store openings and investments in technology, which are expected to make positive medium- and long-term contributions to the Company. This increase was more than offset by the decrease in interest costs.
Excluding unusual items, net earnings were $117.3 million in the nine-month period ended September 27, 2009, or $0.96 per share (diluted), compared to $137.1 million or $1.18 per share (diluted) in 2008. This is a decrease of $19.8 million or 14.5%, reflecting pressure on sales in the renovation-construction industry, which could not be entirely offset by the efficiency improvement measures implemented since the beginning of the year. The average number of shares increased by 6 million or 5.2% compared to the same period in 2008, following a share issue completed in June. Given this increase in the average number of shares, the diluted earnings per share declined by 18.6% over the nine-month period ended September 27, 2009. The dilution effect on earnings per share related to the higher average number of shares is $0.04 per share.
CASH FLOWS AND FINANCIAL POSITION
Operations generated $78.7 million in third quarter 2009, compared to $81.3 million in the corresponding quarter of 2008. Net of increases in working capital, operations generated $100.1 million, down from $112.5 million in 2008. For the nine-month period ended September 27, 2009, operations generated $192.2 million, compared to $207.8 million in 2008. Net of increases in working capital, operations generated $216.7 million, down from $264.1 million in 2008.
In the third quarter of 2009, we invested $33.1 million in capital spending, compared to $39.7 million in 2008. These investments were devoted to the expansion of our retail network, including the construction of new stores as well as maintenance, renovations and upgrades of existing stores to reflect our new concepts. We also allotted part of these investments to ongoing improvements in our IT systems, in order to increase our operational efficiency. Throughout the entire quarter, the Company exercised disciplined financial management and strictly monitored investments in fixed assets. Non-core assets were also sold off during this quarter, generating an additional cash inflow of $1.9 million.
In nine months of activity, RONA invested $124.1 million in capital spending, $5.6 million less than the $129.7 million invested in 2008. RONA management plans to invest about $170 million during 2009 - $25 million or 13% less than in 2008.
RONA issued 11,630,000 shares on June 2 at a price of $12.90 per share, generating gross proceeds of $150 million. Subsequent to the exercise of the overallotment option on June 30, after the end of the second quarter, 1,744,500 additional shares were issued at a price of $12.90 per share, bringing the aggregate gross proceeds generated by the stock offering to $172.5 million, with 13,374,500 shares issued.
Proceeds of the stock issue, major cash flow generated by our operations, and disciplined management of working capital throughout this quarter allowed RONA to finance our various investment projects and still reduce bank loans and revolving credit by $42.2 million over the past nine months. On September 27, 2009, the Company's net debt was reduced by $274.0 million compared to the same date in 2008. On September 27, 2009, RONA had $216.8 million in cash and cash equivalents, which will be used over forthcoming quarters to develop various growth projects in Phase 2 of the Company's 2008-2011 strategic plan. RONA also has an undrawn committed credit facility of up to $650 million.
RONA's balance sheet is strong. On September 27, 2009, the ratio of total net debt to capital was 11.9%, compared to 26.2% at the end of the corresponding quarter in 2008. The ratio of equity to assets was 61.2% at the end of third quarter 2009, compared to 54.4% at the same date in 2008.
The Company's operations generate substantial cash flow. With relatively low debt and long-term fixed rates on most of its long-term debt, RONA also has substantial liquidity and can borrow many millions more at competitive rates. Our financial resources are therefore sufficient to pursue disciplined development of our four growth vectors: growing sales in our existing store network, construction of new corporate and franchise stores, recruitment of new affiliate stores and acquisitions.
OUTLOOK
According to the Bank of Canada's latest Monetary Policy Report, recent economic indicators point to the start of a global recovery from a deep, synchronized recession. In the last months, a recovery of economic activity has also been underway in Canada. This resumption of growth is supported by monetary and fiscal stimulus, increased household wealth, improving financial conditions, higher commodity prices, and stronger business and consumer confidence. The Bank of Canada predicts that in the second half of 2009, growth will be slightly higher than anticipated in its July projections. Positive signs have been noted in our industry in recent months, particularly in the level of housing resales and average housing prices, which have been edging upward for the last few months. Although housing starts are still in decline, a change in the pace of this trend has also been observed.
