RONA INC.
TSX : RON

RONA INC.

February 24, 2011 08:59 ET

RONA Continued to Consolidate Its Market in 2010

Ten acquisitions completed and double-digit growth generated in commercial and professional division

BOUCHERVILLE, QUEBEC--(Marketwire - Feb. 24, 2011) - RONA inc. (TSX:RON), the largest Canadian distributor and retailer of hardware, renovation and gardening products, today reported its financial results for the 13-week and 52-week periods ended December 26, 2010 (fourth quarter and twelve months of 2010). All $ figures in this release are Canadian dollars unless otherwise stated.

2010 FINANCIAL HIGHLIGHTS

Compared to 2009:

  • Total sales increased 2.6%, same-store sales remained flat

  • Double-digit growth generated in the Commercial and Professional Market division

  • Gross margin up 39 basis points and adjusted gross margin up 32 basis points to 30.59%

  • EBITDA of $344.0 million, up 3.3%

  • Net earnings of $143.2 million, up 3.6%

  • Earnings per share (diluted) was $1.09, down 1.8%

2010 OPERATIONAL HIGHLIGHTS

  • Increased positioning in key markets across Canada, market share up from 17.5% to 19.0%

  • Ten acquisitions completed in 2010: four in the Commercial and Professional Market division, five in the retail sector and one in the distribution sector

  • Continued growth of the affiliated dealer network with new dealers recruited and many expansion and remerchandising projects completed by dealers, including five projects completed under RONA's unique succession planning program

  • Increased penetration rate of our private and controlled brands from 19% to 24%, 2011 target of 24% achieved a year ahead of schedule

  • Highly successful RONAdvantages program saw the number of new cards issued tripled over last year

  • Implemented sustainability initiatives dealing with products, procurement policies and environmental footprint

  • Dividend declared and policy established, reflecting confidence in future growth and value creation

"Again in 2010, RONA demonstrated its agility and ability to emerge stronger from the face of challenges. Although the economy has been slow to rebound, we were able to capitalize on growth opportunities. Through acquisitions, we moved much closer to realizing our objective of a national platform for the commercial and professional market, we gave our distribution business an important boost and we increased our retail presence in strategic Eastern Canada locations," stated Robert Dutton, President and CEO of RONA. "We are now at 19% market share, up from 17.5% at the beginning of the year, and on target to reach our 20% objective by the end of 2011. During this challenging year we continued to improve our overall efficiency as well as customer loyalty and we got the first tangible benefits of our unique $100 million succession planning fund launched last year with five projects completed by young entrepreneurs from our independent dealer network "

"As 2011 unfolds, our new, integrated and regional approach is expected to bring significant benefits. We are also poised to grow our distribution and commercial and professional segments and reduce the cyclical nature of our business by continuing to consolidate the Canadian market," said Mr. Dutton.

FINANCIAL RESULTS

CONSOLIDATED RESULTS FOR THE TWELVE-MONTH PERIOD ENDED DECEMBER 26, 2010

The results discussed and analyzed in this section are for the twelve-month period ended December 26, 2010 and, when compared, are compared to the results for the twelve-month period ended December 27, 2009, unless otherwise indicated.

Sales were $4,799.9 million, up $122.5 million, or 2.6%, while same-store sales were flat. The increase was the result of a 2.4% increase in retail and commercial segment sales and a 3.4% increase in distribution segment sales.

The lack of growth in same-store sales reflects mainly the continued decline in consumer confidence and lower housing activity in the second part of the year. It also reflects tax credits that were available to consumers last year, but not this year. Sales growth relating to acquisitions, new stores and the Commercial and Professional Market division helped to offset this pressure.

Retail consumers are being more prudent and selective in their spending as they are worried about the economy, job creation and their debt levels. This behaviour was reflected in less traffic through the stores and lower weekend and install sales. However, for those who did shop, the average size of the basket was up slightly, suggesting that the merchandising and in-store service initiatives were having good success.

While this consumer malaise is affecting all regions, it was more evident in Western Canada where economic conditions are still tougher than in the rest of Canada. Atlantic Region sales saw some strengthening as the integration of the Pierceys acquisition progressed smoothly. Quebec stores did reasonably well, particularly the Réno-Dépôt stores and the stores that had expanded from the RONA Le Régional to the RONA L'entrepôt banner, while commercial and professional market sales were particularly strong in Ontario. This resulted in relatively stronger sales in Eastern Canada than Western Canada.

Lighting and HVAC were the best performing categories for the retail and commercial segment in 2010, while private-brand and controlled-brand products continued to do well, with the penetration rate increasing from 19% at the beginning of the year to 24% by the end of the year. The flooring, seasonal and kitchen categories, as well as installation services, benefitted in 2009 from the renovation tax credits being provided by the various levels of governments. In 2010, these categories did not perform as well, largely because the tax credits ended early in the year.

Sales to commercial and professional customers by the specialized Commercial and Professional Market division, as well as by the retail stores, were particularly strong this year with many infrastructure projects underway and strong housing starts for multiple units. The Company's strong service and purchasing power enabled it to continue to gain market share in this segment.

The gross margin was 27.75%, up 39 basis points while the adjusted gross margin was up by 32 basis points, to 30.59%. Growth comes from shrink reduction, optimisation of product categories, better conditions from vendors, as well as increased imports and private and controlled brand sales, partly offset by increases in overseas shipping costs and changes in product mix.

