RONA INC.

TSX : RON


RONA INC.

August 08, 2007 08:25 ET

RONA Posts Record Quarter with $86 Million in Net Earnings

BOUCHERVILLE, QUEBEC--(Marketwire - Aug. 8, 2007) - RONA (TSX:RON)

Highlights - Second quarter 2007

- Sales up 9.1%

- Operating income up 11.6% and EBITDA margin up 20 basis points, from 10.8% to 11.0%

- Net earnings of $86.2 million, or $0.74 per share, an increase of 7.7% over 2006

- Results strengthened by recent acquisitions and additional measures taken at the beginning of the quarter to stimulate sales and earnings growth

- With about 15 acquisition opportunities under study and a very proactive recruiting approach, management's 7-07 Program remains on course

RONA (TSX:RON), the largest Canadian distributor and retailer of hardware, home renovation and gardening products, has announced a 9.1% increase in sales and an 11.6% increase in operating income for the second quarter of 2007. This increase in sales and income can be attributed to acquisitions made in the last 12 months and additional measures taken at the beginning of the quarter to stimulate sales and earnings growth in a business environment that was more difficult than anticipated. Net earnings increased by $6.2 million or 7.7%, from $80.0 million in the second quarter of 2006 to $86.2 million in the second quarter of this year.

"Considering the fact that current conditions are less favourable to a strong increase in same-store sales, we are satisfied with these second quarter numbers," said Robert Dutton, RONA's president and CEO. "We achieved these record results by taking additional measures to stimulate sales of our private label products, increase customer loyalty and improve our efficiency. The increase is also related to the integration of our recent acquisitions."

"With about 15 acquisition opportunities under study and a very proactive recruiting approach, RONA is THE consolidator of the home renovation and construction market in Canada. We're in a period that is very conducive to consolidation, and we have our eye on transactions that will allow us to improve our position and expand our product and service offering to consumers. I am still confident we can achieve the objective of our 7-07 Program, $7 billion in annualized retail sales by the end of 2007," Dutton added.

The increase in quarterly earnings was also boosted by a better product mix. Paint, hardware, plumbing and ventilation products, as well as kitchen and seasonal items, fared especially well in the second quarter.

Among the added initiatives planned to stimulate sales and improve customer service, RONA launched the Air Miles™ loyalty program in its network of Reno-Depot stores in the second quarter. The Company expects to reap the benefits of introducing this very popular program over the next few quarters.

In addition to these gains, the distribution segment posted more growth this quarter, with an increase of 5.6% in operating income. This performance reflects major efforts to expand the distribution network and increase efficiency.

Second quarter growth was achieved despite bad weather conditions in April all across the country and in May in Western Canada, a region of the country that normally records high sales growth.

FINANCIAL HIGHLIGHTS OF THE SECOND QUARTER 2007

Sales up $123.1 million, or 9.1%

Consolidated sales for the second quarter of 2007 stood at $1,469.1 million, or 9.1% higher than the $1,346.0 million posted in 2006. This growth can be largely attributed to acquisitions and store openings. Excluding the contributions from major acquisitions, such as Noble Trade, Curtis Lumber, and Mountain Building Centres, consolidated sales rose 4.8%. This organic growth comes from sales generated by new stores opened over the last 12 months, the acquisition of affiliate stores, and a slight increase in sales in the distribution network. Excluding the 1.1% decline due to the drop in average forest product prices, same-store sales increased by 1.4% this quarter.

Operating income up $16.8 million, or 11.6%

Operating income reached $161.8 million in the second quarter of 2007, an increase of $16.8 million, or 11.6%, over 2006. EBITDA margin rose from 10.8% in 2006 to 11.0% in the second quarter of 2007. The increase in operating income can be mainly attributed to the primary effects of additional measures taken immediately after the publication of our first quarter 2007 results to support earnings growth, to the contributions of acquisitions in the corporate and franchise store segment, including synergies related to these acquisitions, and to continued robust performance in the distribution segment. The latter reflects significant efforts made to expand the distribution network and improve its efficiency, resulting in an increase of 20 basis points in the segment's operating income over the quarter. A gain of $2.4 million recorded on the application of a new accounting standard for financial instruments also added to the increase in operating income for the quarter (for more information about this new standard, please see note 2 in our consolidated financial statements). During this quarter, major efforts were also made to stimulate sales and increase in-stores traffic, with promotional activities throughout the RONA network.

Net earnings up 7.7%

Net earnings for the second quarter of 2007 stood at $86.2 million, or $0.74 per share, diluted, compared to $80.0 million in 2006 or $0.69 per share, diluted. This represents an increase of 7.7% in net earnings and 7.2% in diluted earnings per share. The factors that contributed to the increase in operating income also apply to the change in net earnings, but the gain in operating income was reduced by an increase in financial expenses and depreciation and amortization related to the expansion of the network. This is due to the fact that some recent investments have not yet reached their full potential contribution to the Company's consolidated results. Despite slower growth in the construction and renovation industry, RONA is pursuing investments in several development projects that will ensure a stronger position in the next few years.

