The ghost of Rona’s logo is still visible on the navy blue facade of an abandoned building in Toronto’s east end. The store closed two years ago, just one of 20 locations vacated by the retailer. The shutdowns happened so swiftly and often in such high-traffic areas that Rona appeared destined to join forgotten Canadian hardware chains like Aikenhead’s and Beaver Lumber.
To the casual observer, this might seem to be just another tale about a Canadian retailer failing to hold its ground against fierce U.S. competitors—notably, Home Depot and Lowe’s—but take a closer look. Rona is not dead yet. Far from it. The chain, based in Boucherville, Que., is the largest retailer and distributor of home improvement products in Canada, serving a network of more than 500 stores (Home Depot, by comparison, runs 180 locations; Lowe’s has 37). And while the retailer took its lumps in recent years, it’s showing signs of a promising rebound. In the past year, the company’s profit has ballooned to $78 million, from a loss of $153 million one year earlier ($117 million of that loss can be attributed to discontinued operations). Margins are higher, same-store sales are up 5% year-over-year, and the company will open six new stores by December, its biggest expansion since 2008. At the same time, Rona has cut capital expenditures, found more than $100 million in annualized cost savings and bought back stock, and it’s generating tons of cash flow. All this helps explain why Rona’s shares surged almost 50% when dividends are factored in. Consider the state the company was in as recently as three years ago, and Rona’s turnaround seems that much more remarkable.
In 2011, Rona was in a pitched battle with shareholders. At the time, then CEO Robert Dutton was unapologetically pushing ahead with a plan that had failed to curb its revenue and earnings declines, to the disgruntlement of shareholders like Invesco Canada and Caisse de dépôt et placement du Québec, who were tired of seeing the company struggle despite robust demand from contractors and consumers. Dutton was pursuing an aggressive expansion plan that included the purchase of Alberta-based Totem Building Supplies and opening a number of new big-box stores under the Rona banner. Meanwhile, an attempted takeover by Lowe’s was thwarted by the Quebec government.
The growth strategy never paid off. As the retailer grew, it found it increasingly challenging to squeeze profits out of its diverse network of stores of varying sizes—it operates locations under a variety of banners, including Réno-Dépôt, Matériaux Coupal, Dick’s Lumber & Building Supplies and Noble Trade, all of which have different merchandising needs. (It also sells Rona products via a network of dealer-owned stores, which have been dwindling in number.) Historically, Rona had excelled at operating as a wholesaler—it was founded in the 1930s as a co-op of hardware retailers who sought to collectively boost their buying power—but its management team lacked extensive retail experience, which became a significant issue as the chain rolled out more Rona-branded stores. Purchasing, for instance, was directed by head office instead of by store managers, who had a better sense of what was selling, resulting in an oversupply of slow-moving products.
Revenue declined for five consecutive years, even as the broader market for home and hardware products grew. The trend prompted normally quiet shareholders to scream for a shakeup of the board and the CEO’s resignation.
Ian Hardacre, head of Canadian equities at Trimark Investments, which is owned by Invesco, was one of those angry investors. “We felt the company’s approach was growth at any cost, but the market had changed, and they were spending an enormous amount of capital and getting no return for it,” he says. At first, Rona threw up legal barriers to block Invesco from pressuring the company to overhaul its board. But a short time later, Dutton resigned and a majority of the board was replaced.
The turning point for Rona came in March 2013 with the appointment of Robert Sawyer as the new CEO. His job was clearly outlined by Rona executive chairman Robert Chevrier in the press release announcing the hire. At the top of the list: simplify the business, optimize merchandising and fix the supply chain. Sawyer, a 30-year retail veteran with a solid track record in distribution and retail operations, was no stranger to dealing with those challenges. He’d gained that experience from his time at Metro, a grocery chain that had a similar structure to Rona, in that it operated under several different banners. “He’s the right person for the job. I couldn’t think of anyone better,” says Hardacre. The company really needed someone who could get it back to basics, and Hardacre says that’s what Sawyer has done.
Within four months of his appointment, Sawyer started unwinding the work of his predecessor. His first move was to close 20 underperforming Rona stores, most of which were part of the company’s big push into Ontario. Many of those closures targeted stores built in the past 10 years, including one in Bowmanville, Ont., that never opened. Some of those stores were in markets that one would expect to be no-brainers, but in the words of one analyst, Rona was ruthless in deciding which locations were going to close.
Sawyer also streamlined Rona’s distribution system—he closed a number of smaller satellite distribution centres—and reduced the number of products the company stocks in-store, while introducing new categories, like automotive cleaning products, pet food and basics like bottled water. These categories are meant to function like magazine and candy racks in a grocery store, offering convenience for customers, potentially saving them a trip to a competitor like Canadian Tire.
Many of these changes can be seen at the company’s Réno-Dépôt stores in Quebec. When Sawyer announced his plans to reposition those 16 locations, he thought it’d take 12 months—it took him only six. The transformation beefed up the number of brand-name products (particularly in the power tool aisle) to appeal to the high number of contractors who shop the chain, increased the size of parking spaces to accommodate larger vehicles, reorganized the store and added bigger signage to make it easier to find products. The other major change was in limiting the variety of items in a given category. In the lighting department, for instance, the company reduced the selection of fixtures available, but the ones that are for sale are easier to find and well-stocked, meaning they don’t have to be special-ordered. All of these changes have resulted in higher sales. Not all the alterations at Réno-Dépôt will be rolled out across the various banners, but some, like the expanded range of ancillary items and emphasis on cleaning supplies, will likely extend across the company.
Turning around a major retailer is no simple task, and analysts and investors are impressed with what Rona has accomplished in such a short time. But there is still more work to be done. The bigger issue now is how Rona intends to grow in a tough market. With Lowe’s announcing plans to add 25 new stores, it’s a timely question.
In a recent conference call, Sawyer said the company is transitioning back to growth mode, with several expansion projects in the works for 2016 and 2017. As for Lowe’s, Sawyer said he’s not worried about added competition. Lowe’s stores, he argues, are based on a template, unlike Rona. “With our proximity stores and our contractor stores and our big-box stores, we are really catering differently to tons of different customers,” Sawyer said.
The larger concern for analysts is about what impact a slowdown in Western Canada will have on sales. So far that hasn’t shown up in the numbers, but as BMO analyst Peter Sklar wrote in a recent note, that part of the country accounts for a third of Rona’s sales, so it’s something to watch. The weakening dollar is another challenge. While the company’s currency hedging strategy has protected it, Sklar is concerned that once these hedges roll off early next year, procurement costs could rise. Because of these concerns, analysts remain cautious on the stock. Rona currently has two Buy ratings, six Holds and one Sell, with a consensus target of slightly above $16.
Sawyer’s current focus is on expanding the company’s seasonal merchandise and putting more emphasis on big-ticket high-end products that haven’t been available in the stores before. Managing the rollout of the national install program, in which the company will find contractors to do the work for you, is another priority. “It is another growth vector with huge potential,” says Sawyer. For the first time in years, Rona looks like it has potential too.
This article originally appeared at CanadianBusiness.com.