EBITDA amounted to $344.0 million, an increase of $11.0 million, or 3.3%, as the result of a 5.4% increase in the retail and commercial segment EBITDA and a 3.3% decrease in the distribution segment EBITDA.

The EBITDA margin was up 5 basis points to 7.17%, reflecting a 21 basis point increase for the retail and commercial segment offset by a 45 basis point decrease for the distribution segment.

Excluding unusual items, EBITDA was down $2.8 million, or 0.8%, and the EBITDA margin was down 24 basis points. Charges for unusual items were incurred only in 2009, in the retail and commercial segment, and related to the cost of store closures. This decrease is attributable to higher transportation costs, costs relating to new store start-ups that have not yet reached their full potential and a strong increase in the sales of lumber products to affiliated dealers, which was positive for the loyalty rate of their purchases at RONA, but put pressure on the Company's EBITDA margin as the margin on these products is lower than our average margin. The margin was also affected by the acquisition of businesses with lower margin than our average margin. This situation will gradually be eliminated as expected synergies are realized.

Interest expenses on long-term debt and bank loans were down $1.0 million, or 4.3%. This decline is attributable to a share issue in June 2009 and a continued effort to maintain a more disciplined management of the balance sheet and capital investments.

Amortization and depreciation costs totalled $110.9 million, an increase of $7.7 million, or 7.5%. This increase can be attributed to the opening of new retail corporate stores, the renovation program for existing retail corporate stores, acquisitions and ongoing improvements to information systems.

Net earnings were up $5.0 million to $143.2 million, and earnings per share (diluted) were down $0.02 to $1.09. Excluding unusual items recorded in 2009, net earnings were down $4.6 million, or 3.1%, and earnings per share (diluted) were down $0.10, or 8.4%, reflecting a decrease in EBITDA and higher amortization and depreciation charges partly offset by reduced interest expenses.

CONSOLIDATED RESULTS FOR THE THREE-MONTH PERIOD ENDED DECEMBER 26, 2010

The results discussed and analyzed in this section are for the thirteen-week period ended December 26, 2010 and, when compared, are compared to the results for the thirteen-week period ended December 27, 2009, unless otherwise indicated.

Consolidated sales in fourth quarter 2010 totalled $1,136.6 million, down $4.4 million, or 0.4%, the result of a $16.5 million, or 1.9%, decline in sales for the retail and commercial segment, partly offset by a $12.1 million, or 4.6%, increase in distribution segment sales. Same-store sales were down 6.4%.

Sales for the retail and commercial segment in 2009 were positively impacted by increasing consumer confidence and renovation tax credit programs which were nearing an end, while in 2010, consumer confidence was on the decline and the government tax credit programs had all expired in the early part of the year. In addition, fourth quarter 2010 housing resales and new starts both experienced double-digit decreases. The decline in sales resulting from these factors more than offset the growth in sales as a result of acquisitions and new store openings. Distribution segment sales were also affected by these same factors, but the impacts were more than offset by the growth generated by the expansion of the affiliated dealer network.

EBITDA amounted to $67.6 million, a decrease of $11.3 million, or 14.3%, as the result of a $9.9 million, or 15.6%, decrease in the retail and commercial segment EBITDA and a $1.4 million, or 8.9%, decrease in the distribution segment EBITDA. Excluding unusual items, EBITDA was down $10.9 million, or 13.9%.

The EBITDA margin was down 97 basis points to 5.94% reflecting a 101 basis point decrease for the retail and commercial segment and a 77 basis point decrease for the distribution segment. Excluding unusual items, the EBITDA margin was down 93 basis points.

The decreases in the EBITDA and in the EBITDA margin excluding unusual items were driven by lower sales and increased SG&A expenses resulting from acquisitions, renovations and new construction in the retail and commercial segment, as well as by higher shipping costs and a strong increase in the sales of lumber products to affiliated dealers, which was positive for the loyalty rate of their purchases at RONA, but put pressure on the distribution segment's EBITDA margin as the margin on these products is lower than our average margin. The consolidated EBITDA margin was also affected by the acquisitions completed during the year which generated a lower margin than our average margin. This situation will gradually be eliminated as expected synergies are realized.

Net earnings in the fourth quarter of 2010 decreased by $8.7 million, or 28.1%, to $22.2 million, or $0.17 per share (diluted). Net earnings were down due primarily to a decline in EBITDA of $11.3 million and higher amortization and depreciation charges, partly offset by lower income tax and interest expense. Excluding unusual items recorded in 2009, relating to store closures in the retail and commercial segment, net earnings were down $8.4 million, or 27.5%.

Key segment figures Quarter ended   Year ended  

(Unaudited, in thousands of dollars)
December 26, 2010   December 27, 2009   December 26, 2010   December 27, 2009  
Segment sales                
  Retail and commercial 860,778   877,304   3,624,361   3,540,227  
  Distribution 511,828   527,597   2,384,853   2,318,172  
Total 1,372,606   1,404,901   6,009,214   5,858,399  
                 
Intersegment sales and royalties                
  Retail and commercial -   -   -   -  
  Distribution (236,039 ) (263,969 ) (1,209,349 ) (1,181,040 )
Total (236,039 ) (263,969 ) (1,209,349 ) (1,181,040 )
                 
Sales                
  Retail and commercial 860,778   877,304   3,624,361   3,540,227  
  Distribution 275,789   263,628   1,175,504   1,137,132  
Total 1,136,567   1,140,932   4,799,865   4,677,359  
                 