FINANCIAL HIGHLIGHTS OF THE FIRST HALF OF 2007

Sales up $202.8 million, or 9.5%

Consolidated sales for the first half of 2007 stood at $2,347.6 million, or 9.5% more than the $2,144.8 million recorded in 2006. This growth can be mainly attributed to acquisitions and store openings. Excluding the contributions of major acquisitions such as Noble Trade, Chester Dawe, Curtis Lumber, Materiaux Coupal and Mountain Building Centres, consolidated sales rose 4.7%. This organic growth stems from sales generated by new stores opened in the last 12 months, affiliate stores acquired by RONA, and a slight increase in sales in the distribution network.

Same-store sales increased by 0.2% over the 26-week period ended July 1, 2007. Excluding the 1.1% decline due to the drop in average forest product prices, same-store sales increased by 1.3% over the period.

Operating income up $15.0 million, or 8.0%

RONA's operating income was $202.6 million in the first half of 2007, up $15.0 million, or 8.0%, over 2006. The increase in operating income can be mainly attributed to the primary effects of additional measures taken immediately after publication of our first quarter 2007 results to support earnings growth, to the contributions of acquisitions in the corporate and franchise store segment, including synergies related to these acquisitions, and to continued robust performance in the distribution segment. A gain of $3.6 million recorded on the application of a new accounting standard for financial instruments also added to the increase in operating income for the half (for more information about this new standard, please see note 2 in our consolidated financial statements).

The EBITDA margin declined from 8.7% in 2006 to 8.6% in the first half of 2007. This figure was affected by the stronger seasonal effect in the first quarter 2007. In addition, the margin related to contributions from acquisitions, including affiliate stores, was lower than the margin recorded in 2006. During the first half, significant efforts were also made to stimulate sales and traffic, with promotional activities throughout the RONA network. These factors were counterbalanced by efficiency improvement measures and a favourable product mix during the second quarter.

Net earnings

Net earnings for the first half of 2007 stood at $95.2 million, or $0.82 per share, diluted, compared to $96.4 million in 2006, or $0.83 per share, diluted. This represents a drop of 1.2% in net earnings and diluted earnings per share. The decline in the first quarter 2007, due to stronger seasonal variations and unfavourable weather conditions, was almost completely compensated for by growth posted in the second quarter. Certain investments made to expand the RONA network are not yet fully contributing to the Company's results despite having generated significant depreciation and amortization and interest expenses. In spite of slower growth in the renovation industry, RONA is pursuing investments in several development projects that will ensure a stronger position in the next few years.

CASH FLOWS AND FINANCIAL POSITION

Operations generated $111.5 million in the second quarter of 2007, compared to $101.3 million in the same quarter of 2006. Including working capital items, operations generated $169.8 million, compared to $173.7 million in 2006. This decrease is primarily coming from the increase in inventories from acquisitions and new stores.

During the second quarter of 2007, $65.4 million was invested in fixed assets. These investments related to the expansion of our retail network, namely construction of new stores as well as repairs, renovations and upgrades for existing stores to reflect our new concepts. Significant investments were also approved for the continuous improvement of information systems in order to increase our operational effectiveness.

RONA's balance sheet remains strong. As of July 1, 2007, the total debt-to-capital ratio was 37.9%, compared with 27.9% at the close of the second quarter in 2006. The Company's operations produce significant cash flows. With relatively low debt and rates fixed for 10 years on our long-term debt, we have significant liquidity and can access some $250 million of additional credit at competitive rates. Last July, we extended the maturity date of our revolving credit by one year, from October 6, 2011, to October 6, 2012. Our resources are sufficient to continue our development along our four vectors of growth: sales growth in our existing network, construction of new corporate and franchise stores, recruitment of new affiliate stores, and acquisitions.

OUTLOOK

For the last few quarters, the American economy has been experiencing a major correction in the real estate market. Housing starts and resales have dropped significantly, and the average price of homes has stopped increasing. The situation is very different in Canada, where all of RONA's sales are based. The drop in housing starts is much less pronounced than in the United States, and resales are still climbing despite CMHC predictions of a drop. The number of housing starts remains at historically high levels, and resales have reached new records, boosting housing prices, which have risen more than 10% since the beginning of the year.

A number of economists believe that the Canadian economy will grow faster than the American economy in 2007 and 2008, as long as economic activities related to natural resources remain strong and there is no major slowdown in housing construction and resales. Inflationary pressure, especially in Western Canada, recently induced the Bank of Canada to raise interest rates, and the trend seems likely to continue to rise over the next quarters, which could have a temporary impact on consumer confidence in Canada.

