Rona shares sink to five-year low as weak consumer confidence punishes Q1 earnings
- Shares of Canadian home renovation leader Rona Inc. (TSX:RON) sank to their lowest level in nearly five years Tuesday after weak consumer confidence and a slowdown in new home construction punished the company's first-quarter results.
The shares lost 50 cents to close at $12.95 on the Toronto Stock Exchange as operating profits fell by 18 per cent.
The results reflect a more difficult operating environment than the company had expected in February, president and CEO Robert Dutton said in a conference call.
"The results of the first quarter 2008 reflect the strong drop in consumer confidence in the country's economic growth," he told analysts.
Net earnings for the period ended March 30 declined to $1 million or one cent per share for the 13-week period ended March 30, compared with a profit of $9 million or eight cents per share a year-ago.
The average analyst estimate had been for earnings of four cents per share based on eight analysts surveyed by Thomson Financial.
Sales advanced 3.8 per cent to $911.5 million from $878.5 million, helped by acquisitions, store openings and the addition to new affiliate dealer-owners.
Same-store sales, a key measure of retail operations, fell seven per cent at locations that had been open for a year or more, the company said.
Excluding the impact of lower prices of 0.5 per cent in building materials and a 1.3 per cent hit from the timing of Easter and Ontario's new Family Day holiday, same-store sales fell 5.2 per cent.
A decline in single-family home starts in Canada and a temporary slowdown in the demand for building materials in Alberta contributed to the quarterly downturn.
Unfavourable weather in Ontario and Quebec, which generate nearly 70 per cent of Rona's sales, were also factors. Rona is facing increased competition in Ontario with the arrival of U.S. retailer Lowe's Home Improvement Warehouse.
Cooler spring weather is delaying a boost of sales by up to three weeks, analysts were told
"People are very prudent," said Claude Guevin, the chief financial officer. "The confidence is not there, so no matter what will happen with weather, I think 2008 will be a very challenging year and we will have to deal with that."
The results for the first quarter are seasonally the slowest for Rona, typically accounting for 15 per cent of annual sales and five per cent of earnings.
Dutton said many of the initiatives in its 2008-2011 strategic plan to produce improved results are beginning to take shape and should help to mitigate the soft market conditions in the coming quarters.
However, the company plans to open just seven new stores this year, down from previous forecasts of 10.
"Achieving our goal of a low single digit growth in average earnings per share in the first half of the plan is turning out to be a bigger challenge than we had expected given our first-quarter results and the greater than anticipated slowdown in the Canadian economy," Dutton added.
The results demonstrated the challenges faced by Rona and the entire home renovations industry, industry analysts said.
"It's tough out there," said an analyst who didn't want to be identified.
"It's kind of like they went into a four quarter boxing match and got KO'd in the first quarter."
Most of the drivers to the weakness are not new, the analyst added. Market conditions aren't expected to turn around until the second half of 2009.
He said Rona management is doing what is required in this difficult operating period by investing more carefully in new store growth, closing two underperforming locations and training staff to battle Home Depot and Lowe's.
"When the market does turn, and it will eventually, I think they'll be in pretty good shape."
Irene Nattel of RBC Capital Markets said Rona's results confirmed that increasingly challenging consumer spending, along with harsh weather, would produce disappointing results.
In a report, she wrote that The environment was "challenging for discretionary retailers but margin building initiatives are helping."
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