August 8, 2012 / 1:07 PM / 5 years ago

Takeover target Rona's earnings rise with sales

5 Min Read

(Reuters) - Canada's Rona Inc RON.TO, which has rejected a C$1.8 billion takeover proposal from U.S. home-improvement retailer Lowe's Cos Inc (LOW.N), said on Wednesday its quarterly adjusted earnings rose along with higher sales volumes.

The results come as investors try to gauge the chances of Rona - which says it is No. 1 in Canada's hardware and home improvement market - succumbing to a Lowe's takeover.

Rona has said repeatedly that it is not for sale, and the government of the province of Quebec, where it is based, wasted no time criticizing Lowe's proposed offer when it was announced last week.

Rona's stock touched C$14.49 shortly after the news of the C$14.50-a-share offer broke, but since then the stock has consistently traded below that level. Shares rose 1.0 percent to C$13.88 on the Toronto Stock Exchange on Wednesday morning.

On Wednesday's quarterly results conference call with analysts and investors, Rona said it would not discuss the Lowe's proposal.

Sales Rise

In the second quarter, Rona's distribution sales rose 8.7 percent and retail and commercial sales were 1.8 percent higher.

"We view the results as mixed," said National Bank Financial analyst Vishal Shreedhar in a note to clients. "Q2 financial results were slightly below expectation; however, management is making progress towards its financial priorities."

Beginning with the quarter, Rona changed the way it measures same-store sales, a yardstick generally designed to strip out gains from opening new outlets.

Rona had reported seven consecutive quarters of same-store sales declines before the revision.

For the first time the company is including distribution sales to affiliate dealers, and on that basis same-store sales rose 1 percent in the quarter.

In Rona's retail and commercial business alone, same-store sales fell 0.9 percent. The company attributed the decline to cautious consumers and the mix of products sold.

When it last reported earnings in May, Rona said same-store sales - which at that point did not include sales to dealers - had been positive late in the first quarter, and through April. But the trend did not continue.

"Starting at the end of May, we saw a slowdown," Chief Financial Officer Dominique Boies said on the conference call. "We saw, I would say, somewhat of a rapid slowdown in same-store sales, where consumers became, again, very unstable."

Adjusted Earnings Rise

The company said its earnings benefited from lower financial costs, amortization and depreciation, and efficiency measures put in place during the quarter.

Net earnings attributable to participating shares after a dividend on preferred shares fell to C$34.1 million ($34.2 million), or 28 Canadian cents a share, compared with C$37.0 million, or 28 Canadian cents, a year earlier.

Excluding unusual items, earnings rose to C$43.6 million, or 36 Canadian cents a share, from C$37.0 million, or 28 Canadian cents. Revenue rose 3.4 percent to C$1.42 billion.

Analysts, on average, had expected earnings of 37 Canadian cents a share on revenue of C$1.41 billion, according to Thomson Reuters I/B/E/S.

Quebec's government has sharply criticized the Lowe's proposal, saying it is not in the interests of Quebec or Canada. Rona's figures put its national market share ahead of that of U.S. industry giant Home Depot Inc HD.TO.

The company, founded in Quebec in 1939 by independent hardware stores keen to ditch their powerful wholesalers, has deep roots in the French-speaking province, still home to about half of its 30,000 employees.

Turnaround Plan

Rona argues that its own turnaround plan is a better deal for shareholders than Lowe's proposal.

The company is refocusing on smaller stores that it says customers prefer, closing 10 of its biggest outlets and splitting up 13 others by the end of 2013. In their place, it is opening smaller "proximity" and "satellite" stores.

On Wednesday, Rona said it still expects the new strategy, announced early this year, to boost earnings before interest, taxes, depreciation and amortization by C$10 million in 2012.

The first of the new proximity stores opens in Edmonton, Alberta, on Wednesday.

Reporting by Allison Martell; Editing by Peter Galloway

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