Recent data on housing resales still support a strong demand for products and services related to the renovation market, with a growth rate that is nevertheless significantly lower than growth in recent years. This explains why growth in same-store sales was weaker at the beginning of the year for major players in the industry. Management believes that sales contributions from existing stores may be weaker than expected this year. Given the effect of this situation on same-store earnings since the beginning of the year, the Company took additional measures to stimulate sales and improve operational efficiency at the beginning of the second quarter. These include a more dynamic approach to private label product sales, the introduction of new customer loyalty measures, and operational efficiency measures. These activities have already improved results in the second quarter and we are confident that they will continue to prove their worth in the coming quarters.

Growth in these quarters is expected to come from market consolidation and the recruitment of more dealer-owners, from the addition of new stores and from acquisitions. Although recruitment is down somewhat from this date last year, management remains confident of achieving its recruitment goal of about $200 million. We still plan to open 10 new stores in 2007, with four already opened since the beginning of the year. In terms of acquisitions, we are currently studying 15 opportunities, and management is confident that a number of these opportunities could materialize.

ADDITIONAL INFORMATION

The Management Discussion and Analysis and the financial statements for the second quarter 2007 are available on the Company website at www.rona.ca in the Investors section, and on 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 CALL WITH THE FINANCIAL COMMUNITY

Wednesday, August 8, 2007, at 11:00 AM (EST), RONA will hold a telephone conference call for the financial community. To join the conference, please dial 514-861-0443 or 1-866-542-4146. To tune in online, please go to http://events.startcast.com/events/153/B0016.

NON-GAAP PERFORMANCE MEASURE

In this press release, as in our internal management, we use the concept of earnings before interest, taxes, depreciation and amortization (EBITDA), which we also refer to as operating income. This corresponds to "Earnings before the following items" in our consolidated financial statements.

While the meaning of EBITDA is not standardized by GAAP, it is widely used in our industry and financial circles to measure the profitability of operations, excluding tax considerations and the cost and use of capital. As it is not standardized, EBITDA cannot be compared from one company to the next, but we calculate it internally in the same way for every identified segment, and, unless expressly mentioned, our method does not change over time. EBITDA should not be regarded in isolation or as a substitute for other measurements of performance 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 2006 Annual Information Form.

The forward-looking statements in this press release reflect the Company's expectations as of August 7, 2007, 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 671 franchise, affiliate and corporate stores of various sizes and formats. With over 26,000 employees working under its family of banners in every region of Canada and more than 14 million square feet of retail space, the RONA store network generates close to $6 billion in annual retail sales.



RONA

Consolidated Financial Statements
July 1, 2007 and June 25, 2006



RONA inc.
Consolidated Earnings
For the thirteen-week and twenty-six-week periods ended July 1, 2007 and
June 25, 2006
(Unaudited, in thousands of dollars, except earnings per share)
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Second Quarter Year-to-date
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2007 2006 2007 2006
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Sales $1,469,100 $1,346,009 $2,347,596 $2,144,795
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Earnings before the
following items 161,778 145,015 202,628 187,596
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Interest on long-term
debt 8,163 5,328 14,410 9,622
Interest on bank loans 858 1,024 1,642 1,738
Depreciation and
amortization 22,412 17,419 44,017 33,069
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31,433 23,771 60,069 44,429
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Earnings before income
taxes and
non-controlling
interest 130,345 121,244 142,559 143,167
Income taxes 41,797 39,238 45,475 45,775
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Earnings before
non-controlling
interest 88,548 82,006 97,084 97,392
Non-controlling
interest 2,385 1,994 1,894 1,000
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Net earnings $86,163 $80,012 $95,190 $96,392
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Net earnings per
share (Note 10)
Basic $0.75 $0.70 $0.83 $0.84
Diluted $0.74 $0.69 $0.82 $0.83
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The accompanying notes are an integral part of the interim consolidated
financial statements.



RONA inc.
Consolidated Retained Earnings
Consolidated Contributed Surplus
For the twenty-six-week periods ended July 1, 2007 and June 25, 2006
(Unaudited, in thousands of dollars)
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2007 2006
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Consolidated Retained Earnings
Balance, beginning of period, as previously reported $709,467 $518,883
Financial instruments - recognition and measurement
(Note 2) (1,589) -
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Restated balance, beginning of period 707,878 518,883
Net earnings 95,190 96,392
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Balance, end of period $803,068 $615,275
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Consolidated Contributed Surplus
Balance, beginning of period $9,182 $6,618
Compensation cost relating to stock-based
compensation plans 1,008 1,098
Exercise of stock options (219) (168)
Gain on disposal of the Company's common shares by a
joint venture, net of income taxes of $59 - 251
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Balance, end of period $9,971 $7,799
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The accompanying notes are an integral part of the interim consolidated
financial statements.



