Rona targets renewed growth even if constrained by moderate economic recovery

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MONTREAL - Canadian home renovations leader Rona Inc. (TSX:RON) is looking to expand its presence in Ontario and Western Canada as it again accelerates development coming out of the recession.

The Quebec-based industry leader expects moderate economic recovery and plans on acquisitions to help it grow its share of the market over the next couple of years.

In its annual outlook conference with investors, webcast from Toronto on Monday, Rona executives said the company plans to boost earnings by 10 to 15 per cent by 2011.

In the nine months ended Sept. 30, the Montreal company earned net profits of $107.4 million on sales of $3.5 billion. That was down from net earnings of $126.7 million on revenues of $3.8 billion for the same 2008 period.

"We are confident that our many initiatives aimed at enhancing the customer experience - innovative store concepts, new product categories, new private and controlled brands, new tools to improve loyalty and stepped-up training for store employees - will drive customer growth," said president and CEO Robert Dutton.

He added that a company program will lure more independent retailers to join Rona's network and solidify its role as the consolidator of the Canadian hardware and renovation industry.

Rona expects same-store sales for locations open a year will increase by two to 2.5 per cent over the coming two years, even amid a moderate economic recovery. That would mark a turnaround from decreases sustained over many months as it faced a deeper recession than expected.

Rona said it plans to expand its private-label product lines and eco-friendly offerings while adding work clothing, furniture, basic auto parts and small appliances.

The company is also studying the possibility of adding renewable energy products such as solar panels, products for the physically disabled, pet food and accessories, health, fitness and outdoor products and kitchen items.

Backed by growth, Rona repeated its objective of having its network of 700 corporate, franchised and affiliate stores capture 20 per cent of the home improvement retail sales market. They currently have 17.5 per cent of the market.

Chief financial officer Claude Guevin said Rona expects to grow its operating earnings (earnings before interest, taxes, depreciation and amortization) by 20 to 30 basis points annually while maintaining its investment grade credit rating.

He said the company, which operates 213 corporate and franchise Reno-Depot, Rona and Studio by Rona retail stores, has the money and financial flexibility to successfully attract new dealers and pursue acquisitions, focused primarily on the professional and commercial market that's worth an estimated $70 billion

"We will invest in very high-return projects and we will have an approach much more integrated between store openings, recruitment and acquisitions," Guevin said.

Dutton told analysts during the webcast that plenty of growth opportunities are available despite lingering economic uncertainty and increased competition.

"No doubt our industry will continue to undergo profound changes over the next decade. That's good news for Rona (since) change creates opportunities for those who are prepared," he said.

In addition to acquiring more independent retailers, Rona will focus on offering a better shopping experience than rivals such as Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) by having better customer service and in-stock products.

Despite the growing presence in Ontario of Lowe's, Rona said it plans to strengthen its position in Canada's most populous province by opening new stores, renovating some and harmonizing its network by shedding the Cashway and Lansing banners.

It also plans to improve its position in the West while developing markets in Quebec and Atlantic Canada.

Edwards Jones analyst Brian Yarbrough said much of Rona's plan is unchanged from its previously announced four-year strategy for 2008 to 2011.

While it has done a good job of increasing margins by cutting costs, achieving its sales and earnings targets will be its toughest challenge, he said.

"The environment remains challenging in Canada and not just from a competitive standpoint but (because) the consumer continues to be strapped."

Yarbrough said some of the push into Ontario is related to boost Rona's presence ahead of Lowe's planned expansion. He said the U.S. giant may have trouble finding as many quality and profitable locations as it had hoped.

On the Toronto Stock Exchange, Rona's shares closed up six cents at $16.62.

Organizations: Rona Inc., TSX, Lowe's Home Depot NYSE Toronto Stock Exchange

Geographic location: Atlantic Canada, Ontario, MONTREAL Toronto Quebec U.S.

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