EBITDA                
  Retail and commercial 53,207   63,067   266,479   252,840  
  Distribution 14,349   15,744   77,548   80,154  
Total 67,556   78,811   344,027   332,994  
                 
EBITDA (excluding unusual items)                
  Retail and commercial 53,207   62,684   266,479   266,649  
  Distribution 14,349   15,744   77,548   80,154  
Total 67,556   78,428   344,027   346,803  
                 
EBITDA margin                
  Retail and commercial 6.18 % 7.19 % 7.35 % 7.14 %
  Distribution 5.20 % 5.97 % 6.60 % 7.05 %
Total 5.94 % 6.91 % 7.17 % 7.12 %
                 
EBITDA margin (excluding unusual items)                
  Retail and commercial 6.18 % 7.15 % 7.35 % 7.53 %
  Distribution 5.20 % 5.97 % 6.60 % 7.05 %
Total 5.94 % 6.87 % 7.17 % 7.41 %

CASH FLOWS AND FINANCIAL POSITION

For the year ended December 26, 2010, operations generated $272.2 million, compared to $258.5 million in 2009. Net of changes in working capital, operations generated $124.1 million, compared to $282.8 million in 2009. The differences in cash flow relating to changes in working capital items are mainly attributable to an increase in inventory reflecting the opening of new stores, new HVAC lines of products introduced in our Commercial and Professional Market division as well as new categories of products introduced in our retail network, the addition of new private and controlled brand products and imports. As a growing portion of our products are imported, we also wanted to get some products earlier this year to avoid the problematic transportation situation we had to deal with last year with a portion of our imports. The decrease in working capital is also attributable to an increase in accounts receivable coming from the growth of the Commercial and Professional Market division as well as a decrease in accounts payable coming from higher imports and changes in product mix.

Over the past year, the Company exercised disciplined financial management and strictly monitored investments in fixed assets. For the year ended December 26, 2010, RONA invested $149.6 million in capital and intangible assets, $12.3 million less than the $161.9 million invested in 2009. These investments were devoted to the expansion of our retail network, including the construction of new stores, renovations and upgrades of existing stores, as well as maintenance. We also allotted part of these investments to ongoing improvements in our information systems, in order to increase our operational efficiency. 

With the approval of the Toronto Stock Exchange, during the second quarter, the Board of Directors of the Company has authorized RONA to purchase in the normal course of its activities, from June 21, 2010 to June 20, 2011, up to 3,250,000 common shares, representing 2.5% of its 129,936,351 common shares issued and outstanding on June 7, 2010. Under the issuer bid, the purchases will be made at market prices through the facility of the Toronto Stock Exchange or alternative Canadian trading platforms, in accordance with the rules and policies of the Toronto Stock Exchange. The common shares thereby purchased will be cancelled. The average daily trading volume (ADTV) of the Company's common shares was 293,413 on the Toronto Stock Exchange over the first six completed calendar months of the year. Accordingly, since the Company is entitled to purchase up to 25% of the ADTV on any trading day, it can purchase 73,353 common shares per day in addition to block trades in accordance with the Toronto Stock Exchange rules. Since the Company has the financial flexibility required to execute its growth plan, it will use its normal course issuer bid to eliminate the dilutive effect caused by the issuance of common shares when businesses are acquired. The Company believes that the purchase of its common shares represents an effective use of its funds and is in the best interests of the Company and its shareholders. Shareholders may obtain a free copy of the documents filed with the Exchange concerning this bid by writing to the Corporate Secretary of the Company. In the second and third quarter of 2010, the Company repurchased 2,230,067 shares for a total consideration of $31.6 million in order to avoid dilution caused by the issuance of shares relating to the acquisition of Pierceys.

Cash flow from operations, along with cash available at the beginning of the year, has been used over the period to fund acquisitions, capital expenditures and working capital. As a result, compared to December 27, 2009, net debt was up $185.4 million. As at December 26, 2010, RONA had $75.6 million in cash, which will be used over forthcoming quarters to realize various growth projects in Phase 2 of the Company's 2008–2011 strategic plan. RONA also has an undrawn committed credit facility of up to $650 million.

The Board of Directors established a new dividend policy and announced on December 8, 2010 that a cash dividend is to be payable to holders of RONA's common shares on a semi-annual basis when declared. The first payment, a $0.07 per share dividend, is payable on March 25, 2011 to holders of record on March 10, 2011. The Board will review the policy from time to time in light of the Company's cash flow, earnings, financial position and other relevant factors.

On February 22, 2011, RONA issued Series 6 Class A Preferred Shares for total gross proceeds of $150 million. The net proceeds of the offering will be used by RONA to reduce indebtedness, contribute to the funding of future acquisitions, capital projects and for general corporate purposes. This will further strengthen RONA's balance sheet, diversify its sources of financing and increase its financial flexibility in order to continue to execute the Company's strategic plan. Further details regarding these shares may be found in the Company's press release of February 1, 2011.

While cash has been used to fund acquisitions and capital expenditures over the past year, RONA's balance sheet has remained strong. On December 26, 2010, the ratio of total net debt to capital was 16.9%, compared to 10.4% as at December 27, 2009. The ratio of equity to assets was 64.6% at the end of 2010, compared to 64.7% as at December 27, 2009.

The Company's operations generate substantial cash flow. With relatively low debt and long-term fixed rates on most of its long-term debt, RONA also has substantial liquidity and can borrow many millions more at competitive rates. Our financial resources are therefore sufficient to pursue disciplined development of our four growth vectors: customer growth, construction of new stores, recruitment of affiliated dealers and acquisitions.

