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RONA Inc.
(RON-T) C$11.78
— INITIATING COVERAGE —
Recommendation: BUY
Overall Risk Rating: Medium
12-Month Target Price: $15.50
12-Month Projected Return: 31.6%
Investment Summary
We are initiating coverage of RONA Inc. (RON–T) with a BUY rating and $15.50
target price. We believe that management has implemented a number of positive
initiatives that should benefit the company when the economic climate improves
and for the long term. RONA also continues to prudently preserve capital by
reducing store openings and related capex. In the near term, the macro-
environment is clearly challenging, masking the benefits of aforementioned
initiatives. As such, we expect continued deterioration in sales trends over the next
few quarters, with our EBITDA margin bottoming around Q3/09 and the lack of
earnings momentum in 2009 limiting multiple expansion. Therefore, the stock
YOUR ATTENTION could experience further weakness in the near term, as the market awaits visibility
IS DIRECTED TO on the timing of a rebound, which the macro conditions render difficult to predict.
THE IMPORTANT However, we believe that investors should be gradually accumulating positions in
RONA at opportunistic prices (downward revisions to estimates post Q4 may
DISCLOSURES IN provide this opportunity), in anticipation of a bottoming in fundamentals toward
APPENDIX A. mid-end 2009. Home improvement and housing related stocks have typically been
among the first consumer related stocks to rebound.
RONA Inc. holds the leading market position in the Canadian home
improvement landscape with a 15% market share. Its network of 693 stores is
spread across all provinces, with a solid position in Quebec. One of its main
competitive advantages lies in a “one size does not fit all approach”, consisting
of multi-format and banner stores. This gives it exceptional diversification and
flexibility to access growth areas that cannot be served by big box outlets, and
where low population density rules this option out, in addition to areas that
favour consolidation.
Driven by, what we view as, a well thought out acquisition and affiliate
recruitment strategy, RONA’s revenues grew at a CAGR of 20% and
EBITDA margins rose on average 70 bps per year, between 2001 and 2006.
Over the same period, organic growth averaged 7.5% and EPS grew at a CAGR of
25%, as the home improvement industry benefited from a booming housing
market, and RONA implemented initiatives to increase store traffic, sales and
profits. Its SSS growth peaked in 2004, and has since decelerated, affected by
significant lumber price fluctuations in 2005-2006 and, more recently, a
deteriorating macro-economic climate. When the economy recovers, SSS should
follow suit; until then, we do not expect a material improvement. Yet, RONA
is not sitting by idly. Programs for continual upgrade of stores and merchandise
Critics of the RONA story would point out that the slowing economy is uncovering
the need to fix a number of issues, including IT system upgrades, and redundant
store locations, which have resulted in the company initiating its PEP program.
While there is some truth to such statements, we also believe that solid operators
typically seek to bring improvements to their operations when times are
tough, tweaking the metrics that would improve efficiency and get the
company ready for the eventual economic rebound.
Outlook
RONA’s stock price performance is highly correlated with Home Depot and
Lowe’s. As such, following their stock downturn, RONA’s stock performance had
started to deteriorate well ahead of the overall Canadian market downturn, when its
SSS turned negative in Q3/07. RONA has historically traded at an average
discount of 15% to both companies. Interestingly, both comparables appear to have
RONA has two distinct business segments: retail sales through corporate and
franchised stores (Retail segment) and distribution to affiliated stores (Distribution
segment).
Exhibit 1. RONA Inc.: Retail Segment Represents Bulk of Revenues and Profits
Distribution
23% Distribution
Retail
18%
Retail 82%
77%
RONA’s network of 693 stores across Canada with 15 million square feet (mmsf)
of retail space is composed of different store formats and banners located in both
metropolitan and small rural areas. The store network is supported by a strong
distribution infrastructure, inclusive of nine distribution centers (DCs)
across Canada.
Distribution Centres 1 4 1 3 9
# of RONA’s
Type Stores Ownership RONA’s Interest
Total 693
RONA’s network includes four primary store formats, each of which caters to
a targeted market. Big Box Stores offer over 40,000 hardware, renovation, and
gardening products. These stores range from 60,000 to 165,000 sf in size and cater
to all customer types. Proximity Stores, a new generation of stores launched in
2004, are much smaller and offer a reduced assortment of products meant to cater
to the basic hardware and seasonal needs of local communities. These stores also
typically offer an extended selection of interior decorating products. Specialized–
Consumers Stores are similar in size to Proximity Stores, but are specialized to
meet the needs of specific targeted groups, including contractors, tradesmen and
gardeners. Lastly, Specialized–ICI Stores target Institutional, Commercial and
Industrial customers by focusing on specific product categories such as building
materials and plumbing.
RONA Le Rénovateur
5,000–60,000 - Wide variety with higher proportion in lumber / building materials
RONA Home Centre
Specialized – ICI Matériaux Coupal - Market leader in sales of building materials in Montreal
In our opinion, the current state of the Canadian economy represents a significant
challenge for RONA’s growth prospects in the short to medium term, as for any
company tied closely to consumer spending. And, unfortunately, we believe that
there are few options in the company’s control, to counter such a downturn.
With the Canadian economy now in a recession, the outlook for home
improvement spending remains challenging. Historically, home improvement
spending, which is positively correlated with GDP, has benefited from low interest
rates, rising employment and disposable income. While interest rates are at historic
lows, typically making it more affordable to renovate or purchase a house,
unemployment is on the rise and disposable income has been negatively affected
by reduced home equity values and household net worth. While we are certainly
seeing significant deceleration in the Canadian housing market, we believe it is
highly unlikely that it would experience a correction as significant as the one
witnessed in the U.S. We believe this is the result of many factors that shape our
housing sector environment, including: 1) a conservative banking sector culture
and government regulations, 2) a far less exotic and much smaller sub-prime
mortgage share (peak of 5% of the Canadian market in 2006 versus 20–25% of the
U.S. market), 3) a mandatory insurance by the CMHC for mortgages with down
payments of less than 20%. These are just a few takeaways, and for a detailed
write-up on the subject by TD Economics, please refer to Appendix I.
