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Rona looking to boost long-term profits through strategic moves, asset sales

A Rona store is seen in Halifax on Thursday, Dec.6, 2012. Canada's largest home-improvement retailer says it's preparing to sell non-core assets and make other strategic moves to improve its profitability. THE CANADIAN PRESS/Andrew Vaughan

MONTREAL - Rona is hoping to convince investors of the long-term potential of Canada's largest home-improvement chain by making strategic moves, including the sale of non-core assets, to improve profitability after years of focusing on topline growth.

"This is really managing the business long-term and creating value long-term," acting CEO Dominique Boies said in an interview Thursday after Rona disclosed the Quebec-based company's strategic plan.

"If someone wants cash-out tomorrow morning, that might not please them. But we're not managing the business for the next quarter, we're managing the business for the long run so that's why those strategic priorities are there."

Rona Inc. (TSX:RON) said it will take until Feb. 21 to evaluate what changes need to be made to unlock the "profit potential of a simplified business model."

The troubled company has been under pressure to improve its bottom line, especially since it rejected a lucrative takeover bid by U.S. rival Lowe's.

Earlier, Boies told a news conference that Rona had in fact offered to buy Lowe's Canada in 2011 in order to reduce overcapacity in the market. Former Rona CEO Robert Dutton made the offer in a meeting with Lowe's after the U.S. rival expressed an interest in a purchase agreement.

Lowe's second unofficial bid which was dropped after the American company met stiff resistance from Rona's board, Quebec politicians and the independent dealership owners that operate under Rona's brands had been worth $1.8 billion.

Since then, Rona has reported dismal financial results, replaced its long-time chief executive officer and received a formal request from a major fund manager for a shareholder meeting to select a new board of directors.

Its shares gained 30 cents to close at $10.45 in Thursday trading well below the offer of $14.50 per share that the Rona board rejected in July.

The former chief financial officer denied that the strategic plan is a defensive move to address mounting shareholder dissatisfaction with Rona's performance.

"It's a step where right now of course we need to improve the financial performance of Rona and that's not defensive at all," Boies said.

Under the leadership of Dutton, who left the company suddenly last month, Rona had amassed a retail network with a wide variety of store formats and sizes many of them acquired by purchasing local and regional home improvement and building centres.

Boies, 40, said the company will now focus on improving its lagging profits by reviewing all of its operation to see if they meet new criteria.

"Today what's different is there is no sacred cow," he said. "We've grown all those businesses over the past 73 years and now we're stopping, taking a deep breath and saying OK how do we envision the future."

The three priorities are: leverage the strength of Rona's core business, grow key customer segments with a "more compelling value proposition" and unlock the profit potential of a simplified business model.

Boies said he has no financial target for how much can be saved and won't prejudge the process by suggesting what assets could be disposed and how many employees could be let go.

Derek Dley of Canaccord Genuity said the strategic plan was similar to previous efforts and he was maintaining his $10.75 share price target.

"Rona continues to face headwinds relating to a soft home-renovation-spending market in Canada, which will likely continue to pressure the company's top line," he wrote in a research note.

"Until we witness sustained increases in consumer confidence, we expect the home-renovation-spending market to remain subdued."

Given the strength of its distribution network and contribution of big box stores in Quebec, the changes are more likely to affect its operations in the rest of the country, Boies said.

He doesn't think there's necessarily a problem outside Quebec, but said the company needs to decide on which customer segments it wants to serve and how to deliver to those patrons.

The acting CEO, who would like to get the job on a permanent basis after a head-hunting firm completes its search, said he will continue to meet with shareholders. He noted that Rona's largest shareholder, Invesco, declined an invitation to meet a couple of weeks ago.

Rona is looking to add two directors from outside Quebec to fill vacancies, whereas Invesco wants a clean sweep of directors at next May's annual meeting.

Boies said it can't control how shareholders will vote at the meeting, but said the existing board remains steadfast against a takeover by its U.S. rival.

"The position of the board to the proposal was unanimous and it was based on the long-term value creation potential of Rona and this hasn't changed," he said.

"So basically the answer is still the same and we strongly believe that long-term it's way better than an opportunistic proposal from a third party."

Rona currently has nearly 30,000 employees and 830 locations under its banner, giving Rona a bigger reach in Canada than Home Depot or Lowe's. Home Depot has just 180 stores across Canada and Lowe's has about 31 Canadian locations.


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