RONA inc.
Consolidated Cash Flows
For the thirteen-week and twenty-six-week periods ended July 1, 2007 and
June 25, 2006
(Unaudited, in thousands of dollars)
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Second Quarter Year-to-date
2007 2006 2007 2006
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Operating activities
Net earnings $86,163 $80,012 $95,190 $96,392
Non-cash items
Depreciation and
amortization 22,412 17,419 44,017 33,069
Derivative financial
instruments (2,406) - (3,630) -
Future income taxes 1,802 776 (2,479) (575)
Net gain on disposal
of assets (241) (1,322) (181) (1,341)
Compensation cost
relating to
stock-based
compensation plans 537 670 1,008 1,098
Non-controlling
interest 2,385 1,994 1,894 1,000
Other items 836 1,742 1,655 1,336
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111,488 101,291 137,474 130,979
Changes in working
capital items 58,306 72,406 (99,237) (16,253)
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Cash flows from
operating activities 169,794 173,697 38,237 114,726
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Investing activities
Business acquisitions
(Note 3) (167,638) (27,791) (170,661) (113,164)
Advances to joint
ventures and other
advances 615 (215) 4,640 (397)
Other investments (588) - (588) -
Fixed assets (65,364) (48,454) (108,144) (86,487)
Other assets (1,738) (3,066) (3,231) (4,819)
Disposal of assets 1,650 3,650 2,920 4,840
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Cash flows from
investing activities (233,063) (75,876) (275,064) (200,027)
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Financing activities
Bank loans and
revolving credit 122,534 (96,889) 245,572 109,232
Other long-term debt 11 420 933 1,663
Repayment of other
long-term debt
and redemption of
preferred shares (4,811) (3,303) (14,553) (8,347)
Issue of common shares 1,092 1,934 3,312 3,077
Issue of equity
securities to
non-controlling
interest 750 735 750 735
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Cash flows from
financing activities 119,576 (97,103) 236,014 106,360
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Net increase
(decrease) in cash 56,307 718 (813) 21,059
Cash, beginning
of period 1,366 24,461 58,486 4,120
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Cash, end of period $57,673 $25,179 $57,673 $25,179
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Supplementary
information
Interest paid $4,655 $4,858 $11,323 $9,653
Income taxes paid $25,218 $25,015 $62,680 $58,734
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The accompanying notes are an integral part of the interim consolidated
financial statements.



RONA inc.
Consolidated Balance Sheets
July 1, 2007, June 25, 2006 and December 31, 2006
(In thousands of dollars)
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2007 2006 2006
July 1 June 25 December 31
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(unaudited)(unaudited)
Assets
Current assets
Cash $57,673 $25,179 $58,486
Accounts receivable 328,328 305,410 205,808
Income taxes receivable 7,476 7,695 -
Inventory 958,839 841,987 790,496
Prepaid expenses 51,432 31,909 23,454
Derivative financial instruments
(Note 2) 1,809 - -
Future income taxes 14,839 9,823 10,859
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1,420,396 1,222,003 1,089,103
Investments 14,559 17,572 17,642
Fixed assets 716,237 500,170 634,131
Goodwill 438,609 301,289 316,558
Trademarks 3,593 - 1,380
Other assets 25,589 19,120 30,314
Future income taxes 20,364 20,677 19,254
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$2,639,347 $2,080,831 $2,108,382
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Liabilities
Current liabilities
Bank loans $26,861 $34,387 $21,221
Accounts payable and accrued
liabilities 583,021 585,607 394,103
Income taxes payable - - 7,242
Derivative financial instruments
(Note 2) 562 - -
Future income taxes 2,442 710 3,314
Installments on long-term debt 37,474 19,808 29,511
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650,360 640,512 455,391
Long-term debt 687,131 346,913 455,310
Other long-term liabilities 22,190 17,413 20,386
Future income taxes 21,303 13,871 19,402
Non-controlling interest 26,076 24,964 23,527
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1,407,060 1,043,673 974,016
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Shareholders' equity
Capital stock (Note 4) 419,248 414,084 415,717
Retained earnings 803,068 615,275 709,467
Contributed surplus 9,971 7,799 9,182
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1,232,287 1,037,158 1,134,366
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$2,639,347 $2,080,831 $2,108,382
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The accompanying notes are an integral part of the interim consolidated
financial statements.



RONA inc.
Notes to Interim Consolidated Financial Statements
July 1, 2007 and June 25, 2006
(Unaudited, in thousands of dollars, except amounts per share)


1. Basis of presentation

The accompanying unaudited interim consolidated financial statements are in accordance with Canadian generally accepted accounting principles for interim financial statements and do not include all the information required for complete financial statements. They are also consistent with the policies outlined in the Company's audited financial statements for the years ended December 31, 2006. The interim financial statements and related notes should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2006. The interim operating results do not necessarily reflect the results for the full fiscal year. Accordingly, the comparative balance sheet as at June 25, 2006 is also included to reflect seasonal fluctuations that characterize the hardware, renovation and home garden industry. When necessary, the financial statements include amounts based on estimated information and management's best judgments. Certain comparative figures have been reclassified to conform with the presentation adopted in the current period.

