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  Rona's bright future

BENJ GALLANDER and BEN STADELMANN

Friday, August 22, 2014

When most Canadians outside of Quebec think of iconic brands, Rona does not spring to mind. Yet this company, with more than 500 stores, traces its roots back to 1939 and is a leader in the building materials, hardware and home-renovation fields.

Rona has had difficulties over the last number of years. Competition has grown stiffer as The Home Depot and Lowe's — huge American players &mdahs; home 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 having been 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 it was not interested, and the Quebec government stated 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., 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 profit 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 percent 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 percent, 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 percent, 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 seven cents 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.


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