Despite Tough Economic Conditions, Strong Execution of PEP Program and Strict Balance Sheet Management Set the Pace at RONA in First Quarter 2009
BOUCHERVILLE, QUEBEC, May 12, 2009 (Marketwire via COMTEX) --
RONA inc. (TSX:RON)
FIRST QUARTER HIGHLIGHTS
- 7.2% decline in consolidated sales as a result of economic uncertainty and seasonality effect, exacerbated by weather conditions that hampered renovation-construction activities.
- Distribution sales up 0.2% through recruitment of new dealer-owners.
- Higher sales to commercial and professional customers through the big-box stores network and the Commercial and Professional Market division in Ontario, despite a slowdown in that market.
- An increase of 28 basis points in the gross margin and 72 basis points in adjusted gross margin.
- A $71 million or 7.3% reduction of comparable inventories.
- Net debt down $222.3 million compared to 2008, resulting in a 25.7% reduction of interest expenses on long-term debt and bank loans.
- Net loss of $2.5 million or $0.02 per share (diluted), compared to a net loss of $2.4 million or $0.02 per share (diluted) in 2008, as restated to comply with a new accounting standard.
- Ongoing store network optimization and expansion, with renovation of Reno-Depot stores in Anjou, Quebec and Saint-Hubert, Quebec, recruitment of 6 new independent dealer-owners, and a 180,000-square-foot expansion of the specialty plumbing distribution centre in Ontario.
RONA inc. (TSX:RON), Canada's largest distributor and retailer of hardware, renovation and gardening products, announced a 7.2% decline in consolidated sales, which stood at $846.0 million for first quarter 2009, compared to $911.5 million in 2008. This decline is largely the result of an 8.5% drop in same-store sales due to low levels of consumer confidence in the economy and the significant drop in housing starts in Western Canada, as well as a seasonal effect exacerbated by a period of intense cold at the beginning of the year, which affected sales of construction materials and forest products everywhere in the country. Weather conditions were especially poor in Western Canada in March, with record precipitation levels in Alberta. Sales in the distribution sector were up slightly this quarter, reflecting the recruitment of new affiliate dealer-owners over the past year. Finally, commercial and professional sales in the big-box network and the Commercial and Professional Market division in Ontario increased this quarter, despite a slowdown in that market.
Readers of this News release should note the application of a new accounting standard in the first quarter of the year, which changes the results presented in the first quarter of 2008. For a summary description of the impact of this new standard on RONA's consolidated results, please see the "New accounting standard" section on page 2 of this press release, and for a full description, please see note 2 of the Company's consolidated financial statements.
Operating income was $25.5 million in first quarter 2009, down $1.1 million or 4.2% from the $26.6 million posted in 2008. This decline is largely attributable to downward pressure on sales in the renovation-construction industry due to low consumer confidence and seasonality effect. This downward pressure has a greater impact in the first and fourth quarters than in the second and third quarters, because the beginning and the end of the year are the times when store traffic is at its lowest, and variable costs are harder to contain. However, the numerous efficiency improvements introduced under the PEP program in Phase 1 of the 2008-2011 strategic plan have helped offset the negative impact of these factors.
Despite the 28 basis point increase in the gross margin and the 72 basis point increase in the adjusted gross margin, the EBITDA margin increased by only 9 basis points during the quarter, from 2.92% in 2008 to 3.01% in 2009. As mentioned above in our explanation of the decline in operating income, the first quarter represents a low proportion of the year's business volume and variable costs during this period, as a result, are more difficult to contain. This puts substantially greater downward pressure on the EBITDA margin. This negative impact, however, was offset by a substantial increase in the EBITDA margin in the Company's distribution activities.
For first quarter 2009, RONA posted a net loss of $2.5 million or $0.02 per share, compared to a net loss of $2.4 million or $0.02 per share in first quarter 2008. This is a decrease of $0.1 million, reflecting current downward pressure on sales in the renovation-construction industry and a seasonal effect amplified by poor weather conditions. These factors were almost completely offset by the improved efficiency measures under the PEP program and the reduction in interest costs.
"We are starting 2009 the way we ended 2008 - with very good performance in our PEP program (productivity, efficiency, profitability), including an improved gross margin, lower comparable inventories and reduced logistics costs. These factors have helped mitigate the impact of the current recession on our retail sales, which were affected by especially poor weather conditions in January and March. We have considerably improved our balance sheet, with a significant reduction in our debt levels and financial costs this quarter. Although the PEP program has helped offset most of the negative impact of the tough economic conditions in 2008 and first quarter 2009, we believe that the current economic environment could continue to have repercussions on our own business environment and, by extension on our same-store sales and earnings in the next quarters," RONA President and CEO Robert Dutton explained.
"Given this context, we intend to vigorously pursue the various efficiency improvement measures ongoing under the PEP program to stimulate sales and improve our efficiency over the next quarters. The Company will remain very vigilant throughout the year and be ready to adapt its operating activities and capital investments to the specific economic conditions expected in 2009. We plan to reduce our capital spending by nearly $50 million or 25% in 2009, and continue to reduce inventory and administrative costs. But we remain optimistic about the fundamental factors underpinning the demand for renovation projects, especially as this demand should be stimulated by the renovation tax credits announced by the federal and provincial governments in early 2009, and by RONA's own complementary incentives program. We also believe that the current market conditions present significant potential for further consolidation of the Canadian renovation-construction market. We therefore plan to pursue our consolidation efforts in the next quarters," Dutton concluded.