UPDATE ON THE COMPANY'S STRATEGIC ORIENTATION

On February 27, 2008, RONA released its strategic plan for 2008-2011. The plan comprised two phases. Phase 1 of the plan focused on productivity, efficiency, and profitability (the "PEP program"), over the 2008-2009 period. On January 25, 2010, RONA unveiled Phase 2 of its strategic plan (the "New World program"), which places renewed emphasis on growth over the 2010-2011 period.

RONA's management made a commitment to provide quarterly updates of the plan's progress in its management report, and an annual update in its annual report and at its annual general meeting. The information below is an update of the plan's progress in 2010.

1. Customer growth:

Customer growth will be stimulated by numerous initiatives to improve the customer experience – innovative store concepts, new product categories, new private-brand and controlled-label products, new tools and programs to improve customer loyalty, and new training programs for store employees.

  • Success in the first year of Phase 2 is evidenced by the fact RONA increased market share to 19% by the end of the year, from 17.5% at the beginning of the year.

  • Last spring, RONAdvantages was improved and made into a permanent program that is now one of the most advantageous customer programs in the industry in Canada. The program is linked with the new RONA credit card for consumers and the number of new cards issued during 2010 under this program was more than triple what was issued under the previous program during the whole year in 2009. These customers are our most loyal customers; they generally visit our stores more frequently and have a higher basket size than other customers, plus the program shows real clientele acquisition. This new program definitely contributed to gain market share in a difficult market.

  • RONA's private-brand and controlled-brand product sales for the year continued to progress, bringing the penetration level of these products to 24%, up from 19% at the beginning of the year.

  • The ability to meet the needs of commercial and professional customers is growing rapidly as the Commercial and Professional Market division makes significant strides to develop a national platform, largely through strategic acquisitions (for more information on the acquisitions see below) and strong organic growth.

  • Fourteen stores were renovated during the year to improve the shopping experience: 11 in Ontario (Lindsay, Barrie, Windsor, Peterborough, Sheppard, Simcoe, Dundas, Oakville, Belleville, Midland and Kingston), 2 in Quebec (Anjou and Mascouche) and 1 in the Atlantic Provinces (O'Leary).

  • In October, RONA entered into an exclusive partnership with the Calgary Flames of the NHL (National Hockey League) and a major junior hockey team, the Calgary Hitmen of the WHL (Western Hockey League). RONA's partnerships with MLSE (Maple Leaf Sports and Entertainment), signed in 2009, and the Calgary Flames, signed in 2010, are a continuation of its long-standing commitment to Canadian sports, both professional and amateur. RONA was a National Partner of the Vancouver 2010 Olympic and Paralympic Games. As well, it will be a National Partner of the Canadian Olympic and Paralympic Teams through the London 2012 Summer Games.

  • Major "Made in Canada" advertising campaign for the Vancouver 2010 Olympic Winter Games raised consumer awareness of RONA from coast to coast. The campaign consisted of 14 television spots of 15, 30 and 60 seconds, which featured close-up portraits of two Canadian Olympic athletes, as well as other people who generally would not be in the spotlight during the Olympic Winter Games: RONA dealer-owners and employees, young apprentices at the RONA 2010 Vancouver Fabrication Workshop and the workers who did the job of building the Olympic venues. As a National Partner, RONA developed a five-year program to take part in the preparations for the 2010 Winter Games, and also to leave a legacy that would endure long after the Games were over. Its involvement was fourfold: direct support for 100 Canadian athletes, assistance in building more than a dozen Olympic venues, helping more than 60 young people from disadvantaged backgrounds learn a trade through the RONA Vancouver 2010 Fabrication Workshop, and getting RONA employees involved by sending approximately 100 of them to Vancouver as delegated volunteers.

2. Construction of new stores:

RONA has several different store concepts to meet the specific needs of the communities it serves, big or small, urban or not. Be it a totally new store, or the expansion or transformation of an existing one, RONA has a design to meet the needs.

  • In 2010, new store construction has resulted in the addition of about 300,000 square-feet to the network.

  • The corporate RONA Le Régional store located in St-Luc, Quebec became a RONA L'entrepôt big-box store. The Upper Richelieu region, which it serves, has grown considerably in the last ten years and is still growing. The expansion adds an extra 20,000 square feet to the store, which now offers the full line of services provided by the RONA L'entrepôt concept, including specialized boutiques. Unique in the home improvement sector, RONA boutiques are designed to support the renovation process and make it more efficient. The store has an inventory of over 45,000 different items.

  • A new 73,000 square-foot proximity store was opened under the RONA banner in Saskatoon, Saskatchewan, replacing an older 35,000 square-foot store. It represents a $22 million investment.

  • A 35,000 square-foot proximity store in St. John's, Newfoundland and Labrador was renovated and reopened at a cost of $2.8 million.

  • A franchise dealer from St-Eustache, Quebec, expanded to become a RONA big-box store, investing $6 million in the process. The expansion added 50,000 square feet to the existing store, for a total of 125,000 square feet. It now offers the full line of services provided by the RONA L'entrepôt concept.

  • Two new 52,000 square-foot proximity stores were opened under the RONA banner, one in Sherwood Park, Alberta and the other in Welland, Ontario.

  • A new 100,000 square-foot big-box store was opened in Aurora, Ontario under the RONA banner.

  • A 68,000 square-foot store RONA proximity store will be built in St. John's, Newfoundland and Labrador, representing an investment of about $20 million. Store is scheduled to open in spring 2011.

