* Adj earnings C$0.27/shr vs C$0.36/shr a year earlier
* Revenue down 0.8 percent at C$1.34 billion
* Rona says difficult market weighs on results
* Shares fall 5 pct (Adds analyst's comments, background on turnaround plan, byline)
By Allison Martell
Nov 7 (Reuters) - Canadian home-improvement retailer and distributor Rona Inc reported a drop in quarterly profit on Wednesday after cutting prices to limit sales declines in a tough market.
Rona launched a turnaround plan earlier this year and refused a takeover by U.S.-based competitor Lowe's Cos Inc . The company said its turnaround plan would proceed.
"Rona saw its progress interrupted in a quarter marked by a decline in the Canadian hardware-renovation industry as a whole," the Boucherville, Quebec-based company said in a release. "The drop in sales, coupled with more intense competition, put pressure on gross margins."
Sales at established stores fell 1 percent, pulled down by retail operations, where same-store sales were 1.8 percent lower. Distribution sales rose on a same-store basis.
"It was quite a bit weaker than I was anticipating," said Canaccord Genuity analyst Derek Dley. "Really, the challenge here was on the margins - it looks like the environment was quite competitive."
Gross profit margin fell to 26.91 percent in the third quarter that ended Sept. 23, from 28.09 percent a year earlier, as Rona cut prices, the cost of some construction materials was higher and sales of lower-margin building materials rose.
Lowe's takeover proposal, which never made it to the formal offer stage, became a hot-button issue during this year's provincial election in Quebec, where Rona has deep roots. Politicians from the incumbent Liberal Party and the election's eventual winner, the Parti Quebecois, both opposed the plan.
Rona was founded in Quebec in 1939 by independent hardware stores keen to ditch their powerful wholesalers. The French-speaking province is still home to about half of its 30,000 employees.
Under its turnaround plan, the company is refocusing on smaller outlets that it said customers prefer. Earlier this year it said it would close 10 of its biggest outlets and split up 13 others by the end of 2013. It will replace them with smaller "proximity" and "satellite" stores.
But on Wednesday, Rona said it had postponed the closing of five big-box stores to better coordinate with the new openings and reduce the financial impact of the move.
"The new store formats are generating very promising results in line with the favorable trend observed in recent quarters for smaller stores, in spite of challenging market conditions," Chief Executive Robert Dutton said in the release.
"I'm certain that we are one step ahead of our competitors in this period of great change in our industry."
The smaller-store strategy is a big change for Rona, which kicked off its transformation from a modest Quebec hardware distributor to national retailer in the 1990s to better compete with Home Depot Inc as it arrived in Canada.
Home Depot now has some 180 locations in Canada, while Lowe's, which did not enter the market until 2007, has about 30.
Dley said he likes Rona's new strategy over the long term, but in the short term, balancing margins and sales growth could be tricky. "I think there's going to be some challenges over the next couple of quarters," he said.
Net income fell to C$5.1 million ($5.1 million), or 4 Canadian cents a share, from C$47.8 million, or 36 Canadian cents, a year earlier.
Excluding one-time items, its profit was C$33.1 million, or 27 Canadian cents a share. Analysts, on average, had been expecting earnings of 40 Canadian cents a share, according to Thomson Reuters I/B/E/S.
Rona said revenue fell 0.8 percent to C$1.34 billion, compared with the consensus forecast of C$1.36 billion.
Rona's stock was down 5 percent at C$9.64 on the Toronto Stock Exchange.
$1=$0.99 Canadian Editing by Peter Galloway and Maureen Bavdek