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Rona’s Third Quarter Results: Attempts to Stabilize Performance

Rona (TSX: RON) reported third quarter results that were below expectations again this quarter. EPS was $0.25 compared to $0.28 (excluding one-time items). Let’s dig deeper into the results to see if there is a silver lining in these results.

Market Conditions Still Challenging
Weak housing starts in Quebec (a 31% decrease during the quarter) and an increasingly competitive environment weighed on Rona’s results for the third quarter. Quebec accounts for almost 50% of revenue for Rona. As a result of this challenging environment, Rona ramped up its promotional activities and the company’s gross margin suffered accordingly.

Cost Savings on Track With Plan
Annualized cost savings amounted to $63 million, increasing from $17 million in the first quarter and $30 million in the second. The cost savings are mainly related to workforce reductions, the renegotiations of major administrative services contracts and the closure of underperforming stores.

Accelerating Same Store Sales Declines
This quarter’s 2.4% decrease in same store sales follows a 1% decline in the second quarter, a 0.8% decline in the first quarter, and flat same store sales in 2012. This is a troublesome trend for the company.

Tighter Financial Management
This quarter Rona generated $161 million in operating cash flow compared to $153.2 million in the same quarter last year. A $114 million reduction in inventory contributed to the company’s strong cash flow this year. Free cash flow was $151 million as capital expenditures were reduced. The company is using this cash flow to pay out dividends, reduce debt and to fund their share buyback program.

Competitors Going Strong
Home Depot (NYSE: HD) will release its third quarter results on November 19. Same store sales growth has been very healthy at Home Depot, in Canada as well as in the United States. In the first quarter of 2013, Home Depot’s same store sales increased more than 5%, and in the second quarter same store sales increased 10.7%.

Lowes (NYSE: LOW) is also looking good. Although same store sales declined 0.7% in the first quarter, the company redeemed itself in the second quarter with an increase of 9.6%.

Foolish Bottom Line
While Rona’s dismal performance is affected to a large degree by the weak market in Quebec, that is not the full story, as Rona stores have been underperforming relative to Home Depot and Lowes. Home Depot has recently stated that its same store sales in Canada are increasing while Lowes has also seen an acceleration. Rona is doing its best to combat declining sales through cost savings, increasing efficiencies and better financial management, but with same store sales declines accelerating, the future is still looking bleak.

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Karen Thomas does not own shares in any of the companies mentioned in this article.  David Gardner owns shares of Lowe's.

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