  • Two new 100,000-square-foot Réno-Dépôt stores will be built in Vaudreuil and Sainte-Foy, Quebec, for a total investment of close to $50 million. The locations of both sites were carefully chosen to allow RONA to serve customers better and expand its share of the Quebec market. Construction is underway on both sites. The stores are scheduled to open in spring 2011.

  • Two new 52,000-square-foot TOTEM stores will be built in Edmonton, for a total investment of close to $40 million (including land purchased in previous years). Both sites were carefully chosen to allow RONA to better serve its growing customer base and expand its market share in the Alberta market. One store is expected to open in the spring of 2011, while the other is expected to open in 2012.

3. Development of the affiliated dealer network:

In addition to recruiting new dealers to the group and helping existing dealers improve and expand their stores, a key element of development in this area is RONA's newly-minted succession-planning program. It was designed to secure RONA's leadership in the market and sustain the growth of its network. The Company's new succession-planning program will help RONA attract next-generation dealer-owners and continue to be the company that offers independent dealer-owners in Canada the best development support.

  • In 2010, 250,000 square-feet of store space has been added through the recruitment of new dealers and the expansion of existing dealer stores (83,000 square-feet through recruitment and 167,000 square-feet through expansion projects). This represents more than $100 million in annual retail sales (about $60 million relating to new dealers and $40 million to expansion projects, which includes 49,500 square-feet associated with the new Blainville store detailed below). RONA dealers have completed 84 projects in total, which include 23 expansions projects and 61 remerchandising projects. These projects represent close to $35 million in investments by our dealers. Counting the recruitment and all projects completed by RONA dealers, the Company has achieved its objective of adding $100 million to $150 million of annual retail sales to its dealer network.

  • In Blainville, Quebec, this past August, RONA dealer André Lespérance completed the conversion of an existing building into a new 49,500-square-foot proximity store, offering more than 25,000 products, and representing an investment of more than $6 million in the local community. Renovation of the building that would become the new RONA store included measures to protect air quality and reduce energy consumption.

  • A year after the introduction of the innovative succession-planning program in late 2009, five young leaders, representing four different projects, were the first selected to receive support from the Development Fund and recently two new projects were presented to the selection committee. This new program combined with the summer retreat described below is really gaining traction as more than 20 projects are currently under study by our young dealers and could potentially be presented to the selection committee in the coming year.

  • In August, a youth forum was held in Kananaskis, Alberta for a number of young people representing the next generation of RONA leaders. This was the second such event. Led by Robert Dutton, RONA's President and CEO, the retreat consisted of active working sessions with senior members of RONA's management committee, as well as exchanges with industry experts and Canadian business leaders.

4. Acquisitions:

Through targeted acquisitions in retail, distribution and commercial and professional sectors, the Company will quickly grow different aspects of its operations and capabilities, such as market coverage, brand extension, leverage of existing infrastructure, product offerings, and purchasing power, while also reducing the cyclical nature of the retail business.

  • Acquisitions are a key element in achieving the goal of establishing a national platform in the commercial and professional market. Of the eleven acquisitions completed since the beginning of 2010, five have been for this purpose. This division, which was formed in late 2007, today includes 46 stores and outlets, 4 distribution centres and 3 manufacturing facilities specialized in plumbing and HVAC (heating, ventilation and air conditioning):

    • 37 outlets, 2 distribution centres and 3 manufacturing facilities in Ontario.

    • 3 plumbing fixtures and accessories stores plus 2 distribution centres for plumbing parts and materials in Quebec.

    • 5 outlets and 1 plumbing fixtures and accessories store in British Columbia.

  • This year, through its subsidiary Noble, RONA acquired the assets of Plomberie Payette & Perreault inc., LGC Plomberie inc., Don Park Limited Partnership in Canada, MPH Supply Limited and, just following year-end, the assets of La Boutique Plomberie Décoration 25 Inc.

  • One major acquisition was made to help grow the distribution segment and reduce the cyclical nature of RONA's business, that of TruServ Canada Inc. They operate two warehouse and distribution centres, one of 400,000 square feet in Winnipeg, Manitoba and one of 250,000 square feet in Kitchener, Ontario, from where it supplies over 40,000 products (SKUs). It generates hardware distribution sales of over $100 million and serves more than 650 independent dealers across Canada.

  • Five acquisitions were made during 2010 which helps expand the retail store network: Pierceys in Nova Scotia, Boiseries Signées in Quebec, Welland Lumber in Ontario, Matériaux R. M. Bibeau Ltée and Matériaux Campagna in Quebec. The latest three transactions are acquisitions by RONA of dealer-owners from its network of affiliated stores.

    • Pierceys significantly increased RONA's presence in the Atlantic Provinces, with five hardware stores around the Halifax region, major lumberyards, and one of the biggest fleets of construction materials and hardware delivery trucks in Nova Scotia.

    • Through its subsidiary Matériaux Coupal, RONA acquired Boiseries Signées, a Quebec-based manufacturer of custom prefabricated stairs.

    • Ontario-based Welland Lumber was owned by a RONA affiliated dealer. The store was acquired by RONA and business was consolidated with a new proximity store which is twice the size of the former store.

    • Matériaux R. M. Bibeau Ltée added their six Quebec-based hardware stores, located in Sorel, Tracy, Varennes, Contrecoeur, Longueuil and Ste-Julie, to RONA's retail corporate store network.

    • Matériaux Campagna added three Quebec-based hardware stores, two located in Rouyn-Noranda and one in Senneterre, to RONA's retail corporate store network.