The business environment is increasingly favourable to real estate activity over all. The very low mortgage rates and the popularity of the renovation tax credits should continue to stimulate renovation activity across the country. It is important to note, however, that the sharp decrease in housing starts in the last quarters will continue to put downward pressure on sales by building materials specialists and on home renovation spending, since new home buyers generally undertake major improvements in the years following their purchase of a new property.
In this economic context, we will continue in the next quarter to pursue the numerous optimization measures under the PEP program in Phase 1 of the 2008-2011 strategic plan. Given the major gains in efficiency achieved to date under the PEP program and the Company's increased financial flexibility in the wake of our issue of common shares in June, RONA management believes the Company is in an excellent position to commence Phase 2 of the 2008-2011 strategic plan as planned. We are currently finalizing plans for this second phase, which will focus on the re-acceleration of RONA's development activities in order to take full advantage of the four growth vectors that have been the wellsprings of our success for many years. Beginning in late 2009, initiatives will be launched to re-accelerate development, including the launch, on November 12, of a new concept for a highly innovative interior design and paint store.
ADDITIONAL INFORMATION
The Management's Discussion and Analysis (MD&A) and unaudited financial statements for the third quarter 2009 can be found in the "Investor Relations" section of the Company's website at www.rona.ca, and at www.sedar.com. The Company's Annual Report can also be found on the RONA website, along with other information about RONA, including its Annual Information Form, which can also be found on the SEDAR website.
TELEPHONE CONFERENCE WITH THE FINANCIAL COMMUNITY
On Tuesday, November 10, 2009, at 11:00 a.m. (EST), RONA will hold a telephone conference for the financial community. To join the conference, please call 514-861-4190 or 1 877 677-7769. To listen to the call online, please go to: http://events.startcast.com/events6/153/C0008/Default.aspx.
NON-GAAP PERFORMANCE MEASURES
In this News Release, as in our internal management, we use the concept of "earnings before interest, taxes, depreciation, amortization and non-controlling interest" (EBITDA), which we also refer to as "operating income." This measure corresponds to "Earnings before the following items" in our consolidated financial statements. We also use the concept of "adjusted gross margin," which corresponds to sales less the cost of goods sold, including all vendor rebates. While EBITDA does not have a definition that is standardized by GAAP, it is widely used in our industry and in financial circles to measure the profitability of operations, excluding tax considerations and the cost and use of capital. Adjusted gross margin is used by RONA management to analyze the profitability of our network, including all vendor rebates. Given that they are not standardized, EBITDA and adjusted gross margin cannot be strictly compared from one company to the next. However, we establish them in the same way for the segments identified, and, unless expressly mentioned, our method does not change over time.
EBITDA and adjusted gross margin must not be considered in isolation or as substitutes for other performance measures calculated according to GAAP, but rather as additional information. While these measures do not have a meaning standardized by GAAP, the management of the Company believes they represent good indicators of the operating performance of existing activities.
FORWARD-LOOKING STATEMENTS
This News Release includes "forward-looking statements" that involve risks and uncertainties. All statements other than statements of historical facts included in this News Release, including statements regarding the prospects of the industry and prospects, plans, financial position and business strategy of the Company, may constitute forward-looking statements within the meaning of the Canadian securities legislation and regulations. Investors and others are cautioned that undue reliance should not be placed on any forward-looking statements.
For more information on the risks, uncertainties and assumptions that would cause the Company's actual results to differ from current expectations, please also refer to the Company's public filings available at www.sedar.com and www.rona.ca. In particular, further details and descriptions of these and other factors are disclosed in the MD&A under the "Risks and uncertainties" section and in the "Risk factors" section of the Company's current Annual Information Form.
The forward-looking statements in this News release reflect the Company's expectations as at November 10, 2009, and are subject to change after this date. The Company expressly disclaims any obligation or intention to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by the applicable securities laws.
ABOUT RONA
RONA is the largest Canadian distributor and retailer of hardware, home renovation and gardening products. RONA operates a network of nearly 700 corporate, franchise and affiliate stores of various sizes and formats. With close to 30,000 employees working under its family of banners in every region of Canada and more than 15 million square feet of retail space, the RONA store network generates over $6 billion in annual retail sales.
RONA inc.