FIRST QUARTER 2009 FINANCIAL HIGHLIGHTS
New Accounting Standard
At the beginning of 2009 the Company retroactively adopted Section 3064 of the Canadian Institute of Chartered Accountants' (CICA) Handbook, Goodwill and intangible assets, which replaces Section 3062 of the same title. The section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets, including internally generated intangible assets. Pre-opening expenses for stores and distribution centres (previously included in Other assets), advertising costs including those related to store openings and costs incurred for Olympic and Paralympic sponsorship (previously included in Prepaid expenses) no longer meet the requirements of the new section. The balances in these asset accounts as at December 31, 2007- that is, at the beginning of first quarter 2008 - were restated and included in Retained Earnings and the results of operations of 2008 were also restated to conform to the 2009 presentation.
In brief, operating income for first quarter 2008 has been reduced by $6.8 million, amortization and depreciation by $1.9 million, and net earnings by $3.4 million, or a reduction of $0.03 per share. Prepaid expenses have also been reduced by $21.7 million, other assets by $11.1 million, and retained earnings by $20.5 million. The detailed impact of applying these new recommendations is explained in Note 2 of the Consolidated Financial Statements.
Economic conditions
In first quarter 2009, several factors combined to keep Canadian consumer confidence at an historic low. The unemployment rate rose to its highest point since 2003, at 7.7% in February, and the economic slowdown was worse than anticipated. In its April Monetary Policy Report, the Bank of Canada indicated that in an environment of continued high uncertainty, the global recession has intensified and become more synchronous since the Bank's January Monetary Policy Report update. It also indicated that although monetary and budgetary authorities are taking more aggressive action, measures to stabilize the global financial system have taken longer than expected to enact. As a result, the Bank of Canada expects the recession in Canada to be deeper than anticipated, with the economy projected to contract by 3.0% in 2009, significantly more than the bank's January projection of a 1.2% decline. (In 2008, the Canadian economy grew by 0.7% of GDP, while in 2007, growth was 2.7%.) Under these circumstances, the Bank of Canada has lowered its overnight rate to 0.25% in April, a level it judges to be the effective lower bound for that rate. Since the end of 2007, the Bank of Canada has lowered its overnight rate by 425 basis points.
This particular economic environment has been highly unfavourable for renovation-construction activities, as can be seen by the significant declines in housing starts since the beginning of the year, especially in the West. In first quarter 2009, housing starts for single-family homes in Canadian urban areas declined by 46.4%, according to CMHC estimates. This decline has been particularly strong in British Columbia, where housing starts for single-family homes decreased by 69%, compared to 43.1% in Alberta and 51.9% in Ontario. In Quebec, the decline in housing starts has been less pronounced, at 24.1%, while in the Atlantic Provinces, housing starts for single-family homes are down by 28.2%. The most recent figures for home resales and average home prices are also down, especially in Western Canada and Ontario. However, average sale prices are up in Quebec and the Atlantic Provinces.
Very low mortgage rates and the introduction of federal and provincial renovation tax credits are expected to stimulate renovation activity nationwide. The fundamentals are also positive for renovation in Canada, since more than 65% of existing dwellings are over 25 years old and will need maintenance and repair work. In addition, Baby Boomers represent roughly 30% of the population and they are investing heavily in their homes and secondary residences, while interior decorating and gardening also remain highly popular activities. Last but not least, more and more next-generation Canadians are looking for one-stop solutions for their renovation projects and outstanding service in a friendly store near their home. Based on all these different trends, RONA is increasing new store formats and concepts, selecting products and product categories, and developing innovative services. The current business environment also remains favourable to the consolidation of the renovation-construction market in Canada, especially through acquisitions and recruitment of independent dealer-owners.
Consolidated sales
Consolidated sales in first quarter 2009 stood at $846.0 million, down $65.5 million or 7.2% less than the $911.5 million posted in 2008. This decline is largely the result of an 8.5% drop in same-store sales, due to the low level of consumer confidence in the economy, the significant drop in housing starts in Western Canada, and a seasonal effect amplified by a period of intense cold at the beginning of the year, which affected the sale of construction materials and forest products everywhere in the country. Weather conditions were especially poor in Western Canada in March, with record precipitation levels in Alberta. Sales in the distribution sector were up slightly this quarter, reflecting the recruitment of new affiliate dealer-owners over the last year. These dealer-owners posted a comparatively strong retail performance, with a decline of only 3.2% in same-store sales over this quarter.
Gross margin
In first quarter 2009, the gross margin increased 28 basis points from 27.97% to 28.25%. Given better terms and conditions from our suppliers and the resulting supportive impact on growth of the store network, the adjusted gross margin rose by 72 basis points from 30.97% to 31.69%. These improvements stem from better management of product categories, further improvements in terms and conditions from our suppliers, and reduced transportation costs.
Consolidated operating income
Operating income was $25.5 million in first quarter 2009, down $1.1 million or 4.2% from the $26.6 million posted in 2008. This decrease in operating income can be attributed mainly to downward pressure on sales in the renovation-construction industry, due to the low level of consumer confidence and the seasonal effect. This pressure has a more substantial impact on results in the first and fourth quarters than in the second and third, because the beginning and the end of the year are the times when store traffic is at its lowest, and variable costs are harder to contain. However, the numerous efficiency improvements introduced under the PEP program in Phase 1 of the 2008-2011 strategic plan have helped offset the negative impact of these factors. In the first quarter, the PEP program helped improve the gross margin by 28 basis points and the adjusted gross margin by 72 basis points, reduce comparable inventory levels by $71 million, reduce transportation and logistics costs by nearly $1 million, and optimize the network of existing stores.
Despite the 28 basis point increase in the gross margin and the 72 basis point increase in the adjusted gross margin, the EBITDA margin increased by only 9 basis points during the first quarter, from 2.92% in 2008 to 3.01% in 2009. As mentioned above in our explanation of the decline in operating income, the first quarter represents a low proportion of the year's business volume and variable costs during this period, as a result, are more difficult to contain. This puts substantially greater downward pressure on the EBITDA margin. This negative impact, however, was offset by a substantial increase in the EBITDA margin in the Company's distribution activities.