Unemployment (%)
45
12%
YoY Change (%)
20.0%
Existing home sales
40 11%
10.0% 35 10%
0.0% 9%
30
(000)
-10.0% l-----------l 8%
25
-20.0% Mar'01–Nov'01 7%
-30.0% 20 6%
l----------l l----------l
-40.0% Jul'81–Nov'02 Jul'90–Mar'01 15 5%
Q1-09E
Q1-10E
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
2010E
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
Canada Canada
Home improvement spending vs GDP Home improvement spending vs Existing home sales
20% 30%
6.0%
YoY Change (%)
15%
YoY Change (%)
20%
YoY Change (%)
10% 4.0%
5% 10%
0% 2.0% 0%
-5% 2
R = 90% 0.0% -10%
-10% 2
R = 89%
-15% -2.0% -20%
2008E
2009E
2010E
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008E
2009E
2010E
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Housing starts have been on a downtrend since April 2008. As of December 2008,
housing starts were down 4% year over year, off of an easier comparable – as
December 2007 starts were down 16% year over year – suggesting the worst in
home improvement spending is not behind us yet. To date, the decline has been
concentrated in single-unit properties, RONA’s primary business segment.
However, according to CMHC, multi-unit housing, to which RONA will be
increasingly exposed to (10% of sales) through its Commercial and Professional
Division, is forecast to drop significantly in 2009.
2008E
2009E
2010E
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Starts (LHS) YoY Change (RHS) Existing Home Sales (LHS) YoY Change (RHS)
YoY Change
5% US
0%
-5%
-10%
Canada
-15%
2010E
2009E
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Canada US
Over the past 10-years, home prices in Canada grew at a CAGR of 7%, fuelling
increased home improvement spending. However, in 2008, home prices dropped
by 1%, with December prices down approximately 13%, representing the worst
drop on record. The drop was particularly pronounced in British Columbia, Alberta
and Ontario, where prices were down 14%, 7% and 12%, respectively; however,
Quebec, which accounts for about half of RONA’s business, was down only 1%.
TD Economics expects this drop to be more pronounced in 2009, with Quebec
existing home sales dropping over 13%.
Ontario
24% Western Canada Ontario Quebec Atlantic Provinces
Exhibit 10. Home Improvement Retailers’ SSS Move in Tandem with Housing Stats
1Q-01
3Q-01
1Q-02
3Q-02
1Q-03
3Q-03
1Q-04
3Q-04
1Q-05
3Q-05
1Q-06
3Q-06
1Q-07
3Q-07
1Q-08
3Q-08
1Q-03
3Q-03
1Q-04
3Q-04
1Q-05
3Q-05
1Q-06
3Q-06
1Q-07
3Q-07
1Q-08
3Q-08
RONA SSS Growth YoY Chg in Existing Home Sales HD SSS Growth LOW SSS Growth YoY Chg in Existing Home Sales
Current industry conditions do not bode well for the home improvement industry
over the near term, explaining our cautious outlook for 2009. In the U.S., the
market has seen steady declines since mid-2007, although the rate of decline
has recently flattened. The Canadian renovation market has held up well,
especially when compared to the U.S. However, it appears that like housing, the
renovation market is starting to cool in Canada. Renovation spending growth
slowed to 6% in 2Q/08, the slowest pace since mid-2002, before improving slightly
to 7.7% in Q3/08, which still represented the third lowest growth rate since the
beginning of 2003.
Exhibit 11. Remodelling Activity Slowing in Canada and Declining in the U.S.
$25
10% $110 0%
$20
$15 $100 -5%
$10 5% $90 -10%
$5 $80 -15%
$0 0% $70 -20%
1Q-00
3Q-00
1Q-01
3Q-01
1Q-02
3Q-02
1Q-03
3Q-03
1Q-04
3Q-04
1Q-05
3Q-05
1Q-06
3Q-06
1Q-07
3Q-07
1Q-08
3Q-08
1Q-09E
1Q-00
4Q-00
3Q-01
2Q-02
1Q-03
4Q-03
3Q-04
2Q-05
1Q-06
4Q-06
3Q-07
2Q-08
2008E
2009E
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Home Depot
Canada RONA
14.7% 15.3%
Market Size YoY Change
RONA has achieved impressive market penetration, increasing its market share
from approximately 6% in 2000 to 15% in 2007 per Hardlines, an industry
publication, although the company claims to have a 17% share (based on its own
computed market size of C$36 billion). It has been the prominent consolidator in
Canada and we believe that RONA remains well positioned to continue leading
the consolidation of the Canadian home improvement market. Its goal of
reaching a 20% share of the market by 2011 seems realizable, seeing that a large
portion of the market remains in the hands of independents.
1
Hardware Merchandising sales estimates
2
Home and Leisure sales only
3
Acquired by RONA in December 2007
4
Included in RONA's sales figures
5
Hardlines estimate of market size
RONA’s stated four areas of growth can essentially be grouped into two:
About half of RONA’s growth over the past decade is attributable to acquisitions,
About half of RONA’s particularly since 2000. Over the past eight years, RONA has successfully
growth over the past
completed 11 acquisitions, adding over 200 stores and approximately $2.8 billion
decade is attributable to
acquisitions, particularly to sales. Past acquisitions have not only fuelled RONA’s growth, but have also
since 2000. greatly diversified its geographic presence, enhanced its buying power, and
enabled it to reach different types of customers. The company has recorded
about $80 million in synergies from past acquisitions, and has yet to fully reap the
benefits from its latest acquisitions.
Organic growth
30%
Acquisitions
Affiliate
50%
recruitment
20%
RONA has a strong track record of sticking to its acquisition criteria, which
include: 1) profitable target that is immediately accretive to earnings; 2) operations
in a segment with good growth potential; 2) operations in a complementary
business for recurring synergies to be attainable; and 3) strong management. The
company typically pays 5–7x EBITDA and looks for a minimum ROI of 15%.