Consolidated Earnings
For the thirteen and thirty-nine-week periods ended September 27, 2009
and September 28, 2008
(Unaudited, in thousands of dollars, except earnings per share)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Third Quarter Year-to-date
-------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
(Restated - Note 2) (Restated - Note 2)
Sales $1,320,510 $1,381,722 $3,536,427 $3,766,510
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings before
the following
items (Note 5) 105,815 112,513 254,183 289,437
-------------------------------------------------------------------------
Interest on long-
term debt 5,143 6,490 15,674 22,412
Interest on bank loans 645 567 1,731 1,544
Depreciation and
amortization 25,893 25,781 77,416 76,280
-------------------------------------------------------------------------
31,681 32,838 94,821 100,236
-------------------------------------------------------------------------
Earnings before income
taxes and non-
controlling interest 74,134 79,675 159,362 189,201
Income taxes 22,537 24,538 48,446 58,272
-------------------------------------------------------------------------
Earnings before non-
controlling interest 51,597 55,137 110,916 130,929
Non-controlling
interest 2,449 2,633 3,489 4,231
-------------------------------------------------------------------------
Net earnings and
comprehensive
income $49,148 $52,504 $107,427 $126,698
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per
share (Note 13)
Basic $0.38 $0.45 $0.88 $1.10
Diluted $0.38 $0.45 $0.88 $1.09
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the interim consolidated
financial statements.
RONA inc.
Consolidated Retained Earnings
Consolidated Contributed Surplus
For the thirty-nine-week periods ended September 27, 2009 and September 28,
2008
(Unaudited, in thousands of dollars)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
(Restated - Note 2)
Consolidated Retained Earnings
Balance, beginning of period, as
previously reported $1,053,166 $892,967
Change in accounting policy - Goodwill and
intangible assets (Note 2) (24,290) (20,542)
-------------------------------------------------------------------------
Restated balance, beginning of period 1,028,876 872,425
Net earnings 107,427 126,698
-------------------------------------------------------------------------
1,136,303 999,123
Expenses relating to the issue of common shares,
net of income tax recovery of $2,042 5,320 -
-------------------------------------------------------------------------
Balance, end of period $1,130,983 $999,123
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Contributed Surplus
Balance, beginning of period $12,563 $11,045
Compensation cost relating to stock option plans 709 1,138
-------------------------------------------------------------------------
Balance, end of period $13,272 $12,183
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the interim consolidated
financial statements.
RONA inc.
Consolidated Cash Flows
For the thirteen and thirty-nine-week periods ended September 27, 2009 and
September 28, 2008
(Unaudited, in thousands of dollars)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Third Quarter Year-to-date
-------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
(Restated - Note 2) (Restated - Note 2)
Operating activities
Net earnings $49,148 $52,504 $107,427 $126,698
Non-cash items
Depreciation and
amortization 25,893 25,781 77,416 76,280
Derivative financial
instruments (67) 86 (1,188) 181
Future income taxes (1,446) (515) 2,726 (1,050)
Net loss (gain) on
disposal of assets 101 (379) (1,835) (1,870)
Impairment charge on
fixed assets held
for sale 2,050 - 2,050 -
Compensation cost
relating to stock
option plans 236 380 709 1,138
Non-controlling
interest 2,449 2,633 3,489 4,231
Other items 328 813 1,399 2,206
-------------------------------------------------------------------------
78,692 81,303 192,193 207 814
Changes in working
capital items 21,434 31,213 24,461 56 288
-------------------------------------------------------------------------
Cash flows from
operating activities 100,126 112,516 216,654 264 102
-------------------------------------------------------------------------
Investing activities
Business acquisitions
(Note 7) - (173) (3,214) (4,059)
Advances to joint
ventures and other
advances 955 228 (52) 8,157
Other investments (2,970) - (3,496) (2,440)
Fixed assets (33,112) (39,703) (124,099) (129,682)
Other assets (1,952) (3,341) (4,762) (9,811)
Disposal of
fixed assets 1,207 1,463 4,695 8,909
Disposal of
investments 740 307 1,905 8,710
-------------------------------------------------------------------------
Cash flows from
investing activities (35,132) (41,219) (129,023) (120,216)
-------------------------------------------------------------------------
Financing activities
Bank loans and
revolving credit (6,194) (54,089) (42,236) (106,164)
Other long-term debt - - 188 1,977
Repayment of other
long-term debt and
redemption of
preferred shares (3,628) (5,740) (9,585) (18,042)
Issue of
common shares 23,769 1,428 175,795 4,398
Expenses relating to
the issue of
common shares (1,244) - (7,362) -
-------------------------------------------------------------------------
Cash flows from
financing activities 12,703 (58,401) 116,800 (117,831)
-------------------------------------------------------------------------
Net increase in cash
and cash equivalents 77,697 12,896 204,431 26,055
Cash and cash
equivalents,
beginning of period 139,079 16,025 12,345 2,866
-------------------------------------------------------------------------
Cash and cash
equivalents, end
of period $216,776 $28,921 $216,776 $28,921
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary
information
Interest paid $11,638 $12,975 $24,958 $31,624
Income taxes paid $9,166 $15,459 $30,326 $67,253
-------------------------------------------------------------------------
The accompanying notes are an integral part of the interim consolidated
financial statements.