Interest, depreciation and amortization
RONA interest expenses on long-term debt and bank loans for first quarter 2009 decreased by $2.0 million to $5.9 million, down 25.7% from $7.9 million in 2008. This decrease is attributable to highly disciplined management of our balance sheet and capital investments, resulting in lower debt levels. The reduction is also partly due to the decline in interest rates over the last year.
Depreciation and amortization costs for first quarter 2009 rose to $24.9 million, compared to $23.3 million in 2008, an increase of $1.6 million or 6.7%. This increase is due to new corporate store openings in 2008, store acquisitions, the renovation program for existing corporate stores, and ongoing upgrades to our information systems.
Net loss
For first quarter 2009, RONA posted a net loss of $2.5 million or $0.02 per share, compared to a net loss of $2.4 million or $0.02 per share in first quarter 2008. This is a decrease of $0.1 million, reflecting current downward pressure on sales in the renovation-construction industry and a seasonal effect amplified by poor weather conditions, which were almost completely offset by the improved efficiency measures under the PEP program and the reduction in interest costs.
CASH FLOWS AND FINANCIAL POSITION
Operations generated $26.9 million in first quarter 2009, compared to $21.5 million in 2008. Net of increases in working capital related to the growth and expansion of the retail and distribution network, operations resulted in cash outflows of $68.1 million, compared to $127.0 million in 2008, an improvement of 46.4%. As explained earlier, comparable inventories were reduced by $71 million in first quarter 2009.
Comparable inventories were likewise significantly reduced in every quarter in 2008, as the following table shows:
Reductions in comparable inventories
------------------------------------------------------------------------ In millions of dollars Q1-2008 Q2-2008 Q3-2008 Q4-2008 Q1-2009 ------------------------------------------------------------------------ Inventories at end of the corresponding quarter the year before $944 $959 $872 $856 $967 ------------------------------------------------------------------------ Reduction in comparable inventories $83 $118 $80 $118 $71 ------------------------------------------------------------------------ Reduction (percent) 8.8% 12.3% 9.2% 13.8% 7.3% ------------------------------------------------------------------------
During the first quarter, RONA invested $40.9 million in capital spending, compared to $42.1 million in 2008. At the beginning of the year, management indicated that it would reduce capital spending by nearly $50 million in 2009. Although the first quarter shows a reduction of only $1.2 million compared to 2008, RONA intends to reduce capital spending as promised in the forthcoming quarters. RONA expects to invest about $150 million in capital spending in 2009, mainly in information technology upgrades, store renovations and new store construction. During the first quarter, RONA also disposed of non-strategic assets worth $2.2 million.
The Company's net indebtedness as at March 29, 2009 totalled $598.9 million. This is a reduction of $222.3 million or 27.1% compared to 2008. The net debt has increased by $108.6 million compared to year end 2008, however, due to the seasonal effects in the first quarter.
On March 29, 2009, the ratio of total debt to capital was 29.5%, compared to 38.4% at the end of first quarter 2008. The ratio of shareholders' equity to total assets was 53.9% at the end of first quarter 2009, compared to 48.5% at the same date in 2008.
RONA has access to $650 million in revolving credit. At the end of this quarter, $154 million had been drawn on that total. Renewal of this credit facility is projected for 2012, and the unsecured debentures that constitute the major portion of the Company's long-term debt mature in 2016.
OUTLOOK
As explained in some detail in the "Economic conditions" section, during the first quarter of 2009 several factors contributed to keep the level of Canadian consumer confidence at an historically low level. Unemployment was at its highest since 2003, reaching 7.7% in February, and the economic slowdown was more severe than anticipated. The Bank of Canada predicts that the recession in Canada will be deeper than expected and that the economy will contract by 3.0% in 2009, far more than the 1.2% contraction the Bank predicted in January. In addition, consumer confidence in institutions in general has been deeply shaken in the wake of the world financial crisis.
While the PEP program very largely helped offset the negative impact of the difficult economic conditions in 2008 and first quarter 2009, RONA management believes that the current economic environment could continue to have repercussions on the Company's business environment and, by extension, on its same-store sales and earnings in the next quarters.
As such, RONA intends to actively pursue the various measures under the PEP program to stimulate sales and improve efficiency over the next quarters. The Company will remain very vigilant throughout the year and be ready to adapt its operating activities and capital investments to the specific economic conditions expected in 2009. RONA plans to reduce capital spending from $196.1 million in 2008 to approximately $150 million in 2009, a reduction of nearly $50 million or 25%. This measure, together with the planned reduction of inventories, and improvements to operational efficiency, will allow RONA to reduce its sales and administrative costs (excluding costs related to store openings and acquisitions), reduce its financial costs, and limit the increase in depreciation and amortization.
Management remains optimistic about the fundamental factors that support the demand for renovation projects, especially as this demand should be stimulated by the renovation tax credits announced by the federal and provincial governments in early 2009, and by RONA's own complementary incentives program. Management also believes that the current market conditions present significant potential for further consolidation of the Canadian construction/renovation market and will therefore pursue its consolidation efforts in the next quarters.
ADDITIONAL INFORMATION
The Management Discussion and Analysis (MD&A) and unaudited financial statements for the 2008 fiscal year can be found in the "Investor Relations" section of the Company's website at www.rona.ca, and at www.sedar.com. The Company's Annual Report can also be found on the RONA website, along with other information about RONA, including its Annual Information Form, which can also be found on the SEDAR website.
TELEPHONE CONFERENCE WITH THE FINANCIAL COMMUNITY
On Tuesday, May 12, 2009, at 11:00 a.m. (EST), RONA will hold a telephone conference for the financial community. To join the conference, please call 514-861-4190 or 1 877 677-7769. To listen to the call online, please go to: http://events.startcast.com/events6/153/C0004/Default.aspx.