2. Changes in accounting policies

On January 1, 2007, in accordance with applicable transitional provisions, the Company retroactively adopted without restatement of prior period financial statements the following new recommendations of the Canadian Institute of Chartered Accountants (CICA) Handbook:

Financial instruments

Section 3855, Financial Instruments - Recognition and Measurement and Section 3861, Financial Instruments - Disclosure and Presentation describe standards for the classification, recognition, measurement, disclosure and presentation of financial instruments (including derivatives) and non-financial derivatives in the financial statements.

The adoption of these new standards resulted in the following changes in the classification and measurement of the Company's financial instruments, previously recorded at cost:

- Cash is classified as a "financial asset held for trading" and is measured at fair value. All changes in fair value are recognized in earnings. This change had no impact on the Company's consolidated financial statements.

- Accounts receivable and long-term loans and advances and redeemable preferred shares (included in investments) are classified as "loans and receivables" and are recorded at cost which at initial measurement corresponds to fair value. Subsequent revaluations of accounts receivable are recorded at amortized cost which generally corresponds to initial measurement less all allowances for doubtful accounts. Subsequent revaluations of long-term loans and advances and redeemable preferred shares are recorded at amortized cost using the effective interest method less any amortization. This change had no impact on the Company's consolidated financial statements.

- Bank loans and accounts payable and accrued liabilities are classified as "other financial liabilities". They are initially measured at fair value and subsequent revaluations are recorded at amortized cost using the effective interest method. This change had no impact on the Company's consolidated financial statements.

- Long-term debt is classified as "other financial liabilities". It is measured at amortized cost which corresponds to initial measurement plus accumulated amortization of financing costs. Initial measurement corresponds to the principal amount of the debt less applicable financing costs. This change resulted in a decrease of $4,824 in deferred financing costs previously included in other assets, a decrease of $4,870 in long-term debt and an increase of $46 ($31, net of future income taxes) in opening retained earnings.

The Company also adopted the following accounting policies:

- Transaction costs related to other financial liabilities are recorded as a reduction in the book value of the related financial liability.

- The Company records as a separate asset or liability only those derivatives embedded in hybrid financial instruments issued, acquired or substantially modified by the Company as at December 29, 2002 when these hybrid instruments are not recorded as held for trading and remain outstanding at January 1, 2007. Embedded derivatives that are not closely related to the host contracts must be separated from the host contract, classified as a financial instrument held for trading and measured at fair value with changes in fair value recorded in earnings. The Company has not identified any embedded derivatives to be separated other than derivatives embedded in purchase contracts concluded in foreign countries and settled in a foreign currency that is not the conventional currency of either of the two principal parties to the contract. Although the payments are made in a foreign currency that is routinely used in the economic environment where the transaction occurred, the Company has opted to separate the embedded derivatives. This policy change resulted in an increase in current liabilities of $2,382 and a decrease in retained earnings of $2,382 ($1,620 net of future income taxes) at January 1, 2007. For the thirteen and twenty-six-week periods ended July 1, 2007 this policy change resulted in an increase in earnings before interest, depreciation and amortization, income taxes and non-controlling interest of $2,967 and $4,191.

The Company uses derivative financial instruments to manage foreign exchange risk. The Company does not use derivative financial instruments for speculative or trading purposes. The derivatives are classified as "liabilities held for trading" and are measured at fair value with the changes in fair value recorded in earnings. For the thirteen and twenty-six-week periods ended July 1, 2007, this resulted in a decrease in earnings before interest, depreciation and amortization, income taxes and non-controlling interest of $562.

Comprehensive income

Section 1530, Comprehensive Income describes standards for the presentation of comprehensive income and its components. Comprehensive income is the change in shareholders' equity, which results from transactions and events from sources other than the Company's shareholders. The adoption of the new recommendation had no impact on the Company's consolidated financial statements.

Equity

Section 3251, Equity describes standards for the presentation of equity and changes in equity in the period. The adoption of the new recommendation had no impact on the Company's consolidated financial statements.

Accounting changes (Note 11)

On January 1, 2007, in accordance with applicable transitional provisions, the Company adopted the new recommendations of CICA Handbook, Section 1506, Accounting Changes. This section establishes the criteria for changing accounting policies together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors.

Accounting by a vendor for consideration given to a customer (volume rebates)

At the beginning of fiscal year 2006, the Company adopted EIC-156 "Accounting by a Vendor for Consideration Given to a Customer (Including a Reseller of the Vendor's Products)", which provides guidance as to the circumstances under which a consideration is an adjustment of the selling price of the vendor's products or services and under which it is a cost incurred by the vendor to sell his products. EIC-156 was applied retroactively, with restatement of prior years. Volume rebates to customers, previously presented as a reduction of earnings before interest, depreciation and amortization, income taxes and non-controlling interest are now presented as a reduction of sales.

3. Business acquisitions

The Company acquired four companies, operating in the corporate and franchised stores segment, by way of share or asset purchase. These acquisitions were for a total consideration of $184,260. The Company financed these acquisitions from its existing credit facilities. The results of operations of these companies are consolidated from their date of acquisition.