RONA inc.
Consolidated Balance Sheets
September 27, 2009, September 28, 2008 and December 28, 2008
(In thousands of dollars)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September 27, September 28, December 28,
2009 2008 2008
-------------------------------------------------------------------------
(Restated - (Restated -
Note 2) Note 2)
(Unaudited) (Unaudited)
Assets
Current assets
Cash and cash equivalents $216,776 $28,921 $12,345
Accounts receivable 303,867 329,488 234,027
Income taxes receivable - 13,612 6,475
Inventory (Note 4) 808,233 846,078 763,239
Prepaid expenses 25,078 18,661 11,202
Derivative financial instruments 297 194 1,089
Future income taxes 17,502 16,895 19,274
-------------------------------------------------------------------------
1,371,753 1,253,849 1,047,651
Investments 12,328 9,644 10,186
Fixed assets 907,902 836,683 875,634
Fixed assets held for sale (Note 8) 47,581 35,848 34,870
Goodwill 455,662 456,345 454,889
Trademarks 3,451 3,884 3,797
Other assets 28,867 25,223 27,210
Future income taxes 26,808 22,406 24,681
-------------------------------------------------------------------------
$2,854,352 $2,643,882 $2,478,918
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current liabilities
Bank loans $6,021 $9,601 $8,468
Accounts payable and
accrued liabilities 556,201 586,830 422,318
Income taxes payable 8,918 - -
Derivative financial instruments 200 274 2,180
Future income taxes 5,189 3,852 4,461
Instalments on long-term debt 13,197 26,363 15,696
-------------------------------------------------------------------------
589,726 626,920 453,123
Long-term debt 433,189 502,553 478,475
Other long-term liabilities 30,563 27,222 28,571
Future income taxes 21,618 19,540 21,304
Non-controlling interest 32,420 30,749 29,220
-------------------------------------------------------------------------
1,107,516 1,206,984 1,010,693
-------------------------------------------------------------------------
Shareholders' equity
Capital stock (Note 9) 602,581 425,592 426,786
Retained earnings 1,130,983 999,123 1,028,876
Contributed surplus 13,272 12,183 12,563
-------------------------------------------------------------------------
1,746,836 1,436,898 1,468,225
-------------------------------------------------------------------------
$2,854,352 $2,643,882 $2,478,918
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the interim consolidated
financial statements.
RONA inc.
Notes to Interim Consolidated Financial Statements
September 27, 2009 and September 28, 2008
(Unaudited, in thousands of dollars, except amounts per share)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1. Basis of presentation
The accompanying unaudited interim consolidated financial statements are in accordance with Canadian generally accepted accounting principles for interim financial statements and do not include all the information required for complete financial statements. They are also consistent with the policies outlined in the Company's audited financial statements for the year ended December 28, 2008, except for the change in accounting policy described in Note 2. The interim financial statements and related notes should be read in conjunction with the Company's audited financial statements for the year ended December 28, 2008. The interim operating results do not necessarily reflect the results for the full fiscal year. Accordingly, the comparative balance sheet as at September 28, 2008 is also included to reflect seasonal fluctuations that characterize the hardware, renovation and home garden industry. When necessary, the financial statements include amounts based on estimated information and management's best judgments.