NON-GAAP PERFORMANCE MEASURES
In this press release, as in our internal management, we use the concept of earnings before interest, taxes, depreciation, amortization and non-controlling interest (EBITDA), which we also refer to as operating income. This measure corresponds to "Earnings before the following items" in our consolidated financial statements. We also use the concept of "adjusted gross margin," which corresponds to sales less the cost of goods sold including all vendor rebates.
While EBITDA does not have a definition that is standardized by GAAP, it is widely used in our industry and in financial circles to measure the profitability of operations, excluding tax considerations and the cost and use of capital. Adjusted gross margin is used by RONA management to analyse the profitability of our network, including all vendor rebates. Given that they are not standardized, EBITDA and adjusted gross margin cannot be strictly compared from one company to the next. However, we establish them in the same way for the segments identified, and, unless expressly mentioned, our method does not change over time. EBITDA and adjusted gross margin must not be considered in isolation or as substitutes for other performance measures calculated according to GAAP, but rather as additional information.
While these measures do not have a meaning standardized by GAAP, the management of the Company believes they represent good indicators of the operating performance of existing activities.
FORWARD-LOOKING STATEMENTS
This press release includes "forward-looking statements" that involve risks and uncertainties. All statements other than statements of historical facts included in this press release, including statements regarding the prospects of the industry and prospects, plans, financial position and business strategy of the Company, may constitute forward-looking statements within the meaning of the Canadian securities legislation and regulations. Investors and others are cautioned that undue reliance should not be placed on any forward-looking statements.
For more information on the risks, uncertainties and assumptions that would cause the Company's actual results to differ from current expectations, please also refer to the Company's public filings available at www.sedar.com and www.rona.ca. In particular, further details and descriptions of these and other factors are disclosed in the MD&A under the "Risks and uncertainties" section and in the "Risk factors" section of the Company's current Annual Information Form.
The forward-looking statements in this News release reflect the Company's expectations as at May 12, 2009, and are subject to change after this date. The Company expressly disclaims any obligation or intention to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by the applicable securities laws.
ABOUT RONA
RONA is the largest Canadian distributor and retailer of hardware, home renovation and gardening products. RONA operates a network of nearly 700 corporate, franchise and affiliate stores of various sizes and formats. With over 29,000 employees working under its family of banners in every region of Canada and more than 15 million square feet of retail space, the RONA store network generates over $6.3 billion in annual retail sales.
RONA inc.
Consolidated Financial Statements
March 29, 2009 and March 30, 2008
RONA inc.
Consolidated Earnings
For the thirteen-week periods ended March 29, 2009 and March 30, 2008
(Unaudited, in thousands of dollars, except earnings per share)
------------------------------------------------------------------------
------------------------------------------------------------------------
2009 2008
------------------------------------------------------------------------
(Restated
- Note 2)
Sales $846,010 $911,534
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings before
the following
items (Note 5) 25,492 26,603
------------------------------------------------------------------------
Interest on long-term debt 5,325 7,662
Interest on bank loans 556 258
Depreciation and amortization 24,890 23,321
------------------------------------------------------------------------
30,771 31,241
------------------------------------------------------------------------
Loss before income taxes and
non-controlling interest (5,279) (4,638)
Income taxes (1,605) (1,428)
------------------------------------------------------------------------
Loss before non-controlling interest (3,674) (3,210)
Non-controlling interest (1,157) (784)
------------------------------------------------------------------------
Net loss and comprehensive loss $(2,517) $(2,426)
------------------------------------------------------------------------
------------------------------------------------------------------------
Net loss per share (Note 13)
Basic and diluted $(0.02) $(0.02)
------------------------------------------------------------------------
------------------------------------------------------------------------
The accompanying notes are an integral part of the interim consolidated
financial statements.
RONA inc.
Consolidated Retained Earnings
Consolidated Contributed Surplus
For the thirteen-week periods ended March 29, 2009 and March 30, 2008
(Unaudited, in thousands of dollars)
------------------------------------------------------------------------
------------------------------------------------------------------------
2009 2008
------------------------------------------------------------------------
(Restated
- Note 2)
Consolidated Retained Earnings
Balance, beginning of period,
as previously reported $1,053,166 $892,967
Change in accounting policy
- Goodwill and intangible
assets (Note 2) (24,290) (20,542)
------------------------------------------------------------------------
Restated balance, beginning of period 1,028,876 872,425
Net loss (2,517) (2,426)
------------------------------------------------------------------------
Balance, end of period $1,026,359 $869,999
------------------------------------------------------------------------
------------------------------------------------------------------------
Consolidated Contributed Surplus
Balance, beginning of period $12,563 $11,045
Compensation cost relating to stock option plans 302 379
------------------------------------------------------------------------
Balance, end of period $12,865 $11,424
------------------------------------------------------------------------
------------------------------------------------------------------------
The accompanying notes are an integral part of the interim consolidated
financial statements.
RONA inc.
