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Why Rona and Restaurant Brands International Are Outperforming

With the sharp decline in energy prices and rates that have fallen even lower recently, consumers have more money in their pockets. This should translate to higher spending on consumer staples and consumer discretionary products, and companies like Rona Inc. (TSX:RON) and Restaurant Brands International Inc. (TSX:QSR)(NYSE:QSR) are well positioned to benefit. Here’s why.

Accelerating sales growth

At Rona, the story for the last few years has been about cost-cutting, navigating an increasingly competitive environment, and same-store-sales declines. The most recent quarter, however, showed a new trend of increasing same-store sales. In the fourth quarter of 2014, same-store sales in the retail segment increased 6%. This was the second quarter of same-store sales growth; in the third quarter, retail same-store sales increased 2%.

This result partly reflects the improvement in the company’s Quebec banner, Reno Depot. Rona has been working on repositioning the banner with changes in marketing, procurement, and a redesigned in-store shopping experience. Strong growth in most parts of the country also helped. In 2015, Rona will expand again, after having downsized by closing 11 unprofitable stores since 2012. The Reno Depot banner will re-open in two former Rona locations in Alberta and Ontario.

By contrast, Home Depot Inc. has been booming all along. Same-store sales were strong in 2013, and in the third quarter of 2014 (the latest quarter), the company beat revenue and profit estimates, as net income increased 14% and same-store sales increased 5.2% in Canada and 5.8% in the United States.

Sales at Restaurant Brands International are also strong. While the company reported a quarterly loss yesterday due to merger-related expenses (a loss of $2.52 per share versus a profit of $0.19 in the same period last year), sales at Tim Horton’s and Burger King were strong, up 4.1% and 3% respectively.

Burger King’s sales growth in Canada and the United States were even stronger, at 4.2%. By contrast, January global same store sales at McDonald’s Corporation declined 1.8%. While same-store sales performance in the U.S. was a bit better, with a same-store sales increase of 0.4%, it is still pretty dismal. Burger King is clearly gaining on McDonald’s as McDonald’s continues to struggle with its menu and its service.

Cost reductions

Over at Rona, there has been a strong focus on cost reductions and efficiencies. In the latest quarter, EBITDA increased 27% to $235.4 million and EBITDA margins increased 140 basis points. The company’s cost savings program of $110 million has been reached, driving up margins. The company did this by closing 11 non-profitable stores, eight in Ontario, and three in British Columbia, and reducing expenses such as administrative, marketing, merchandising, and distribution expenses, as well as by cutting 125 jobs in the administrative centres in Canada.

Restaurant Brands International also sees a lot of room for expense reduction in order to drive profits. The company recently announced that it would lay off approximately 350 people in its Tim Horton’s division. While the two chains will continue to operate independently, there is room for savings in back office functions such as legal, finance and the IT.

Should you invest?

While both companies have put up good results in the latest quarter and investors are bidding up both stocks, each company comes with its own concerns. Restaurant Brands International, with expectations of heavy cost-cutting by new owner 3G Capital, is trading at lofty valuations. In fact, the stock’s P/E ratio is over 45 times. While Rona is trading at a more reasonable 24 times earnings, the company is going up against giants Home Depot and  Lowe’s, both of which have performed substantially better for many years. And while Rona’s recent results are promising, competition remains fierce.

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Fool contributor Karen Thomas has no position in any stocks mentioned. David Gardner owns shares of Lowe's.

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