2. Changes in accounting policies
Goodwill and intangible assets
At the beginning of 2009 the Company retroactively adopted Section 3064 of the Canadian Institute of Chartered Accountants' (CICA) Handbook, Goodwill and intangible assets, which replaces Section 3062 of the same title. The section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets, including internally generated intangible assets. Pre-opening expenses for stores and distribution centres (previously included in Other assets), advertising costs, including those related to store openings and costs incurred for Olympic and Paralympic sponsorship (previously included in Prepaid expenses) no longer meet the requirements of the new section. The balances in these asset accounts as at December 31, 2007- that is, at the beginning of first quarter 2008 - were restated and included in Retained Earnings and the results of operations of 2008 were also restated to conform to the 2009 presentation.
The impact of the recommendations of the new section on the consolidated financial statements is as follows:
Third Quarter 2008
-------------------------------------------------------------------------
Previously
reported Adjustments Restated
-------------------------------------------------------------------------
Consolidated Earnings
Earnings before the
following items $115,502 $(2,989) $112,513
Depreciation and amortization 27,539 (1,758) 25,781
Income taxes 24,920 (382) 24,538
Non-controlling interest 2,618 15 2,633
Net earnings and
comprehensive income 53,368 (864) 52,504
Net earnings per share - basic 0.46 (0.01) 0.45
Net earnings per share - diluted 0.46 (0.01) 0.45
Consolidated Cash Flows
Net earnings 53,368 (864) 52,504
Depreciation and amortization 27,539 (1,758) 25,781
Future income taxes (138) (377) (515)
Non-controlling interest 2,618 15 2,633
Changes in working capital items 27,011 4,202 31,213
Other assets (2,123) (1,218) (3,341)
Year-to-date September 28, 2008
-------------------------------------------------------------------------
Previously
reported Adjustments Restated
-------------------------------------------------------------------------
Consolidated Earnings
Earnings before the following
items $306,187 $(16,750) $289,437
Depreciation and amortization 81,899 (5,619) 76,280
Income taxes 61,703 (3,431) 58,272
Non-controlling interest 4,127 104 4,231
Net earnings and
comprehensive income 134,502 (7,804) 126,698
Net earnings per share - basic 1.16 (0.06) 1.10
Net earnings per share - diluted 1.15 (0.06) 1.09
Consolidated Cash Flows
Net earnings 134,502 (7,804) 126,698
Depreciation and amortization 81,899 (5,619) 76,280
Future income taxes (37) (1,013) (1,050)
Non-controlling interest 4,127 104 4,231
Changes in working capital items 38,440 17,848 56,288
Other assets (6,295) (3,516) (9,811)
Consolidated Balance Sheets
Assets
Income taxes receivable 11,197 2,415 13,612
Prepaid expenses 54,880 (36,219) 18,661
Future income taxes - current 12,092 4,803 16,895
Other assets 28,051 (2,828) 25,223
Liabilities
Future income taxes - current 4,239 (387) 3,852
Future income taxes - long-term 22,739 (3,199) 19,540
Non-controlling interest 30,646 103 30,749
Retained Earnings - beginning
of year 892,967 (20,542) 872,425
As at December 28, 2008
-------------------------------------------------------------------------
Previously
reported Adjustments Restated
-------------------------------------------------------------------------
Consolidated Balance Sheets
Assets
Income taxes receivable $6,046 $429 $6,475
Prepaid expenses 33,104 (21,902) 11,202
Future income taxes - current 13,800 5,474 19,274
Other assets 38,466 (11,256) 27,210
Liabilities
Future income taxes - current 4,854 (393) 4,461
Future income taxes - long-term 23,998 (2,694) 21,304
Non-controlling interest 29,098 122 29,220
Retained Earnings - beginning
of year 892,967 (20,542) 872,425
Credit risk and the fair value of financial assets and financial liabilities
The Emerging Issues Committee issued EIC-173, Credit risk and the fair value of financial assets and financial liabilities, which provides guidance on how to measure financial assets and liabilities, taking into account the company's own credit risk and the counterparty credit risk in determining the fair value of financial assets and financial liabilities. The adoption of these recommendations had no material impact on the results, financial position and cash flows of the Company.