In the first several years after its IPO, RONA focused on expanding its geographic
footprint coast-to-coast. However, in 2005, the company established a Pro Services
division to address the ICI market (Institutional, Commercial and Industrial market).
Since then, four of the seven acquisitions undertaken have been in this segment.
At the end of 2007, RONA grouped the operations of Materiaux Coupal, Curtis
Lumber, Noble Trade, and Dick's Lumber under a newly created Commercial and
Professional Division. The new division includes 40 of the company’s corporate
stores and accounts for 10% of consolidated revenues. Below, we detail the two
most significant acquisitions in the segment.
In April 2007, RONA acquired Noble Trade, a leader in the Ontario plumbing and
heating, ventilating and air conditioning (HVAC) markets, with 19 stores and 1
The Noble Trade acquisition DC. At the time of the acquisition, the company had annual revenues of over $150
represents a full push into
million, had been growing at an average annual rate of 27% since 1998, and had
the Ontario plumbing and
HVAC markets EBITDA margins above RONA’s legacy operations. We estimate that RONA paid
about 7x EBITDA and that the acquisition was immediately accretive to earnings.
With this acquisition, RONA significantly improved its purchasing power for
plumbing products and is also benefiting from Noble Trade’s management
experience in addressing the plumbing industry and more specifically commercial
and professional customers. In fact, at the end of 2007, it appointed Michael
Storfer, Noble Trade’s president, to head up its new ICI division.
In January 2008, RONA increased its penetration of the Ontario plumbing market
through the acquisition of Best-MAR Plumbing and Heating Supplies. RONA
subsequently rolled this company into Noble Trade.
1
Shown pre-synergies
2
C$350m purchase price included ~C$100m in real estate; subsequent to the transaction, RONA entered a sale-and-leaseback transaction; PF EV/EBITDA adjusted
for sale-and-lease-back and assumed rent expense
3
TD Newcrest Estimated Transaction Price
4
Matériaux Coupal Inc.recorded 2005 annual sales of $125m
5
TD Newcrest Estimated Sales Figure
…its priority for expansion We believe that dealer recruitment represents a priority for RONA and a
will be through dealer profitable way to grow, requiring no capital outlay and limited incremental
recruitment, a profitable costs. In fact, in mid-November, RONA announced that these activities would be
way to grow, requiring no spearheaded by a separate department and would fall under the direct
capital outlay and limited
responsibility of President and CEO, Robert Dutton, attesting to the importance of
incremental costs.
this growth vector for the company.
In our conversations with management, it was clear that RONA has no intention to
enter the U.S. market, at least over the next three years. Mr. Dutton firmly believes
that the company has enough growth opportunities in Canada, as evidenced by the
fact that the market remains highly fragmented even after several years of
consolidation, in addition to numerous niche opportunities described above; and
we tend to agree.
As discussed earlier, SSS and new store growth have contributed less to
SSS and new store growth RONA’s growth than acquisitions and affiliate recruitment. Yet, store
have been lesser renovations, product mix and merchandising revamping, as well as innovative
contributors to RONA’s
marketing concepts, are key in order to keep attracting customers into stores. As
growth relative to
acquisitions and
with the rest of the industry, RONA’s SSS growth peaked in 2004 and has since
recruitment of affiliates. been decelerating. RONA’s SSS, which has a larger weighting on lumber and
building material sales, were affected by significant lumber price fluctuations in
2005-2006. Note that the chart below denotes the difference in SSS when
excluding direct lumber price fluctuations (approximately 20% of sales in 2007).
In 2006-2007, the construction and renovation industries were less buoyant and
lumber and commodity price deflation continued, leading RONA to post its first
ever annual SSS drop in 2007. Year to date, as industry conditions have
deteriorated further, SSS dropped a record 5.3%, a trend that is expected to
continue at least into mid-2009.
10%
8%
YoY Change (%)
5%
3%
0%
2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
-3%
-5%
Adjusted SSS (non-constant lumber, but ex-holiday/extra week impact)
Adjusted SSS (constant lumber and ex-holiday/extra week impact)
Programs for continual upgrade of stores and merchandise have been in place
to keep up with increasingly selective and sophisticated consumers. Remodelling
costs average $2 million a store and, according to management, revenues have
historically increased 10–15% in first year, and 5–10% in second year. RONA
typically renovates about 20% of its network annually, with projects ranging from
In mid-2006, the company launched a similar concept for big-box stores, which
was first applied to its Réno-Dépôt store in Rimouski, Quebec. Since then, the
company’s upgrades have been focused on the Réno-Dépôt network. It is expected
to cost $20 million to upgrade 14 stores (2 of the 16 locations were opened in the
past two years and do not need to be retrofitted). As at the end of 2008, eight store
upgrades had been completed; four more are expected be completed by the end of
2009, although we remain skeptical that RONA would go through with all of these
renovations in the current environment.
RONA’s latest big-box concept features wider aisles, improved lighting, interactive
displays and more user-friendly signage. Customers can also access a number of
specialized services, including delivery, installation, tool rentals, a cutting room, a
dedicated counter for contractors and professionals, and a brand new ‘Project Guide’
program that offers the help of knowledgeable, specially-trained staff who provide
advice and personal follow-up to customers through the different stages of specific
renovation projects. Some of its new concept stores include a larger area dedicated to
servicing commercial and professional customers.
A few areas of the PEP program should help with traffic generation and improved
SSS, in addition to any projects undertaken by affiliates as discussed earlier in the
report. These initiatives include:
The first phase of RONA’s 2008-2011 plan aims to focus on lowering costs and
improving efficiencies.