Consolidated Cash Flows
For the thirteen-week periods ended March 29, 2009 and March 30, 2008
(Unaudited, in thousands of dollars)
------------------------------------------------------------------------
------------------------------------------------------------------------
2009 2008
------------------------------------------------------------------------
(Restated
- Note 2)
Operating activities
Net loss $(2,517) $(2,426)
Non-cash items
Depreciation and amortization 24,890 23,321
Derivative financial instruments (1,242) 568
Future income taxes 7,757 (364)
Net (gain) loss on disposal of assets (1,654) 28
Compensation cost relating to stock option plans 302 379
Non-controlling interest (1,157) (784)
Other items 535 769
------------------------------------------------------------------------
26,914 21,491
Changes in working capital items (94,995) (148,468)
------------------------------------------------------------------------
Cash flows from operating activities (68,081) (126,977)
------------------------------------------------------------------------
Investing activities
Business acquisition (Note 7) - (2,128)
Advances to joint ventures and other advances (419) 5,943
Other investments (526) -
Fixed assets (40,943) (42,135)
Other assets (1,380) (997)
Disposal of fixed assets 2,171 220
Disposal of investments 471 2,811
------------------------------------------------------------------------
Cash flows from investing activities (40,626) (36,286)
------------------------------------------------------------------------
Financing activities
Bank loans and revolving credit 113,665 152,723
Other long-term debt 188 1,977
Repayment of other long-term debt
and redemption of preferred shares (2,204) (3,018)
Issue of common shares 348 556
------------------------------------------------------------------------
Cash flows from financing activities 111,997 152,238
------------------------------------------------------------------------
Net increase (decrease) in cash 3,290 (11,025)
Cash, beginning of period 12,345 2,866
------------------------------------------------------------------------
Cash (outstanding cheques), end of period $15,635 $(8,159)
------------------------------------------------------------------------
------------------------------------------------------------------------
Supplementary information
Interest paid $12,208 $15,124
Income taxes paid $13,804 $23,883
------------------------------------------------------------------------
The accompanying notes are an integral part of the interim consolidated
financial statements.
RONA inc.
Consolidated Balance Sheets
March 29, 2009, March 30, 2008 and December 28, 2008
(In thousands of dollars)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
March 29, March 30, December 30,
2009 2008 2008
-----------------------------------------------------------------------
(Restated (Restated
- Note 2) - Note 2)
(Unaudited) (Unaudited)
Assets
Current assets
Cash $15,635 $- $12,345
Accounts receivable 281,566 298,362 234,027
Income taxes receivable 29,641 30,630 6,475
Inventory (Note 4) 904,697 966,932 763,239
Prepaid expenses 28,853 27,769 11,202
Derivative financial instruments 290 139 1,089
Future income taxes 11,660 13,983 19,274
-----------------------------------------------------------------------
1,272,342 1,337,815 1,047,651
Investments 10,356 12,143 10,186
Fixed assets 862,633 795,742 875,634
Fixed assets held for sale (Note 8) 63,926 42,317 34,870
Goodwill 454,889 457,547 454,889
Trademarks 3,710 4,058 3,797
Other assets 27,669 16,968 27,210
Future income taxes 23,893 22,499 24,681
-----------------------------------------------------------------------
$2,719,418 $2,689,089 $2,478,918
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Liabilities
Current liabilities
Outstanding cheques $- $8,159 $-
Bank loans 9,622 18,997 8,468
Accounts payable and
accrued liabilities 556,278 492,079 422,318
Derivative financial instruments 139 607 2,180
Future income taxes 4,318 2,895 4,461
Instalments on long-term debt 15,866 40,146 15,696
-----------------------------------------------------------------------
586,223 562,883 453,123
Long-term debt 589,015 753,859 478,475
Other long-term liabilities 29,207 25,382 28,571
Future income taxes 20,804 18,363 21,304
Non-controlling interest 27,811 25,429 29,220
-----------------------------------------------------------------------
1,253,060 1,385,916 1,010,693
-----------------------------------------------------------------------
Shareholders' equity
Capital stock (Note 9) 427,134 421,750 426,786
Retained earnings 1,026,359 869,999 1,028,876
Contributed surplus 12,865 11,424 12,563
-----------------------------------------------------------------------
1,466,358 1,303,173 1,468,225
-----------------------------------------------------------------------
$2,719,418 $2,689,089 $2,478,918
-----------------------------------------------------------------------
-----------------------------------------------------------------------
The accompanying notes are an integral part of the interim consolidated
financial statements.
RONA inc.
Notes to Interim Consolidated Financial Statements
March 29, 2009 and March 30, 2008
(Unaudited, in thousands of dollars, except amounts per share)
1. Basis of presentation
The accompanying unaudited interim consolidated financial statements are in accordance with Canadian generally accepted accounting principles for interim financial statements and do not include all the information required for complete financial statements. They are also consistent with the policies outlined in the Company's audited financial statements for the year ended December 28, 2008, except for the change in accounting policy described in Note 2. The interim financial statements and related notes should be read in conjunction with the Company's audited financial statements for the year ended December 28, 2008. The interim operating results do not necessarily reflect the results for the full fiscal year. Accordingly, the comparative balance sheet as at March 30, 2008 is also included to reflect seasonal fluctuations that characterize the hardware, renovation and home garden industry. When necessary, the financial statements include amounts based on estimated information and management's best judgments.
2. Changes in accounting policies
Goodwill and intangible assets
At the beginning of 2009 the Company retroactively adopted Section 3064 of the Canadian Institute of Chartered Accountants' (CICA) Handbook, Goodwill and intangible assets, which replaces Section 3062 of the same title. The section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets, including internally generated intangible assets. Pre-opening expenses for stores and distribution centres (previously included in Other assets), advertising costs including those related to store openings and costs incurred for Olympic and Paralympic sponsorship (previously included in Prepaid expenses) no longer meet the requirements of the new section. The balances in these asset accounts as at December 31, 2007- that is, at the beginning of first quarter 2008 - were restated and included in Retained Earnings and the results of operations of 2008 were also restated to conform to the 2009 presentation.