The preliminary allocation of the purchase price of the acquisitions was established as follows:



Current assets $62,112
Fixed assets 10,369
Goodwill 122,051
Trademarks 2,321
Future income taxes 820
Current liabilities (9,889)
Long-term debt (3,524)
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184,260
Less: Accrued direct acquisition costs (520)
Balance of purchase price (13,079)
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Cash consideration paid $170,661
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4. Capital stock

Issued and fully paid:

The following tables present changes in the number of outstanding common shares and their aggregate stated value from December 25, 2005 to July 1, 2007:



July 1, 2007
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Number of shares Amount
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Balance, beginning of period 114,935,569 $413,542
Issuance in exchange for common share
subscription deposits 120,715 2,513
Issuance under stock-based compensation plans 339,327 1,876
Issuance in exchange for cash 2,769 65
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Balance before elimination of reciprocal
shareholdings 115,398,380 417,996
Elimination of reciprocal shareholdings (56,841) (341)
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Balance, end of period 115,341,539 417,655
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Deposits on common share subscriptions, net of
eliminations of joint ventures (a) 1,593
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$419,248
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June 25, 2006
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Number of shares Amount
--------------------------------------------------------------------------
Balance, beginning of period 114,412,744 $408,943
Issuance in exchange for common share
subscription deposits 101,696 2,192
Issuance under stock-based compensation plans 352,300 1,755
Issuance in exchange for cash 13,748 310
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Balance before elimination of reciprocal
shareholdings 114,880,488 413,200
Elimination of reciprocal shareholdings (54,828) (299)
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Balance, end of period 114,825,660 412,901
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Deposits on common share subscriptions, net of
eliminations of joint ventures (a) 1,183
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$414,084
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December 31, 2006
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Number of shares Amount
--------------------------------------------------------------------------
Balance, beginning of year 114,412,744 $408,943
Issuance in exchange for common share
subscription deposits 101,696 2,192
Issuance under stock-based compensation plans 400,550 1,952
Issuance in exchange for cash 20,579 455
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Balance before elimination of reciprocal
shareholdings 114,935,569 413,542
Elimination of reciprocal shareholdings (54,920) (301)
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Balance, end of year 114,880,649 413,241
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Deposits on common share subscriptions, net of
eliminations of joint ventures (a) 2,476
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$415,717
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(a) Deposits on common share subscriptions represent amounts received
during the year from affiliated and franchised merchants in accordance
with commercial agreements. These deposits are exchanged for common
shares on an annual basis.


Stock-based compensation plan of May 1, 2002

The Company adopted a stock option purchase plan for designated senior executives which was approved by the shareholders on May 1, 2002. A total of 2,920,000 options were granted at that date. Options granted under the plan may be exercised since the Company made a public share offering on November 5, 2002. The Company can grant options for a maximum of 3,740,000 common shares. At July 1, 2007 the 2,920,000 options granted have an exercise price of $3.47 and of this number, 1,449,500 options (1,102,723 options at June 25, 2006) were exercised.

The fair value of each option granted was estimated at the grant date using the Black-Scholes option-pricing model. Calculations were based upon a market price of $3.47, an expected volatility of 30%, a risk-free interest rate of 4.92%, an expected life of four years and 0% expected dividend. The fair value of options granted is $1.10 per option according to this method.

No compensation cost was expensed with respect to this plan for the twenty-six-week periods ended July 1, 2007 and June 25, 2006.

Stock-based compensation plan of October 24, 2002

On October 24, 2002, the Board of Directors approved another stock-based compensation plan for designated senior executives of the Company and for certain designated directors. The total number of common shares which may be issued pursuant to the plan will not exceed 10% of the common shares issued and outstanding less the number of shares subject to options granted under a previous stock option plan. These options become vested at 25% per year, if the market price of the common share has traded, for at least 20 consecutive trading days during the twelve-month period preceding the grant anniversary date, at a price equal to or higher than the grant price plus a premium of 8% compounded annually.

On March 8, 2007, the Board of Directors approved certain modifications to the plan. These modifications were also approved by the shareholders at the annual shareholders' meeting on May 8, 2007. These modifications establish that this plan is no longer applicable to the designated directors of the Company and also provide for the replacement of the terms and conditions for granting options under the plan by a more flexible mechanism for setting the terms and conditions for granting options. The Board of Directors will adopt the most appropriate terms and conditions relative to each type of option. For the options granted on March 8, 2007 the Board approved the option grant with vesting over a four-year period following the anniversary date of the grant at 25 % per year.

At July 1, 2007, the 1,700,852 options (1,487,276 options at June 25, 2006) granted have exercise prices ranging from $14.29 to $26.87 and of this number, 85,100 options (44,300 options at June 25, 2006) have been exercised and 141,550 options (60,850 options at June 25, 2006) have been cancelled.

