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Rona’s Turnaround Picks Up Speeds with the Lowe’s Acquisition

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How Rona benefits from the Lowe’s acquisition

Rona (RON.TO) is the largest home improvement retailer (XRT) in Canada (EWC) in terms of store count. The company operates 496 stores in Canada, of which 260 are owned by dealers. Home Depot (HD) and Lowe’s (LOW), the other two big home improvement retailers in Canada, have 181 and 42 stores in the country, respectively. Luxury home furnishing chain Restoration Hardware (RH) presently operates five stores in Canada but estimates that it could increase its future store count by 60–70 stores in the United States and Canada combined.

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Varied revenue stream

However, Rona offers multiple store formats under several banners in contrast to HD and LOW. Its revenue stream is also varied. Rona derives revenue from:

  • corporate-owned retail stores
  • wholesale sales to franchise and dealer-owned stores
  • royalties on sales by franchised stores
  • installation service sales

As part of the purchase agreement, Lowe’s intends to continue operating under Rona’s multiple stores banners, according to Lowe’s chairman, president, and CEO, Robert A. Niblock.

Rona reported EBITDA[1. earnings before interest, taxes, depreciation, and amortization] of $250 million Canadian on sales of $4.2 billion Canadian in the trailing 12 months.

Rona’s turnaround

Rona’s financial and operating performance has struggled and been inconsistent over the last few years. Between May 2007 and November 2011, Rona’s stock price lost almost two-thirds of its value, falling to a low of $8.70 Canadian on November 25, 2011.

Rona is just coming off a turnaround in its performance, however. It’s disposing of its non-core assets, buying out several franchisees, and rationalizing its store footprint (RTH). It’s also in the process of improving capital efficiency. Rona’s has reported positive same-store sales growth for five straight quarters now.

In contrast, retailers like Williams-Sonoma (WSM) have posted healthier same-store sales growth numbers over the past 11 quarters.

Premium opportunity

According to Rona’s chairman, Robert Chevrier, “We believe the time is right to take the next step in the evolution of the Rona family. … With commitments made by Lowe’s to our employees, potential new markets for Canadian manufacturers and product offerings for our independent dealers, this transaction presents the ideal opportunity for the continued growth of our company while delivering an attractive premium for our shareholders.”

The next article in our series discusses the potential synergies and financial benefits that Lowe’s is expecting from the transaction.

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