Outlook

The Company implemented some organizational changes at the end of 2010 in order to help it pull together and leverage all the strengths of RONA's unique business model. The changes entail adopting a more integrated approach for the operation and development of its retail network, along with an increased regional focus designed to better address local market needs. These changes are aimed at optimizing the growth and consolidation of the RONA presence in key urban and regional markets in order to become the leader in each of those target markets.

While economic recovery is underway, the pace is modest and there are still concerns. Lingering economic uncertainty will therefore continue to put pressure on sales and earnings growth over the next quarter particularly in light of the effects of the renovation tax credits and an early spring which drove first quarter 2010 results. However, the underlying fundamentals for the industry are sound:

  • Canada's housing market remains relatively strong compared to most other countries; 

  • there is pent-up demand in the renovation market, arising from an aging housing stock and the postponement of major renovations while homeowners wrestled with credit and debt worries; and

  • Canadian interest rates remain low.

When the market does come back, RONA is well positioned to capitalize on it. The Company has:

  • greater operational leverage than ever as a result of our PEP Program; and

  • a considerably larger and more diversified network than in the past, as a result of successful recruitment, strategic acquisitions, new stores and continued investments in store renovation and relocation.

As 2011 unfolds, the new, integrated structural and regional approach is expected to bring significant benefits. RONA is also poised to grow its distribution and commercial and professional sectors and reduce the cyclical nature of its business by capitalizing on the growing opportunities in these two sectors to consolidate the Canadian market.

The progress made in 2010 — plus the added momentum provided by the many new initiatives and those to come — will enable the Company to resume double-digit bottom line growth and gradually improve its return on capital when market conditions improve, while maintaining an investment-grade credit profile and reducing the cyclical nature of RONA's operations.

Sustainability

Sustainable development is a core component of RONA's strategic plan. Key programs have been developed and introduced in response to the Company's objectives. This past year, RONA has undertaken a number of sustainability initiatives dealing with its products, procurement policies, environmental footprint and corporate governance.

RONA first introduced its RONA ECO and eco-responsible products in 2008. This past year, another significant step was taken with the launch of an innovative online Eco-responsible Renovation Guide to help customers make environmentally responsible decisions when undertaking renovation or construction projects. The user-friendly Guide, based on the life-cycle approach, was developed in collaboration with the International Chair in Life Cycle Assessment of École Polytechnique de Montréal, Équiterre and Écohabitation. It is the most comprehensive, user-friendly tool of its type and, in the opinion of one expert, unprecedented in North America.

The life-cycle approach, which evaluates the impact of products and actions globally, is the same approach used to evaluate products and determine if they meet the standards of RONA ECO or eco-responsible products. To be accepted in the RONA ECO line, a product must leave a smaller ecological footprint than equivalent conventional products throughout its entire life cycle. To qualify as eco-responsible, these products must deliver a better environmental performance in one or more stages of their life cycle, whereas RONA ECO products must be superior considering all stages.

In April 2008, RONA rolled out its first eight RONA ECO products, along with 500 eco-responsible products. From those modest beginnings, the program has continued to grow, spurred on by the enthusiastic reception of consumers across Canada. RONA stores now offer some 450 RONA ECO products, ranging from cleansers to fertilizers, rainwater collectors, mouldings and much more, as well as more than 1,700 eco-responsible products.

With respect to purchasing practices, this past November, RONA introduced its new Responsible Procurement Policy (RPP). This policy encompasses the specific procurement policies already introduced by the Company for certain products, including the wood products procurement policy and the policy ending sales of synthetic cosmetic pesticides. This new policy is an update of the Responsible Buying Code introduced in 2002. The RONA RPP deals with all products and services sold in its stores, as well as goods and services used by the company.

Under the new policy, RONA's goal is to ensure that products sold by the Company:

  • Have the least possible impact on the environment

  • Are the result of the labour of workers whose rights are respected

  • Contribute to social and economic development locally and regionally in Canada.

In order to thoroughly cover the issues relating to responsible procurement, RONA articulated the development of its policy in terms of rigorously identified principles based on analysis of best practices around the world and in consultation with recognized stakeholders. These stakeholders included ethical investment funds, special interest groups and experts specializing in the social and environmental sectors, as well as suppliers.

This past November, RONA issued a progress report for its wood products procurement policy, launched in fall 2008 and designed to help protect our forests and encourage consumers to buy wood from forests that have been sustainably and responsibly managed.

Under its wood products procurement policy, based on precise and measurable objectives which have been rigorously defined after consultation with various stakeholders, RONA has made a formal commitment to encourage responsible forest management through its purchasing practices. To this end, RONA has multiplied its efforts over the last two years to meet the objectives stated as part of the policy and, in some cases, achieved them as much as two years ahead of schedule. As a result, in RONA's corporate retail and franchise stores:

  • 100% of the softwood lumber (spruce, pine and fir) and softwood plywood panel products for sale is sourced from certified forests;

  • 30% of wood products available in RONA's retail corporate stores carry a certification label; and

  • 25% of SPF lumber for sale in corporate and franchise stores will be sourced from FSC (Forest Stewardship Council) certified forests, an objective planned to be met by the end of 2012 and reached two years ahead of schedule.

RONA has also received FSC certification from Rainforest Alliance for the Chain of Custody of wood products in ten of its stores and three distribution centres. RONA is the largest hardware company in America to have obtained the FSC certification to date.