The fair value of stock options granted was estimated at the grant date using the Black-Scholes option-pricing model on the basis of the following weighted average assumptions for the stock options granted during the period:



July 1, 2007 June 25, 2006
--------------------------------------------------------------------------

Weighted average fair value per option granted $8.50 $7.71
Risk-free interest rate 3.90% 4.07%
Expected volatility in stock price 26% 28%
Expected annual dividend 0% 0%
Expected life (years) 6 6


Compensation cost expensed with respect to this plan was $1,008 for the twenty-six-week period ended July 1, 2007 ($1,098 at June 25, 2006).

A summary of the situation from December 25, 2005 to July 1, 2007 of the Company's stock option plans and the changes that occurred during the periods then ended is presented below:



July 1, 2007
--------------------------------------------------------------------------
Weighted average
Options exercise price
--------------------------------------------------------------------------
Balance, beginning of period 3,162,479 $10.16
Granted 196,000 23.58
Exercised (339,327) 4.88
Cancelled (74,450) 20.73
--------------------------------------------------------------------------
Balance, end of period 2,944,702 11.39
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Options exercisable, end of period 1,891,600 $6.21
--------------------------------------------------------------------------


June 25, 2006
--------------------------------------------------------------------------
Weighted average
Options exercise price
--------------------------------------------------------------------------
Balance, beginning of period 3,131,327 $7.84
Granted 446,076 21.43
Exercised (352,300) 4.50
Cancelled (25,700) 17.78
--------------------------------------------------------------------------
Balance, end of period 3,199,403 10.02
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Options exercisable, end of period 2,156,527 $5.49
--------------------------------------------------------------------------
--------------------------------------------------------------------------


December 31, 2006
--------------------------------------------------------------------------
Weighted average
Options exercise price
--------------------------------------------------------------------------
Balance, beginning of year 3,131,327 $7.84
Granted 463,652 21.45
Exercised (400,550) 4.43
Cancelled (31,950) 18.34
--------------------------------------------------------------------------
Balance, end of year 3,162,479 10.16
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Options exercisable, end of year 2,230,927 $6.00
--------------------------------------------------------------------------
--------------------------------------------------------------------------

The following table summarizes information relating to stock options
outstanding at July 1, 2007:

Exercise Expiration Options Options
price date outstanding exercisable
------------------------------------------------------------------------
$3.47 December 31, 2012 1,470,500 1,470,500
$14.29 December 16, 2013 432,550 317,350
$20.27 December 22, 2014 421,000 103,750
$23.73 April 5, 2015 11,000 -
$21.21 February 24, 2016 393,000 -
$26.87 February 24, 2016 17,576 -
$21.78 September 1, 2016 17,576 -
$23.58 March 8, 2017 181,500 -
------------------------------------------------------------------------
2,944,702 1,891,600
------------------------------------------------------------------------
------------------------------------------------------------------------


5. Guarantees

In the normal course of business, the Company reaches agreements that could meet the definition of "guarantees" in AcG-14.

The Company guarantees mortgages for certain customers to an amount of $5,753. The terms of these loans extend until 2012 and the net carrying amount of the assets held as security, which mainly include land and buildings, is $14,985.

Pursuant to the terms of inventory repurchase agreements, the Company is committed towards financial institutions to buy back the inventory of certain customers at an average of 62% of the cost of the inventories to a maximum of $56,229. In the event of recourse, this inventory would be sold in the normal course of the Company's operations. These agreements have undetermined periods but may be cancelled by the Company with a 30-day advance notice. In the opinion of management, the likelihood that significant payments would be incurred as a result of these commitments is low.

6. Vendor rebates

In accordance with EIC-144 "Accounting by a customer (including a reseller) for certain consideration received from a vendor", the Company must disclose the amount recognized for which the full requirements for vendor rebate entitlement have not yet been met. For the twenty-six-week period ended July 1, 2007, the Company recorded an amount of $9,325 ($10,069 at June 25, 2006) which was estimated based on the attainment of specified requirements to receive the rebates.

7. Employee future benefits

At July 1, 2007, the Company had eight defined contribution pension plans and four defined benefit pension plans. The net pension expense for the benefit plans is as follows:



Second Quarter Year-to-date
2007 2006 2007 2006
--------------------------------------------------------------------------
Costs recognized for
defined contribution
pension plans $2,188 $2,123 $4,272 $3,674
Cost recognized for
defined benefit
pension plans 328 376 654 686
--------------------------------------------------------------------------
Net employee future
benefit costs $2,516 $2,499 $4,926 $4,360
--------------------------------------------------------------------------
--------------------------------------------------------------------------


8. Contingencies

Various claims and litigation arise in the course of the Company's activities and its insurers have taken up the Company's defense in some of these cases. In addition, upon the acquisition of Reno-Depot Inc., the vendor committed to indemnify the Company for litigation which the Company assumed in the course of this acquisition.

Management does not expect that the outcome of these claims and litigation will have a material and adverse effect on the Company's results and deemed its allowances adequate in this regard.

9. Segmented information

The Company has two reportable segments: distribution and corporate and franchised stores. The distribution segment relates to the supply activities to affiliated, franchised and corporate stores. The corporate and franchised stores segment relates to the retail operations of the corporate stores and the Company's share of the retail operations of the franchised stores in which the Company has an interest.