3. Effect of new accounting standards not yet implemented
Business combinations
In January 2009, the CICA issued Section 1582, Business combinations which replaces, Section 1581 of the same title. This section applies prospectively to business combinations for which the date of acquisition is in fiscal years beginning on or after January 1, 2011. The section establishes standards for accounting for a business combination.
Consolidated financial statements and non-controlling interests
In January 2009, the CICA issued Section 1601, Consolidated financial statements, and Section 1602, Non-controlling interests which together replace Section 1600, Consolidated financial statements. These sections apply to interim and annual consolidated financial statements for fiscal years beginning on or after January 1, 2011. They establish standards for the preparation of consolidated financial statements and accounting for a non-controlling interest in a subsidiary in the consolidated financial statements subsequent to a business combination.
Financial instruments - disclosures
In June 2009, the CICA issued revisions release no. 54, which includes, among others, several amendments to Section 3862, Financial instruments - disclosures. This Section has been amended to include additional disclosure requirements about fair value measurements of financial instruments and to enhance liquidity risk disclosures. The amendments apply to annual financial statements relating to fiscal years ending after September 30, 2009.
International financial reporting standards (IFRS)
In February 2008, the Accounting Standards Board of Canada announced that Canadian GAAP for publicly accountable enterprises will be replaced by IFRS for financial statements relating to fiscal years beginning on or after January 1, 2011. When converting from Canadian GAAP to IFRS, the Company will prepare both current and comparative information using IFRS. The Company expects this transition to have an impact on its accounting policies, financial reporting and information systems.
The Company is currently evaluating the impact of these new standards on its consolidated financial statements.
4. Inventory
For the thirteen and thirty-nine-week periods ended September 27, 2009, amounts of $967,171 and $2,571,525 of inventory were expensed in the consolidated results ($1,009,028 and $2,741,098 as at September 28, 2008). These amounts include an inventory write-down charge of $11,351 and $30,248 ($14,159 and $38,912 as at September 28, 2008).
5. Store closing costs
Exit and disposal costs and write-down of assets
In April 2008, management approved a detailed plan to close four of its stores included in the corporate and franchised stores segment. Three of these stores were closed in 2008 and one was closed in the second quarter of 2009. During the thirteen and thirty-nine-week periods ended September 27, 2009, the Company recognized the following costs:
Third Quarter Year-to-date
-------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Lease obligations $6,400 $4,231 $14,355 $4,231
Inventory write-down - 157 525 2,114
Termination benefits - 38 - 264
-------------------------------------------------------------------------
Total recorded in
earnings before the
following items 6,400 4,426 14,880 6,609
Fixed assets write-down - 554 - 2,857
-------------------------------------------------------------------------
Total costs $6,400 $4,980 $14,880 $9,466
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The liability for exit and disposal costs and write-down of assets is as
follows:
2009 2008
-------------------------------------------------------------------------
Balance, beginning of period $3,575 $-
Costs recognized:
Lease obligations 14,355 4,231
Termination benefits - 264
Less: cash payments (2,770) (468)
-------------------------------------------------------------------------
Balance, end of period $15,160 $4,027
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other closing costs
During the thirteen and thirty-nine-week periods ended September 27, 2009, in addition to the exit and disposal costs and write-down of assets, the Company recorded operating costs, including interest and depreciation, for the liquidation of the assets of these stores in the amounts of $0 and $1,230 ($1,690 and $4,101 as at September 28, 2008).
6. Vendor rebates
In accordance with EIC-144 Accounting by a customer (including a reseller) for certain consideration received from a vendor, the Company must disclose the amount recognized for which the full requirements for vendor rebate entitlement have not yet been met. For the thirty-nine-week period ended September 27, 2009, the Company recognized an amount of $5,320 ($4,703 as at September 28, 2008) which was estimated based on the attainment of specified requirements to receive the rebates.
7. Business acquisitions
During the thirty-nine-week period ended September 27, 2009, the Company acquired one company (two companies in 2008), operating in the corporate and franchised stores segment, by way of an asset purchase. Taking direct acquisition costs into account, this acquisition was for a total consideration of $3,821 ($5,623 in 2008). The Company financed this acquisition from its existing credit facilities. The results of operations of this company are consolidated from its date of acquisition.
The preliminary purchase price allocation of the acquisition was established as follows:
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