In addition to these achievements, six RONA stores now offer softwood lumber sourced exclusively from FSC certified forests. It should be noted that wood sourced from FSC certified forests is not widely available in Canada and that RONA intends to make it easier for consumers to have access to such products.

With respect to its own environmental footprint, RONA has been taking a pro-active approach to waste management, one that is designed to divert waste material generated by its operations from landfills. In addition to the environmental benefits, it brings the Company financial benefits in terms of cost avoidance and revenues from recovered materials. In October 2010, following the success of a pilot project, RONA announced a series of initiatives to reduce the environmental footprint of its stores, focusing on energy efficiency and waste management, including a zero waste initiative. The Company is actively pushing new programs throughout the organization with the intention of taking a leadership role in protecting the environment.

These various initiatives deal with a number of the many different elements of sustainable development and illustrates the Company's commitment to making sustainable development an integral part of RONA's strategic plan.

Strong corporate governance is also key in building sustainability. The Board has adopted a new pro-active policy that includes publishing an overview of its governance and compensation policies on the Company's web site and proactively communicating to stakeholders any significant changes. As well, means will be made available to stakeholders enabling them to submit to the Board any recommendations or suggestions for improvements to the Company's governance and compensation practices.

ADDITIONAL INFORMATION

The Management's Discussion and Analysis (MD&A) and audited financial statements for 2010 can be found in the "Investor Relations" section of the Company's website at www.rona.ca, and at www.sedar.com. The Company's Annual Report can also be found on the RONA website, along with other information about RONA, including its Annual Information Form, which can also be found on the SEDAR website.

TELEPHONE CONFERENCE WITH THE FINANCIAL COMMUNITY

On Thursday, February 24, 2011, at 10:00 a.m. (EST), RONA will hold a telephone conference for the financial community. To join the conference, please call 514-861-4190 or 1 877-677-7769. To listen to the call online, please go to: http://events.pqm.net/rona/ir/20110224e/

NON-GAAP PERFORMANCE MEASURES

In this Press Release, as in our internal management, we use the concept of "earnings before interest, taxes, depreciation, amortization and non-controlling interest" (EBITDA). This measure corresponds to "Earnings before the following items" in our consolidated financial statements. We also use the concept of "adjusted gross margin," which corresponds to sales less the cost of goods sold including all vendor rebates.

While EBITDA does not have a definition that is standardized by GAAP, it is widely used in our industry and in financial circles to measure the profitability of operations, excluding tax considerations and the cost and use of capital. Adjusted gross margin is used by RONA's management to analyze the profitability of its network, including all vendor rebates. Given that these measures are not standardized, EBITDA and adjusted gross margin cannot be compared from one company to the next. Still, we establish them in the same way for each of the segments identified, and, unless expressly mentioned, our method does not change over time. EBITDA and adjusted gross margin must not be considered separately or as a substitute for other performance measures calculated according to GAAP, but rather as additional information.

FORWARD-LOOKING STATEMENTS

This Press Release includes "forward-looking statements" that involve risks and uncertainties. All statements other than statements of historical facts included in this Press Release, including statements regarding the prospects of the industry and prospects, plans, financial position and business strategy of the Company may constitute forward-looking statements within the meaning of the Canadian securities legislation and regulations. Investors and others are cautioned that undue reliance should not be placed on any forward-looking statements.

For more information on the risks, uncertainties and assumptions that would cause the Company's actual results to differ from current expectations, please also refer to the Company's public filings available at www.sedar.com and www.rona.ca. In particular, further details and descriptions of these and other factors are disclosed in the MD&A under the "Risks and uncertainties" section and in the "Risk factors" section of the Company's current Annual Information Form.

The forward-looking statements in this Press Release reflect the Company's expectations as at February 24, 2011, and are subject to change after this date. The Company expressly disclaims any obligation or intention to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by the applicable securities laws.

ABOUT RONA

RONA is the largest Canadian distributor and retailer of hardware, home renovation and gardening products. RONA operates a network of more than 950 corporate, franchise and affiliate stores of various sizes and formats. With close to 30,000 employees working under its family of banners in every region of Canada and more than 17 million square feet of retail space, the RONA store network generates over $6 billion in annual retail sales. Visit www.rona.ca.

RONA inc.
Consolidated Earnings and Comprehensive Income
Years ended December 26, 2010 and December 27, 2009
(Unaudited, in thousands of dollars, except earnings per share)
 
  Fourth Quarter Year-to-date
  2010 2009 2010 2009
         
         
Sales $ 1,136,567 $ 1,140,932 $ 4,799,865 $ 4,677,359
         
Earnings before the following items 67,556 78,811 344,027 332,994
         
Interest on long-term debt 4,954 5,277 20,226 20,951
Interest on bank loans 867 855 2,295 2,586
Depreciation and amortization 28,481 25,744 110,902 103,160
  34,302 31,876 133,423 126,697
         
Earnings before income taxes and non-controlling interest 33,254 46,935 210,604 206,297
Income taxes 9,777 14,268 61,918 62,714
Earnings before non-controlling interest 23,477 32,667 148,686 143,583
Non-controlling interest 1,325 1,842 5,465 5,331
Net earnings and comprehensive income $ 22,152 $ 30,825 $ 143,221 $ 138,252
         
Net earnings per share        
  Basic $ 0.17 $ 0.24 $ 1.10 $ 1.12
  Diluted $ 0.17 $ 0.24 $ 1.09 $ 1.11
 
 
 