The accounting policies that apply to the reportable segments are the same as those described in accounting policies. The Company evaluates performance according to earnings before interest, depreciation and amortization, rent, income taxes and non-controlling interest, i.e. sales less chargeable expenses. The Company accounts for intersegment operations at fair value.



Second Quarter Year-to-date
--------------------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------
Segment sales
Corporate and
franchised stores $1,136,313 $1,016,606 $1,783,508 $1,591,663
Distribution 705,671 668,245 1,195,199 1,115,134
--------------------------------------------------------------------------
Total 1,841,984 1,684,851 2,978,707 2,706,797
--------------------------------------------------------------------------
Intersegment sales
and royalties
Corporate and
franchised stores (3,960) (3,747) (6,280) (5,790)
Distribution (368,924) (335,095) (624,831) (556,212)
--------------------------------------------------------------------------
Total (372,884) (338,842) (631,111) (562,002)
--------------------------------------------------------------------------
Sales
Corporate and
franchised stores 1,132,353 1,012,859 1,777,228 1,585,873
Distribution 336,747 333,150 570,368 558,922
--------------------------------------------------------------------------
Total 1,469,100 1,346,009 2,347,596 2,144,795
--------------------------------------------------------------------------
Earning before
interest, depreciation
and amortization,
rent, income taxes
and non-controlling
interest
Corporate and
franchised stores 169,111 149,535 217,961 197,279
Distribution 26,936 26,110 49,051 48,013
--------------------------------------------------------------------------
Total 196,047 175,645 267,012 245,292
--------------------------------------------------------------------------
Earnings before
interest, depreciation
and amortization,
income taxes and
non-controlling interest
Corporate and
franchised stores 141,095 125,430 164,482 152,132
Distribution 20,683 19,585 38,146 35,464
--------------------------------------------------------------------------
Total 161,778 145,015 202,628 187,596
--------------------------------------------------------------------------
Acquisition of
fixed assets
Corporate and
franchised stores 66,264 38,999 105,710 72,827
Distribution 7,092 9,701 11,650 20,181
--------------------------------------------------------------------------
Total 73,356 48,700 117,360 93,008
--------------------------------------------------------------------------
Goodwill
Corporate and
franchised stores 121,210 12,917 122,051 48,952
Distribution - - - -
--------------------------------------------------------------------------
Total $121,210 $12,917 $122,051 $48,952
--------------------------------------------------------------------------
Total assets
Corporate and
franchised stores 2,098,438 1,631,898
Distribution 540,909 448,933
--------------------------------------------------------------------------
Total $2,639,347 $2,080,831
--------------------------------------------------------------------------
--------------------------------------------------------------------------


10. Earnings per share

The table below shows the calculation of basic and diluted net earnings per
share:

Second Quarter Year-to-date
--------------------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------

Net earnings $86,163 $80,012 $95,190 $96,392
--------------------------------------------------------------------------

Number of shares
(in thousands)
Weighted average
number of shares
used to compute basic
net earnings per
share 115,339.1 114,731.9 115,234.1 114,606.6
Effect of dilutive
stock options (a) 1,460.6 1,778.0 1,547.8 1,847.3
--------------------------------------------------------------------------
Weighted average
number of shares
used to compute
diluted net
earnings per share 116,799.7 116,509.9 116,781.9 116,453.9
--------------------------------------------------------------------------

Net earnings per
share - basic $0.75 $0.70 $0.83 $0.84

Net earnings per
share - diluted $0.74 $0.69 $0.82 $0.83
--------------------------------------------------------------------------
--------------------------------------------------------------------------

(a) At July 1, 2007, 620,652 common share stock options (911,076 options at
June 25, 2006) were excluded from the calculation of diluted net
earnings per share since the unrecognized future compensation cost of
these options has an antidilutive effect.


11. Effect of new accounting standards not yet implemented

In December 2006, the CICA issued the following new recommendations which apply to fiscal years beginning on or after October 1, 2007. During the next quarters, the Company will evaluate the impact of the adoption of these new sections on its consolidated financial statements.

Financial instruments - disclosures

Section 3862, Financial Instruments - Disclosures describes the required disclosures related to the significance of financial instruments on the entity's financial position and performance and the nature and extent of risks arising for financial instruments to which the entity is exposed and how the entity manages those risks. This Section complements the principles of recognition, measurement and presentation of financial instruments of Section 3855, Financial Instruments - Recognition and Measurement.

Financial instruments - presentation

Section 3863, Financial Instruments - Presentation establishes standards for presentation of financial instruments and non-financial derivatives. It complements standards of Section 3861, Financial Instruments - Disclosure and Presentation.

Capital disclosures

Section 1535, Capital Disclosures establishes standards for disclosing information about the entity's capital and how it is managed to enable users of financial statements to evaluate the entity's objectives, policies and procedures for managing capital.

Contact Information