Product Management: Since 2005, RONA has reduced its product offerings from
over 200,000 SKUs to 90,000, reducing store clutter, removing obsolete items, and
focusing on best selling, profitable product categories. A similar process now aims at
reducing the SKU count to 65,000 by 2011. The company will focus on in-stock
guarantees for its best performing SKUs. With improvements in demand planning
and the POS system, RONA should be able to “pull” products as needed direct-to-
store. This should result in lower inventory levels and a reduced need to use satellite
DCs.
F09E
F04 F05 F06 F07 F08E TD Mgmt Target 1 F10E
Big Box 1 2 5 7 2 1 2 2
Proximity 3 4 3 3 4 3 5 5
Total 4 6 8 10 6 4 7 7
1
1 big box and 2 proximity stores are relocations
One of RONA’s main One of RONA’s main competitive advantages lies in its “one size does not fit all
competitive advantages lies approach”. It allows the company flexibility to penetrate smaller markets quickly
in its “one size does not fit in communities of all sizes. RONA has been scaling back the size of its typical big-
all approach”. box store, which now averages 80,000–100,000 sf, down from 120,000 sf a few
years ago. This is a result of scarcity of large development areas and escalating
land costs in some parts of the country and mainly the belief that the younger
more-informed generation is in search of convenience and expertise. This has also
led to the development of RONA’s Proximity and Specialized stores, in addition to
its goal of providing consumers personalized service typical of small regional
hardware stores. It costs RONA $24–30 million for a new big-box store and $14-
Fiscal 2008 to date, RONA has opened six stores – two big-box and four
Proximity. Another Proximity store originally scheduled to open this year, is now
expected to open in early 2009. Management had indicated that it expects to
open two big-box (one relocation) and five Proximity stores (two relocations)
in 2009. However, we question whether the company will maintain its new
store opening goals for next year given the deteriorating economic climate, and
suspect that RONA will likely postpone some of these projects to early 2010 (we
address this further in the Financial Section of the report).
Proximity Store expansion in Western Canada and Ontario is the focus. RONA
The majority of new store
openings will likely focus
currently has land bank and site commitments for over 30 new stores, with the
on Ontario and Western majority located in Ontario and western Canada. We expect the majority of new
Canada. store openings to be Proximity stores averaging 52,000 sf, given 1) the limited sites
available for big-box formats, as we discuss below, and 2) RONA’s ability to
leverage its distribution structure in addressing local customer needs with smaller
store formats.
The big-box is a large format retail footprint of 85,000–140,000 sf. Since their
appearance in 1992, big-boxes enjoyed significant growth and through the mid-
1990s, sales grew as much as 30%, per Hardlines. The rate of sales growth peaked
in 2005, when market share topped 21.8%, and dropped slightly to 21.5% in 2007.
Canada counted 255 big-box stores, and will likely end 2008 with 264. Home
Depot is the largest in this category, with 172 stores; RONA comes in second with
77. Kent, the third player with seven stores, operates only in Atlantic Canada. The
announcement of Lowe’s entry into Canada, and the subsequent opening of eight
stores, adding yet a third (potentially) national player in the country, have
prompted queries over the ultimate penetration level of this store format.
RONA management believes that the Canadian market for big-box stores is
close to saturation, and our analysis below seems to concur. As described in the
section above, this is part of the reason why RONA has been scaling back the
opening of this store format (having pioneered the ‘mini big-box’ as far back as
1997, with its RONA Regional banner in Quebec). Home Depot, which had 165
big-box stores in Canada (65% of total) at the end of 2007, is also testing smaller
store formats with a 45,000 sf prototype opened in Ontario in October 2008.
A recent article in Hardlines pointed out that unless Lowe’s can increase the big-
box market share without taking it solely from competitors, the total size of
Canada’s big-box market is not likely to increase dramatically. We agree with this
and believe that over the next couple of years, if Lowe is successful in pursuing its
aggressive market penetration (with a target of 100 stores), both Home Depot and
Western Canada Big Box Penetration by Company Atlantic Provinces Big Box Penetration by Company
Square # of people Square # of people
# of Footage/ / big-box # of Footage/ / big-box
big-box Population (000) big-box Population (000)
Home Depot 55 0.60 182 Home Depot 8 0.38 291
RONA 15 0.16 668 RONA 1 0.05 2,326
Kent 0 - - Kent 7 0.33 332
Lowe's 0 - - Lowe's 0 - -
Total 70 0.77 143 Total 16 0.76 145
1,2 1,2
New Additions Possible 21 New Additions Possible 5
1
Assumes saturation point of 1 sf per person
2
Assumes average big-box = 110,000 sf in size.
Note: Store counts and population statistics as of 2007
As can be seen in Exhibit 21, our saturation analysis suggests that the Canadian
The big-box format may be
nearing saturation, with
market could absorb 44 big-box store openings in 2007, using the suggested rule of
about 39 store openings thumb ratio of 1 sf of space per person. A similar analysis of the U.S. market
possible according to our indicates that the current square footage/population ratio stands at 1.43. However,
saturation analysis. assuming this same ratio for Canada would be a mistake in our opinion, as
Canada’s population density is at least nine times less than it is in the U.S. Taking
into account the number of stores opened 2008 to date, and the recently
published 2008 population count, the maximum number of big-box stores
possible in 2008 slips to 39.
1
Store count as of Q3/08
2
Store count as of Q4/08
3
Assumes saturation point of 1 sf per person
4
Assumes average big-box = 110,000 sf in size.
Since Lowe’s first foray into Canada was in Ontario, we have taken a closer look
at the saturation of the Ontario market. Using the same assumptions as above, the
Ontario market seems to have little room for new big-box stores, or four net new
additions possible. Ontario’s denser population, relative to other regions, would
justify a higher saturation level (as is the case in the U.S.). A slight tweak to the
saturation level to 1.05 sf of space per person and a store size of 100,000-110,000
sf, raises the number of possible additions to 10–21 stores.
Ontario Big Box Penetration by Company 2008E Sensitivity Analysis – # of Big Box Additions Possible in Ontario
Square # of people Saturation Point (# of Sq. Ft. per Person)
Population Population # of Footage/ / big-box 1.00 1.05 1.10 1.15
Avg. Square Footage of
1
Opened four stores in Ontario year to date as of Q3/08
2
Assumes saturation point of 1 sf per person
3
Assumes average big-box = 110,000 sf in size.
Lowe’s announced entry into the Canadian market in June 2005 prompted
speculation surrounding its potential interest in acquiring RONA. This appears to
have subsided of late, but remains in the back of investors’ minds as a possibility;
we chose to address it as we believe that there are a number of reasons why an
acquisition of RONA might not make sense, for now.
Lowe’s maintains its • Both RONA and Home Depot are scaling their store sizes back as discussed in
intention to open full sized the previous section. The exception to the rule remains Lowe’s Canada, which
big-box stores in Canada. has maintained its intention to build full sized big-box stores and a disciplined
approach to its store format. Industry observers seem to attribute this to Lowe’s
desire to provide Canadian consumers the full product assortment in order to
make biggest impact on the market, which it seems to have achieved.
• A few corporate differences arise when looking at the two companies as well:
Lowe’s entire store network is corporately owned, whereas RONA’s includes
23 franchised stores (or 3.3% of its network). Admittedly, this is not a big
factor as these franchised stores could be converted or sold if need be. Also,
Lowe’s typically owns 90% of its real estate, versus RONA’s 25%. And, most
importantly, particularly given that Lowe’s has such a disciplined
approach to its store formats, we would be hard-pressed to see the
company become interested in RONA’s affiliated dealer network of 435
stores (or 63% of its store network, which tends to be small in size).
Also, RONA’s distribution network fully integrates both its corporate stores and
affiliates and would be nearly impossible to separate. About 25% of RONA’s
workforce is unionized, whereas Lowe’s (and Home Depot’s) is not. And
finally, there’s the Quebec factor. Owing to cultural differences and additional
costs involved in following laws governing the use of two official languages in
the province, it is typically developed last (or not at all). A few examples that
come to mind include retailers such as Pottery Barn, Williams Sonoma, and
Restoration Hardware that have yet to open stores in the province.
Driven by a well thought out acquisition and affiliate recruitment strategy and
mid-single digit SSS growth, RONA’s net sales grew at a CAGR of 20%, and
EBITDA margins rose on average 70 bps per year, between 2001 and 2006.
Over the same period, organic growth averaged 7.5% and EPS (f.d.) grew at a
CAGR of 25%, as the home improvement industry benefitted from a booming
housing market and RONA implemented initiatives to increase store traffic, sales
and profits. In fiscal 2007, RONA faced significant headwinds, with worsening
economic conditions and unfavourable weather conditions. For the year, the
company recorded a meager 0.9% organic growth, saw SSS drop for the first time
in its history as a public company and EBITDA margins retreat 10 bps.
Exhibit 23. RONA Inc.: Select Historical and Forecast Income Statement Statistics
C$mm
C$b
3.0 100
6.0% 80
2.0 60
1.0 5.0% 40
20
0.0 4.0% 0
2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Retail Sales & EBITDA margins Distribution Sales & EBITDA margins
5.0 9.5% 1.5 8.0%
4.5 7.0%
9.0%
4.0 1.3
6.0%
3.5 8.5%
3.0 1.1 5.0%
8.0%
C$b
C$b
2.5 4.0%
2.0 7.5% 0.9 3.0%
1.5 7.0% 2.0%
1.0 0.7
6.5% 1.0%
0.5
0.0 6.0% 0.5 0.0%
2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Q3/08 review
In its 2009 Budget, the Federal Government proposed a new Home Renovation
Tax Credit (HRTC). Effective through January 31, 2010, homeowners can claim a
tax credit for 15% of renovation expenses up to $1,350, for projects between
$1,000 and $10,000. The government estimated the total value of the tax credit at
approximately $3 billion, and expects about 4.6 million families to take advantage
of the benefit. The government of Quebec, the province where RONA generates
about half its business, also announced in January, that it would provide
homeowners with a refundable tax credit of up to $2,500 for home improvement
and renovation expenses in excess of $7,500.
Exhibit 24. RONA Inc.: LTM EBITDA Margins and EPS to Trough in Mid-2009
$1.70
8.5% $1.60
$1.50
8.0% $1.40
$1.30
7.5%
C$
$1.20
7.0% $1.10
$1.00
6.5% $0.90
$0.80
6.0% $0.70
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08E
1Q09E
2Q09E
3Q09E
4Q09E
1Q10E
2Q10E
3Q10E
4Q10E
4Q08E
1Q09E
2Q09E
3Q09E
4Q09E
1Q10E
2Q10E
3Q10E
4Q10E
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
Our sensitivity analysis indicates that each 1% change in SSS yields a 15–20
Each 1% change in SSS
bps change in EBITDA margin for RONA on an annual basis (or
yields a 15–20 bps change
in EBITDA margin for RONA
$0.03–0.04/share). The sensitivity is more pronounced in Q1 and Q4, given
on an annual basis. revenue seasonality and taking into account the lower fixed cost absorption during
these slower quarters.
Looking back at the past few recessions, the cyclical peak to trough decline in U.S.
existing home sales has averaged 30%. In the current cycle, the U.S. housing
bubble began to burst in 2005-2006, due to high default rates on subprime and
adjustable rate mortgages (ARMs). Since the peak of September 2005, U.S.
existing home sales are down 37%, nearing the level reached in the recession of
the 1980s (-39%). In Canada, since the peak of November 2007, existing home
sales have also dropped 37%. Although Canada is not subject to the same
difficulties tied to the U.S. subprime mortgage, existing homes sales activity
appears to have caught up rather quickly with U.S. housing declines. This is
despite the stark differences in the two housing markets, such as the lack of
aggressive lending practices in Canada and the consequent lower foreclosure rates.
(2) (2)
US Residential Investment as a % of GDP Canada Residential Investment as a % of GDP
(in qtrs) % % (in % pts) (in qtrs) % % (in % pts)
Recession: 'Jan '80–July '80 (length: 7 months) 6 5.8% 4.1% -1.7 3 5.0% 4.6% -0.4
Recession: 'Jul '81–Nov '82 (length: 16 months) 7 4.5% 3.2% -1.3 5 4.8% 4.0% -0.8
Recession: 'July 90–Mar '91 (length: 8 months) 9 4.7% 3.3% -1.3 3 5.8% 5.1% -0.7
Average ex-2001 7 -1.4 4 -0.6
Recession of Dec 07–? 12 6.3% 3.1% -3.2 3 5.7% 5.6% -0.1
1
Note that the housing market peak occurred in Sept 05; whereas in Canada, the peak occurred in Nov 07
2
Note that residential Investment as % of GDP peaked in 4Q/05 in the US; whereas the peak in Canada occurred in 4Q/07
Note: Cycle peak to trough performance for Dec. '07 to-date recession reflects latest available information
U.S. companies in the home improvement and home building industry have
consistently used the ratio of U.S. private residential investment as a percentage of
GDP as a guidepost to market conditions. In 2005, the ratio peaked at 6.3%. The
60-year average is 4.8% and the ratio today stands at 3.1%, down considerably
from historical averages. Interestingly, this level coincides with past troughs
reached in December 1982 and March 1991. Acknowledging that the current
recession may be more severe, one could expect further downward pressure on this
ratio.
Using TD Economics’ forecast U.S. GDP for 2009 and 2010, we have tried to
extrapolate the decline in U.S. private residential investment by assuming that the
ratio to GDP drops steadily through Q2/09 to reach an all time low of 2.8%, and
gradually reverts upward thereafter. This exercise yields a forecast drop of 14% in
residential investments. However, it is important to remember that new housing is
the largest component (approximately 50%) of U.S. residential investments;
historically, it has accounted for about 55% of the drop seen in residential
investments. The balance of the drop (or 6.5%) pertains to a combination of
factors, of which home improvement is the largest component.
100.0
16.5 (2%) YoY Chg in (17%) YoY Chg in
13.8 Residential Investment Residential Investment
50.0 63.3
-115.4
-100.0
-16.8
-150.0
2005 2006 2007
Source: BEA.
Q1/07 Q2/07 Q3/07 Q4/07 Q1/08 Q2/08 Q3/08 Q4/08E Q1/09E Q2/09E Q3/09E Q4/09E 2008 2009E
Canada Residential Investment (C$b; LTM) 83 85 87 89 90 91 92 85 80 73 70 71 85 71
GDP (C$b; SAAR) 1,504 1,537 1,542 1,560 1,576 1,619 1,640 1,577 1,539 1,544 1,562 1,583 1,603 1,557
GDP y/y chg 10.2% 8.7% 1.4% 4.8% 4.1% 10.9% 5.0% -15.3% -9.7% 1.5% 4.6% 5.4% - -2.9%
Canada Residential Investment as % of GDP 5.5% 5.5% 5.6% 5.7% 5.7% 5.6% 5.6% 5.4% 5.2% 4.7% 4.5% 4.5% 5.6% 4.7%
For 2009, we have modelled a base case drop of 4% in retail SSS for RONA. This
takes into account the troughs in relevant metrics discussed above, but also the
company’s ability to partially offset some of the decline through initiatives detailed
earlier in this research report. These include, among others, 1) forecast store
upgrades and new concepts, 2) a focus on increasing the proportion of private label
products, which should be more attractive to the cost-conscious consumer, 3)
increased promotions using loyalty programs such as Air Miles, and 4) potential
benefits from the Federal and Quebec home improvement tax credits.
RONA ended Q3/08, with cash on hand of $29 million. Management committed
Management committed to
reduce debt levels and to lower debt levels and delivered on this promise, repaying $124 mm in debt
delivered on this promise, year to date through disciplined management of working capital and capex. Its
repaying $124 million in Debt/EBITDA and Debt/Cap ratios stood at 1.4x and 0.27:1. The company has
debt year to date. historically been FCF positive, enabling it to finance capital projects with
internally generated cash flows. In 2007, RONA generated $60 million in FCF; we
are forecasting FCF of $132 million (or $1.13 per share) in 2008, slipping to $31
million (or $0.27 per share) in 2009.
Fiscal 2009 capex guidance stood at $200 million at Q3/08, and had been reduced
in Q2/08 from $240 million, when management opted to postpone the expansion of
its Calgary DC and some store construction/upgrades in light of slowing consumer
demand. About $160 million of 2009 capex is for store construction, improvements
or renovations, and property acquisition, with the remaining $40 million earmarked
for upgrading information systems. Our 2009 capex forecast stands at $160
million, as we are forecasting fewer new store openings and expect that some
upgrades will be delayed.
RONA has a $650 million credit facility due in 2012, of which $68 million was
drawn as of Q3/08. Its unsecured medium-term notes due in 2016, which represent
approximately 60% of debt outstanding, are rated BBB (stable outlook) by DBRS,
and BBB- (negative outlook as of Q1/08) by S&P. Management has indicated
that maintaining investment grade debt is a key priority and its actions have
been consistent with this goal to date. This essentially calls for ensuring that
adjusted debt/EBITDAR remains below 3.3x. This ratio currently stands at 2.9x.
C$mm
400 acquisition
150 15%
300
100 200 10%
50 100 5%
0 0 0%
2008E
2009E
2010E
2002
2003
2004
2005
2006
2007
2002
2003
2004
2005
2006
2007
2008E
2009E
2010E
While we include Canadian Tire in the tables below, we limit our discussion to a
comparison between RONA and its two pure comparables, Home Depot and Lowe’s.
Canadian Tire is the closest Canadian retailer comparable to RONA, but we feel that
the diversification of its operating segments makes it less of a “pure” comparable.
After achieving double-digit sales growth in 2005 at the end of the U.S. housing
boom, both Home Depot and Lowe’s growth dropped significantly. RONA’s sales
held up better, thanks to acquisitions undertaken at that time, but have since tapered
off as well. SSS for all three home improvement retailers were negative in 2007.
12%
8%
4%
0%
-4%
-8%
-12%
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
RON (1) RON - reported SSS HD LOW
1) RONA's SSS growth assumes constant lumber prices and comparable year over year number of weeks
RONA has historically generated EBITDA margins below those of its direct
comparables. We believe this is due to 1) its lower margin distribution business;
2) a larger part of its network being made up of mostly Proximity stores and
catering to local market demands versus Home Depot and Lowe’s, which operate
essentially only big-boxes; and 3) costs associated with RONA’s aggressive
acquisition growth.
Sales (mm)
5-Year
6
2002 2003 2004 2005 2006 2007 2008E CAGR
HD (US$) 58,247 64,816 73,094 81,511 79,022 77,349 71,441 5.8%
LOW (US$) 26,112 30,838 36,464 43,243 46,927 48,283 48,411 13.1%
CTC (C$) 5,945 6,553 7,154 7,722 8,269 8,621 9,145 7.7%
1
CTR (C$) 4,339 4,642 4,899 5,094 5,355 5,485 - 4.8%
RON (C$) 2,332 2,710 3,680 4,026 4,552 4,785 4,844 15.5%
7
RON–Retail (C$) 1,386 1,757 2,579 2,903 3,436 3,692 3,720 21.6%
EBITDA (mm)
5-Year
6
2002 2003 2004 2005 2006 2007 2008E CAGR
HD (US$) 6,733 7,922 9,245 10,942 10,752 9,148 6,998 6.3%
LOW (US$) 3,213 3,924 4,638 5,705 6,389 6,169 5,413 13.9%
CTC (C$) 555 601 706 800 827 905 876 10.3%
1
CTR (C$) 385 410 488 530 552 569 - 8.1%
RON (C$) 129 175 277 332 384 400 377 25.5%
7
RON–Retail (C$) 99 133 220 268 317 327 302 26.9%
EBITDA Margin
5-Year
6
2002 2003 2004 2005 2006 2007 2008E Average
HD 11.6% 12.2% 12.6% 13.4% 13.6% 11.8% 9.8% 12.7%
LOW 12.3% 12.7% 12.7% 13.2% 13.6% 12.8% 11.2% 13.0%
CTC 9.3% 9.2% 9.9% 10.4% 10.0% 10.5% 9.6% 10.0%
1
CTR 8.9% 8.8% 10.0% 10.4% 10.3% 10.4% - 10.0%
RON (C$) 0.54 0.72 1.20 1.51 1.64 1.59 1.36 24.1%
ROIC
5-Year
8
2002 2003 2004 2005 2006 2007 2008 YTD Average
HD 18.8% 19.2% 19.9% 20.4% 16.8% 13.9% 11.1% 18.0%
LOW 13.0% 14.0% 14.9% 16.7% 16.3% 13.1% 10.6% 15.0%
CTC 5.9% 6.6% 7.5% 8.6% 8.5% 9.2% 7.8% 8.1%
Exhibit 32. RONA Inc.: Income Statement ($mm, except per-share figures)
A Division of TD Securities Inc.
Fiscal Year End: December 2003 2004 2005 2006 Q1/07 Q2/07 Q3/07 Q4/07 2007 Q1/08 Q2/08 Q3/08 Q4/08E 2008E 2009E 2010E
Net sales 2,710 3,680 4,026 4,552 878 1,469 1,350 1,087 4,785 912 1,473 1,382 1,077 4,844 4,757 4,963
YoY Growth 16.2% 35.8% 9.4% 13.1% 10.0% 9.1% 6.7% -4.8% 5.1% 3.8% 0.3% 2.3% -0.9% 1.2% -1.8% 4.3%
Organic Growth 3.6% 14.1% 4.2% 6.0% 4.7% 4.8% 2.5% -1.9% 2.9% -3.5% -1.7% -0.3% -2.4% -1.7% -1.8% 4.3%
COGS and SG&A Expenses 2,476 3,319 3,590 4,048 808 1,273 1,196 978 4,255 844 1,281 1,228 973 4,326 4,262 4,432
EBITDAR 234 361 436 504 71 196 154 109 530 68 192 154 105 518 495 531
Unusual items 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net Income(Loss) 78 138 175 191 9 86 59 30 185 1 80 53 24 158 142 161
Profitability Analysis:
EBITDA Margin 8.6% 9.8% 10.8% 11.1% 8.1% 13.3% 11.4% 10.0% 11.1% 7.4% 13.0% 11.1% 9.7% 10.7% 10.4% 10.7%
EBITDA Margin 6.5% 7.5% 8.3% 8.4% 4.6% 11.0% 9.0% 7.0% 8.4% 3.7% 10.7% 8.4% 6.6% 7.8% 7.5% 7.8%
EBIT Margin 5.1% 6.2% 6.9% 6.8% 2.2% 9.5% 7.3% 4.8% 6.5% 0.9% 8.7% 6.4% 4.0% 5.5% 5.1% 5.4%
EBT Margin 4.5% 5.8% 6.5% 6.3% 1.4% 8.9% 6.7% 4.1% 5.8% 0.0% 8.1% 5.9% 3.4% 4.9% 4.5% 4.8%
Net Profit Margin (before non-controlling interest & one-time items) 2.9% 3.8% 4.4% 4.3% 1.0% 6.0% 4.5% 2.9% 4.0% 0.0% 5.6% 4.1% 2.3% 3.4% 3.1% 3.3%
Net Profit Margin (before one-time items) 2.9% 3.8% 4.4% 4.2% 1.0% 5.9% 4.4% 2.8% 3.9% 0.1% 5.4% 3.9% 2.2% 3.3% 3.0% 3.2%