RONA inc.
Consolidated Retained Earnings
Consolidated Contributed Surplus
Years ended December 26, 2010 and December 27, 2009
(Unaudited, in thousands of dollars)
 
  2010   2009  
         
Consolidated Retained Earnings        
Balance, beginning of year $ 1,161,808   $ 1,028,876  
Net earnings 143,221   138,252  
Expenses relating to the issue of common shares, net of income tax recovery of $2,042   (5,320 )
Excess of purchase price over the stated value of repurchased common shares and related contributed surplus (17,666 )  
Dividends declared on common shares (9,119 )  
Balance, end of year $ 1,278,244   $ 1,161,808  
         
Consolidated Contributed Surplus        
Balance, beginning of year $ 13,475   $ 12,563  
Compensation cost relating to stock option plans 1,214   946  
Repurchase of common shares – normal course issuer bid (3,153 )  
Exercise of stock options (62 ) (34 )
Balance, end of year $ 11,474   $ 13,475  
         
 
 
 
RONA inc.
Consolidated Cash Flows
Years ended December 26, 2010 and December 27, 2009
(Unaudited, in thousands of dollars)
         
  Fourth Quarter   Year-to-date  
  2010   2009   2010   2009  
Operating activities                
Net earnings $ 22,152   $ 30,825   $ 143,221   $ 138,252  
Non-cash items                
  Depreciation and amortization 28,481   25,744   110,902   103,160  
  Change in fair value of derivative financial instruments (5 ) (88 ) (30 ) 462  
  Future income taxes 12,745   6,499   12,632   9,225  
  Net gain on disposal of assets (1,681 ) (523 ) (2,921 ) (2,358 )
  Impairment charge on fixed assets held for sale       2,050  
  Stock-based compensation 1,681   947   4,588   3,503  
  Difference between amounts paid for employee future benefits and current period cost (1,378 ) (1,967 ) (2,744 ) (3,088 )
  Non-controlling interest 1,325   1,842   5,465   5,331  
  Other items 327   576   1,043   1,975  
  63,647   63,855   272,156   258,512  
Changes in working capital items 16,292   2,265   (148,010 ) 24,262  
Cash flows from operating activities 79,939   66,120   124,146   282,774  
Investing activities                
Business acquisitions (68,124 ) (520 ) (80,275 ) (3,734 )
Other investments 548   (442 ) (2,533 ) (3,990 )
Fixed assets (37,036 ) (23,562 ) (111,873 ) (114,103 )
Intangible assets (21,024 ) (14,238 ) (37,709 ) (47,796 )
Other assets (1,267 ) (75 ) (4,365 ) (4,837 )
Disposal of fixed assets 3,249   1,596   4,950   6,291  
Disposal of investments 3,192   517   10,031   2,422  
Cash flows from investing activities (120,462 ) (36,724 ) (221,774 ) (165,747 )
Financing activities                
Bank loans and revolving credit (13,979 ) (810 ) (7,172 ) (43,046 )
Other long-term debt 1,249   458   1,899   646  
Repayment of other long-term debt and redemption of preferred shares (20,285 ) (6,234 ) (30,433 ) (15,819 )
Issue of common shares 1,151   1,141   3,713   176,936  
Cash dividends paid by a subsidiary to non-controlling interest (2,450 ) (1,470 ) (2,450 ) (1,470 )
Expenses relating to the issue of common shares       (7,362 )
Repurchase of common shares     (31,609 )  
Cash flows from financing activities (34,314 ) (6,915 ) (66,052 ) 109,885  
                 
Net increase (decrease) in cash (74,837 ) 22,481   (163,680 ) 226,912  
Cash, beginning of year 150,414   216,776   239,257   12,345  
Cash, end of year $ 75,577   $ 239,257   $ 75,577   $ 239,257  
Supplementary information                
Interest paid $ 446   $ 535   $ 23,171   $ 25,493  
Income taxes paid $ 10,448   $ 19,124   $ 43,270   $ 49,450  
 
 
 
RONA inc.
Consolidated Balance Sheets
December 26, 2010 and December 27, 2009
(Unaudited, in thousands of dollars)
     
  2010 2009
     
Assets    
Current assets    
Cash $ 75,577 $ 239,257
  Accounts receivable 303,836 250,845
  Income taxes receivable 2,436
  Inventory 905,467 726,262
  Prepaid expenses 17,955 18,114
  Derivative financial instruments 1,905 801
  Future income taxes 12,869 15,914
  1,317,609 1,253,629
Investments 10,488 11,978
Fixed assets 918,273 861,302
Fixed assets held for sale 20,177 13,242
Goodwill 531,675 455,572
Intangible assets 118,747 96,885
Other assets 31,043 29,682
Future income taxes 27,065 27,593
  $ 2,975,077 $ 2,749,883
     
Liabilities    
Current liabilities    
  Bank loans $ 1,943 $ 5,211
  Accounts payable and accrued liabilities 462,351 427,817
  Dividends payable 9,119
  Income taxes payable 3,634
  Derivative financial instruments 1,653 776
  Future income taxes 3,691 4,900
  Instalments on long-term debt 21,151 9,996
  503,542 448,700
Long-term debt 444,333 430,524
Other long-term liabilities 33,121 31,317
Future income taxes 36,551 27,542
Non-controlling interest 35,920 32,761
  1,053,467 970,844
Shareholders' equity    
Capital stock 631,892 603,756
Retained earnings 1,278,244 1,161,808
Contributed surplus 11,474 13,475
  1,921,610 1,779,039
  $ 2,975,077 $ 2,749,883

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