The impact of the recommendations of the new section on the consolidated financial statements follows:
December 28, March 30,
Increase (decrease) 2008 2008
-----------------------------------------------------------------------
Consolidated Balance Sheets
Assets
Income taxes receivable $429 $1,055
Prepaid expenses (21,902) (21,712)
Future income taxes - current 5,474 3,463
Other assets (11,256) (11,077)
Liabilities
Future income taxes - current (393) (322)
Future income taxes - long term (2,694) (4,033)
Non-controlling interest 122 67
Retained Earnings - beginning of year (20,542) (20,542)
March 30,
2008
-----------------------------------------------------------------------
Consolidated Earnings
Earnings before the following items $(6,798)
Depreciation and amortization (1,926)
Income taxes (1,498)
Non-controlling interest 67
Net loss and comprehensive loss (3,441)
Net loss per share - basic and diluted (0.03)
Consolidated Cash Flows
Net loss $(3,441)
Depreciation and amortization (1,926)
Future income taxes (442)
Non-controlling interest 67
Changes in working capital items 4,637
Other assets 1,105
Credit risk and the fair value of financial assets and financial liabilities
The Emerging Issues Committee issued EIC-173, Credit risk and the fair value of financial assets and financial liabilities which provides guidance on how to measure financial assets and liabilities, taking into account the company's own credit risk and the counterparty credit risk in determining the fair value of financial assets and financial liabilities. The adoption of these recommendations had no material impact on the results, financial position and cash flows of the Company.
3. Effect of new accounting standards not yet implemented
Business combinations
In January 2009, the CICA issued Section 1582, Business combinations which replaces Section 1581 of the same title. This section applies prospectively to business combinations for which the date of acquisition is in fiscal years beginning on or after January 1, 2011. The section establishes standards for accounting for a business combination.
Consolidated financial statements and non-controlling interests
In January 2009, the CICA issued Section 1601, Consolidated Financial Statements, and Section 1602, Non-Controlling Interests which together replace Section 1600, Consolidated Financial Statements. These sections apply to interim and annual consolidated financial statements for fiscal years beginning on or after January 1, 2011. They establish standards for the preparation of consolidated financial statements and accounting for a non-controlling interest in a subsidiary in the consolidated financial statements subsequent to a business combination.
International Financial Reporting Standards (IFRS)
In February 2008, the Accounting Standards Board of Canada announced that Canadian GAAP for publicly accountable enterprises will be replaced by IFRS for financial statements relating to fiscal years beginning on or after January 1, 2011. When converting from Canadian GAAP to IFRS, the Company will prepare both current and comparative information using IFRS. The Company expects this transition to have an impact on its accounting policies, financial reporting and information systems.
The Company is currently evaluating the impact of these new standards on its consolidated financial statements.
4. Inventory
For the thirteen-week period ended March 29, 2009, $606,998 of inventory was expensed in the consolidated results ($656,547 as at March 30, 2008). These amounts include an inventory write-down charge of $6,863 ($7,790 as at March 30, 2008).
5. Store closing costs
Exit and disposal costs and write-down of assets
In April 2008, management approved a detailed plan to close four of its stores included in the corporate and franchised stores segment. Three of these stores were closed in 2008 and one will close in 2009. During the thirteen-week period ended March 29, 2009, the Company recognized costs of $525 relating to an inventory write-down. Additional estimated costs of $2,980 relating to store closures, notably lease obligations will be recorded by the Company when the criteria for recognition have been met. The liability for exit and disposal costs and write-down of assets was $3,223 as at March 29, 2009.
Other closing costs
During the thirteen-week period ended March 29, 2009, in addition to the exit and disposal costs and write-down of assets, the Company recorded operating costs, including interest and depreciation, for the liquidation of the assets of these stores in the amount of $1,026. The Company estimates that additional costs of $229 will be incurred in the next quarter to complete the liquidation of one of these stores' assets.
6. Vendor rebates
In accordance with EIC-144 Accounting by a customer (including a reseller) for certain consideration received from a vendor, the Company must disclose the amount recognized for which the full requirements for vendor rebate entitlement have not yet been met. For the thirteen-week period ended March 29, 2009, the Company recognized an amount of $3,954 ($4,481 as at March 30, 2008) which was estimated based on the attainment of specified requirements to receive the rebates.
7. Business acquisition
During the thirteen-week period ended March 30, 2008, the Company acquired one company, operating in the corporate and franchised stores segment, by way of an asset purchase. Taking direct acquisition costs into account, this acquisition was for a total consideration of $5,389. The Company financed this acquisition from its existing credit facilities. The results of operations of this company are consolidated from its date of acquisition.
The purchase price allocation of the acquisition was established as follows:
2008
-----------------------------------------------------------------------
Accounts receivable $2,037
Inventory 1,903
Other current assets 35
Fixed assets 634
Goodwill 2,665
Current liabilities (1,885)
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5,389
Less: Accrued direct acquisition costs (162)
Balance of purchase price (3,099)
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Cash consideration paid $2,128
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The Company expects that an amount of $1,689 of goodwill will be deductible for tax purposes.
8. Fixed assets held for sale
The Company has decided to dispose of land and buildings in the corporate and franchised store segment which are no longer used in operations, and accordingly, established a detailed plan to sell. The Company expects to dispose of these assets within the next twelve-month period.
During the period ended March 29, 2009 the Company disposed of two parcels of land and buildings which had been held for sale and recorded a gain on disposition of $1,521.
