Rona’s Turnaround Strategy Promises New Prospects for Lowe’s

Marivic is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Rona’s (TSX: RON) newly appointed executive chairman of the board of directors, Robert Chevrier who is widely recognized as a turnaround specialist promised a quick return of profit to shareholders. According to Chevrier, Rona has interesting avenues for a quick return to profitability and his focus is to sell some of the underperforming assets of the company, which will definitely result in the reduction of its workforce.

Chevrier pointed out that Rona is a good Canadian company and the board needs to pay attention to all possible options to turnaround its business. He implied a $30 target for the stock within the next three years. According to him, “My mandate is very clear: It’s to improve the results. I’m totally bottom-line oriented. Good Canadian companies, you don’t give them away. I think this company deserves to be looked after, to be turned around. And I don’t know, if three years from now, if our stock is at $30 and somebody comes in [and offers] $50, our shareholders can decide then what they want to do.”

Rona’s turnaround strategy to scale down its business opens new prospects for Lowe’s Companies (NYSE: LOW) to expand its business in the Canadian market. The largest home improvement retailer in Canada indicated the possibility of selling some of its assets in Ontario to Lowe’s or other interested entities.

In July, last year, Lowe’s offered to take over Rona for $1.76 billion or $14.50 per share. Rona rejected the proposal after the review of a special committee of independent directors and financial advisers found that it was not in the best interest of the shareholders. The previous board of directors of the company also cited that their focus is to implement its strategic business plan.

Some of the shareholders of Rona including Invesco supported Lowe’s takeover bid. In November, Lowe’s withdraw its proposal amid oppositions from politicians who wants to retain ownership of the company to Canadians. The news drove the stock value of Rona to plummet by 10 percent that day, and dropped even further to as low as $9.35 a share in November 8 after the company reported a weak financial performance for the third quarter. Rona’s net income declined from $47.8 million or $0.35 per share to $33.1 million or $0.27 per share. 

<img src="/media/images/user_15059/rona_large.JPG" />

This led shareholders to pressure the company to implement changes to alleviate the company’s series of declining quarterly results. Invesco even threatened to launch a proxy war against Rona’s board of directors. In response, Rona revamped its board. Aside from Chevrier, Rona named four new directors. The company is still searching for a new CEO to lead the company in implementing its turnaround strategy.

Rona previously announced its three strategic priorities to speed up its initiative to increase value for shareholders including leveraging the strength of core business, growing key customer segments, and unlocking profit potential through a simplified business model. According to the company, its priorities are perfectly in line with its financial priorities to compete with the existing market and improve its EBITDA.

Last November, Rona’s long-time CEO, Robert Dutton left the company after another poor performance. Its executive vice president and CFO, Dominique Boies replaced him as acting CEO. Irwin Michael, manager of ABC Funds, another major shareholder in the company stated the need for Rona to implement changes such as opening up discussions with Lowe’s, or any entity that would bring new ideas in the company. He believed that Caisse and Invesco would not oppose a possible sale if the board thinks it is the best solution for the company.

Jim Durran, analyst at Barclays investment bank in Toronto opined that the new board of directors of the company showed a “greater support to proactively enhance shareholder value, and the changes could result in a more receptive dialog regarding potential divestitures, or an outright sale of the company.”

Take note that during the discussion of a possible Lowe’s takeover, Rona’s stock surged to more than $14 per share. Some analysts believed that a merger between Lowe’s and Rona is beneficial for both companies. It would boost their ability to compete with its rivals in the industry, particularly Home Depot (NYSE: HD), the world largest home improvement retailer.

Based on the third quarter earnings result of Home Depot, its business operations in Canada contributed 9 basis points to its gross margin at 34.6 percent. The company reported $18.1 billion sales and $947 million income or $0.63 per share.

Over the past three decades, Rona grew rapidly with more than 800 affiliated stores in Canada. However, its business slowed down in recent years because of the expansion of Lowe’s and Home Depot in the country. At present, Lowe’s has only 32 stores in Canada compared with Home Depot’s 180 stores in the country.

Canada is an important market for Lowe’s and other American because of the rising value of its currency, fast growth rate of the retail sector, and less competition from online shopping. Canada offers higher profit for retailers because 64 percent of Canadians have disposable income, and only 55 percent of Canadian women look for a bargain. Furthermore, data from real estate research firm, Colliers International Consulting showed that shopping malls in Canada delivered 50 percent more in sales ($600), per square foot than the sales of its counterparts in the United States ($400) in 2011.

Rona will provide a detailed update regarding its strategic plans during its fourth quarter earnings presentation on February 21. Since the board revamp, Rona’s shares are surging. As of this writing, the stock price of the company is up by more than 1 percent to $12 a share.

 


MarieCabural has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe's Companies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus