August 12, 2008 / 1:27 PM / 10 years ago

Slowing economy shaves 7 percent off Rona's profit

TORONTO (Reuters) - A drop in consumer confidence and a slowing economy shaved 7 percent off the second-quarter profit of home-improvement retailer Rona Inc RON.TO, the company said on Tuesday, but its shares rose as the results came in line with expectations.

Rona earned C$80.1 million ($75.6 million), or 69 Canadian cents a share, in the quarter, down from C$86.2 million, or 74 Canadian cents a share, a year earlier.

Excluding unusual items, net earnings were C$84.1 million, or 72 Canadian cents a share, down from C$86.2 million, or 74 Canadian cents a share.

Analysts had expected a profit of 70 Canadian cents a share before items, according to Reuters Estimates.

Rona’s shares closed up 37 Canadian cents, or 3 percent, at C$12.87 on the Toronto Stock Exchange, though they are still more than 40 percent off the year high of C$22.52 hit last October.

Consolidated sales for the quarter were C$1.473 billion, up slightly from C$1.469 billion, due to acquisitions, store openings and the recruitment of new affiliate dealer-owners.

Excluding acquisitions, sales fell 2.2 percent.

Same-store sales slid 4.4 percent as consumer confidence took a beating, the company said. Rona also pointed to a drop in housing starts, particularly in Alberta, as a reason for the fall.

“Consumer confidence has been shaken for the last few quarters and especially since the beginning of 2008, due to fears of a recession in the U.S., the major softening of the manufacturing sector in Eastern Canada, the credit crisis, and inflation, mainly for food and fuel,” Chief Executive Robert Dutton said in a conference call.

Dutton said those factors, as well as a slowdown in demand for building materials, will make for a difficult market for the rest of the year and well into 2009.

    Analysts said the earnings were basically in line with expectations, given the concerns over the appetite for consumer spending in the face of rising costs.

    “As was the case in the first quarter, the second quarter results demonstrate that Rona continues to suffer from the consumer spending slowdown, but initiatives around gross margin and productivity are helping to mitigate the earnings hit,” Irene Nattel, an analyst with RBC Capital Markets wrote in a research note.

    Rona closed four stores, two of which were big-box outlets in British Columbia and Ontario. The estimated total cost of closing the stores is C$14.8 million, C$6.9 million of which it accounted for in the second quarter.

    The rest of the costs will be seen by the end of fiscal 2008.

    The company had warned it would be hard-pressed to meet its goal of low, single-digit growth in earnings per share over the next few years.

    The Boucherville, Quebec-based company competes with Canadian Tire Corp Ltd (CTC.TO) and the Canadian units of U.S.-based Home Depot Inc (HD.N) and Lowe’s Cos Inc (LOW.N).

    ($1=$1.06 Canadian)

    Additional reporting by Jennifer Kwan; editing by Rob Wilson

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