9. Capital stock
Issued and fully paid:
The following table presents changes in the number of outstanding common shares and their aggregate stated value:
March 29, 2009
-----------------------------------------------------------------------
Number of shares Amount
-----------------------------------------------------------------------
Balance, beginning of period 115,819,699 $423,477
Issuance in exchange for common
share subscription deposits 328,692 3,744
Issuance in exchange for cash 10,360 120
-----------------------------------------------------------------------
Balance before elimination of
reciprocal shareholdings 116,158,751 427,341
Elimination of reciprocal shareholdings (80,251) (524)
-----------------------------------------------------------------------
Balance, end of period 116,078,500 426,817
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Deposits on common share subscriptions,
net of eliminations of
joint ventures (a) 317
-----------------------------------------------------------------------
$427,134
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-----------------------------------------------------------------------
March 30, 2008
-----------------------------------------------------------------------
Number of shares Amount
-----------------------------------------------------------------------
Balance, beginning of period 115,412,766 $418,246
Issuance in exchange for common
share subscription deposits 197,854 3,350
Issuance in exchange for cash 20,764 290
-----------------------------------------------------------------------
Balance before elimination of
reciprocal shareholdings 115,631,384 421,886
Elimination of reciprocal shareholdings (72,396) (435)
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Balance, end of period 115,558,988 421,451
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Deposits on common share subscriptions,
net of eliminations of
joint ventures (a) 299
-----------------------------------------------------------------------
$421,750
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December 28, 2008
-----------------------------------------------------------------------
Number of shares Amount
-----------------------------------------------------------------------
Balance, beginning of year 115,412,766 $418,246
Issuance in exchange for common
share subscription deposits 197,854 3,349
Issuance under stock option plans 89,000 309
Issuance in exchange for cash 120,079 1,573
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Balance before elimination of
reciprocal shareholdings 115,819,699 423,477
Elimination of reciprocal shareholdings (72,396) (435)
-----------------------------------------------------------------------
Balance, end of year 115,747,303 423,042
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-----------------------------------------------------------------------
Deposits on common share subscriptions,
net of eliminations of
joint ventures (a) 3,744
-----------------------------------------------------------------------
$426,786
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(a) Deposits on common share subscriptions represent amounts received
during the period from affiliated and franchised merchants in
accordance with commercial agreements. These deposits are exchanged
for common shares on an annual basis.
Stock option plan of May 1, 2002
The Company adopted a stock option plan for designated senior executives which was approved by the shareholders on May 1, 2002. A total of 2,920,000 options were granted at that date. Options granted under the plan may be exercised since the Company made a public share offering on November 5, 2002. The Company can grant options for a maximum of 3,740,000 common shares. As at March 29, 2009 the 2,920,000 options granted have an exercise price of $3.47 and of this number, 1,538,500 options (1,449,500 options as at March 30, 2008) were exercised.
The fair value of each option granted was estimated at the grant date using the Black-Scholes option-pricing model. Calculations were based upon a market price of $3.47, an expected volatility of 30%, a risk-free interest rate of 4.92%, an expected life of four years and 0% expected dividend. The fair value of options granted was $1.10 per option according to this method.
No compensation cost was expensed with respect to this plan for the thirteen-week periods ended March 29, 2009 and March 30, 2008.
Stock option plan of October 24, 2002
On October 24, 2002, the Board of Directors approved another stock option plan for designated senior executives of the Company and for certain designated directors. The total number of common shares which may be issued pursuant to the plan will not exceed 10% of the common shares issued and outstanding less the number of shares subject to options granted under the stock option plan of May 1, 2002. These options become vested at 25% per year, if the market price of the common share has traded, for at least 20 consecutive trading days during the twelve-month period preceding the grant anniversary date, at a price equal to or higher than the grant price plus a premium of 8% compounded annually.
On March 8, 2007, the Board of Directors approved certain modifications to the plan. These modifications, approved by the shareholders at the annual shareholders' meeting on May 8, 2007, establish that this plan is no longer applicable to the designated directors of the Company and provide for the replacement of the terms and conditions for granting options under the plan by a more flexible mechanism for setting the terms and conditions for granting options. The Board of Directors will adopt the most appropriate terms and conditions relative to each type of grant. For the options granted on March 8, 2007, February 29, 2008, December 9, 2008 and March 11, 2009, the Board approved the option grants with vesting over a four-year period following the anniversary date of the grants at 25% per year.
As at March 29, 2009, the 2,475,752 options (1,944,052 options as at March 30, 2008) granted have exercise prices ranging from $10.62 to $26.87 ($14.18 to $26.87 as at March 30, 2008) and of this number, 85,100 options (85,100 options as at March 30, 2008) have been exercised and 611,325 options (180,300 options as at March 30, 2008) have been forfeited.
The fair value of stock options granted was estimated at the grant date using the Black-Scholes option-pricing model on the basis of the following weighted average assumptions for the stock options granted during the period:
March 29, 2009 March 30, 2008
-----------------------------------------------------------------------
Weighted average fair value
per option granted $4.11 $4.42
Risk-free interest rate 1.98% 3.25%
Expected volatility in stock price 35% 26%
Expected annual dividend 0% 0%
Expected life (years) 6 6
Compensation cost expensed with respect to this plan was $302 for the thirteen-week period ended March 29, 2009 ($379 as at March 30, 2008).
A summary of the situation of the Company's stock option plans and the changes that occurred during the periods then ended is presented below:
March 29, 2009
-----------------------------------------------------------------------
Weighted average
Options exercise price
-----------------------------------------------------------------------
Balance, beginning of period 2,981,002 $11.46
Granted 516,700 10.62
Forfeited (336,875) 19.98
-----------------------------------------------------------------------
Balance, end of period 3,160,827 10.41
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Options exercisable, end of period 2,040,944 $7.64
-----------------------------------------------------------------------
-----------------------------------------------------------------------
March 30, 2008
-----------------------------------------------------------------------
Weighted average
Options exercise price
-----------------------------------------------------------------------
Balance, beginning of period 2,922,552 $11.31
Granted 243,200 14.18
Forfeited (16,600) 21.24
-----------------------------------------------------------------------
Balance, end of period 3,149,152 11.48
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Options exercisable, end of period 2,054,569 $7.06
-----------------------------------------------------------------------
-----------------------------------------------------------------------
December 28, 2008
-----------------------------------------------------------------------
Weighted average
Options exercise price
-----------------------------------------------------------------------
Balance, beginning of year 2,922,552 $11.31
Granted 258,200 13.99
Exercised (89,000) 3.47
Forfeited (110,750) 20.07
-----------------------------------------------------------------------
Balance, end of year 2,981,002 11.46
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Options exercisable, end of year 1,965,569 $7.22
-----------------------------------------------------------------------
-----------------------------------------------------------------------
The following table summarizes information relating to stock options outstanding as at March 29, 2009:
Options Options
Exercise price Expiration date outstanding exercisable
-----------------------------------------------------------------------
$3.47 December 31, 2012 1,381,500 1,381,500
$10.62 March 11, 2019 516,700 -
$10.86 December 9, 2018 15,000 -
$14.18 March 1, 2018 211,500 54,525
$14.29 December 16, 2013 420,850 420,850
$20.27 December 22, 2014 99,250 99,250
$21.21 February 24, 2016 319,500 -
$21.78 September 1, 2016 17,576 4,394
$23.58 March 8, 2017 155,875 80,425
$23.73 April 5, 2015 5,500 -
$26.87 February 24, 2016 17,576 -
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3,160,827 2,040,944
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-----------------------------------------------------------------------
10. Guarantees
In the normal course of business, the Company reaches agreements that could meet the definition of "guarantees" in AcG-14.
The Company guarantees mortgages for an amount of $1,721. The terms of these loans extend until 2012 and the net carrying amount of the assets held as security, which mainly include land and buildings, is $5,807.
Pursuant to the terms of inventory repurchase agreements, the Company is committed towards financial institutions to buy back the inventory of certain customers at an average of 62% of the cost of the inventory to a maximum of $69,168. In the event of recourse, this inventory would be sold in the normal course of the Company's operations. These agreements have undetermined periods but may be cancelled by the Company with a 30-day advance notice. In the opinion of management, the likelihood that significant payments would be incurred as a result of these commitments is low.
11. Employee future benefits
As at March 29, 2009, the Company has nine defined contribution pension plans and four defined benefit pension plans. The net pension expense for the benefit plans is as follows:
2009 2008
-----------------------------------------------------------------------
Cost recognized for defined
contribution pension plans $2,372 $2,176
Cost recognized for defined benefit pension plans 402 197
-----------------------------------------------------------------------
Net employee future benefit costs $2,774 $2,373
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12. Segmented information
The Company has two reportable segments: distribution and corporate and franchised stores. The distribution segment relates to the supply activities to affiliated, franchised and corporate stores. The corporate and franchised stores segment relates to the retail operations of the corporate stores and the Company's share of the retail operations of the franchised stores in which the Company has an interest.
The accounting policies that apply to the reportable segments are the same as those described in accounting policies. The Company evaluates performance according to earnings before interest, depreciation and amortization, rent, income taxes and non-controlling interest, i.e. sales less chargeable expenses. The Company accounts for intersegment operations at fair value.
2009 2008
-----------------------------------------------------------------------
(Restated)
Segment sales
Corporate and franchised stores $617,092 $683,029
Distribution 476,374 491,401
-----------------------------------------------------------------------
Total 1,093,466 1,174,430
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Intersegment sales and royalties
Corporate and franchised stores - -
Distribution (247,456) (262,896)
-----------------------------------------------------------------------
Total (247,456) (262,896)
-----------------------------------------------------------------------
Sales
Corporate and franchised stores 617,092 683,029
Distribution 228,918 228,505
-----------------------------------------------------------------------
Total 846,010 911,534
-----------------------------------------------------------------------
Earnings before interest, depreciation and
amortization, rent, income taxes and
non-controlling interest
Corporate and franchised stores 38,002 41,712
Distribution 21,417 19,040
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Total 59,419 60,752
-----------------------------------------------------------------------
Earnings before interest, depreciation and
amortization, income taxes and
non-controlling interest
Corporate and franchised stores 9,527 13,287
Distribution 15,965 13,316
-----------------------------------------------------------------------
Total 25,492 26,603
-----------------------------------------------------------------------
Acquisition of fixed assets
Corporate and franchised stores 31,499 38,498
Distribution 9,444 4,271
-----------------------------------------------------------------------
Total 40,943 42,769
-----------------------------------------------------------------------
Goodwill
Corporate and franchised stores - 2,665
Distribution - -
-----------------------------------------------------------------------
Total - 2,665
-----------------------------------------------------------------------
Total assets
Corporate and franchised stores 2,192,280 2,246,290
Distribution 527,138 442,799
-----------------------------------------------------------------------
Total $2,719,418 $2,689,089
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13. Net loss per share
The table below shows the calculation of basic and diluted net loss per share:
2009 2008
-----------------------------------------------------------------------
(Restated)
- Note 2)
Net loss $(2,517) $(2,426)
-----------------------------------------------------------------------
Number of shares (in thousands)
Weighted average number of shares used to
compute basic net loss per share 116,076.1 115,544.5
Effect of dilutive stock options (a) - -
-----------------------------------------------------------------------
Weighted average number of shares used to
compute diluted net loss per share 116,076.1 115,544.5
-----------------------------------------------------------------------
Net loss per share - basic and diluted $(0.02) $(0.02)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(a) As at March 29, 2009, 3,160,827 common share stock options (3,149,152
options as at March 30, 2008) were excluded from the calculation of
diluted net loss per share since the Company incurred a loss and
inclusion would have created an antidilutive effect.
SOURCE: RONA INC.
Media RONA inc. Eva Boucher-Hartling Director, External Communications 514-599-5114 eva.boucher-hartling@rona.ca Financial Community RONA inc. Stephane Milot Senior Director, Investor Relations 514-599-5951 stephane.milot@rona.ca
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