Net Profit Margin 2.9% 3.8% 4.4% 4.2% 1.0% 5.9% 4.4% 2.8% 3.9% 0.1% 5.4% 3.9% 2.2% 3.3% 3.0% 3.2%
Fiscal Year End: December 2003 2004 2005 2006 Q1/07 Q2/07 Q3/07 Q4/07 2007 Q1/08 Q2/08 Q3/08 Q4/08E 2008E 2009E 2010E
Net New Store Openings 2 4 6 8 0 2 2 (2) 2 (1) (3) 1 0 (3) 4 7
Adj. SSS (non-constant lumber) 1,2 3.7% 9.0% 0.4% 0.3% -0.1% 0.3% -0.6% -2.5% -1.6% -5.7% -6.0% -3.5% -5.5% -5.1% -4.9% 1.0%
Adj. SSS Growth (constant lumber price) 1 3.7% 9.0% 1.0% 1.4% 1.1% 1.4% 0.1% -2.1% -0.8% -5.2% -5.5% -2.8% -5.5% -4.7% -4.9% 1.0%
New Affiliates Recruited 12 25 31 37 9 0 0 18 27 9 12 4 2 27 33 33
Annual retail sales added from new affiliates (C$m) 60.0 105.0 191.0 198.0 27.0 0.0 0.0 54.0 81.0 50.0 50.0 10.0 9.0 119.0 148.5 148.5
Net Sales
Retail Segment 1,757 2,579 2,903 3,436 642 1,126 1,057 867 3,692 683 1,130 1,062 845 3,720 3,578 3,677
Distribution Segment 954 1,101 1,124 1,116 237 343 293 220 1,093 229 343 320 233 1,124 1,179 1,286
Consolidated Net Sales 2,710 3,680 4,026 4,552 878 1,469 1,350 1,087 4,785 912 1,473 1,382 1,077 4,844 4,757 4,963
EBITDAR
Retail Segment 180 288 349 414 50 163 130 96 440 48 159 127 87 421 396 420
Distribution Segment 54 73 87 90 21 33 24 13 90 20 32 27 17 97 99 111
Consolidated EBITDAR 234 361 436 504 71 196 154 109 530 68 192 154 105 518 495 531
Rent
Retail Segment 47 68 82 97 25 28 27 33 113 28 29 32 30 119 121 122
Distribution Segment 12 16 22 23 5 6 6 0 17 6 6 6 4 22 20 23
Consolidated Rent 59 84 104 120 30 34 32 33 130 34 34 38 34 141 141 144
EBITDA
Retail Segment 133 220 268 317 25 135 103 64 327 19 131 94 58 302 275 298
Distribution Segment 42 57 65 67 16 27 18 12 73 14 27 21 13 75 79 88
Consolidated EBITDA 175 277 332 384 41 162 122 76 400 33 157 116 71 377 354 387
Fiscal Year End: December 2003 2004 2005 2006 2007 2008E 2009E 2010E
Operating Activities
Net Income 78 138 175 191 185 158 142 161
Cash Before Non-Cash Working Capital Balances 109 179 239 283 286 275 262 287
Cash Provided By Operating Activities 114 107 159 283 277 314 191 251
Investing Activities
Business acquisitions (332) (7) (123) (169) (229) (4) 0 0
Advances to joint ventures and other advances 2 (1) 1 (5) (3) 8 0 0
Other investments (3) (2) (3) (1) (1) (2) 0 0
Fixed assets (72) (71) (144) (232) (234) (200) (160) (200)
Other assets (12) (12) (7) (11) (9) (8) (8) (8)
Disposal of assets 16 114 34 7 17 18 0 0
Cash Provided By (Used In) Investing Activities (401) 22 (242) (412) (458) (189) (168) (208)
Financing Activities
Bank loans and revolving credit 50 5 101 (200) 156 (106) 15 0
Other long-term debt 117 1 5 406 2 2 0 0
Repayment of other L/T debt and redemption of preferred shares (29) (130) (28) (21) (36) (18) 0 (28)
Net issue of common shares 153 3 4 5 5 4 0 0
Issue of equity securities to non controlling interest 0 0 1 1 1 0 0 0
Redemption of equity securities from non-controlling interest 0 0 0 (1) 0 0 0 0
Other (7) 0 0 (7) (2) 0 0 0
Cash Used In Financing Activities 283 (121) 83 183 126 (118) 15 (28)
Fiscal Year End: December 2003 2004 2005 2006 2007 2008E 2009E 2010E
ASSETS
Cash and short term investments 0 5 4 58 3 10 48 63
Accounts Receivable 139 158 182 206 237 257 290 308
Income taxes receivable 0 0 0 0 6 11 11 11
Inventories 529 623 734 790 856 775 794 841
Prepaid expenses 8 10 14 23 28 28 38 40
Derivative financial instruments 0 0 0 0 1 0 0 0
Future income taxes 9 11 9 11 12 12 12 12
Other 0 0 0 0 0 0 0 0
Total Current Assets 684 807 942 1,089 1,143 1,094 1,194 1,275
Investments 25 22 19 18 12 10 10 10
Fixed assets 360 303 416 634 817 880 927 1,007
Fixed assets held for sale 0 0 0 0 0 36 36 36
Goodwill 160 163 252 317 455 456 456 456
Trademarks 0 0 0 1 4 4 4 4
Other 14 18 17 30 29 30 38 46
Future income taxes 18 24 22 19 23 22 22 22
Total Assets 1,262 1,337 1,668 2,108 2,482 2,532 2,687 2,856
Long Term Debt 164 137 230 455 603 499 499 471
Other long-term liabilities 2 17 16 20 25 27 27 27
Future income taxes 8 9 14 19 24 23 23 23
Non-controlling interest 5 5 15 24 26 32 37 42
Total Liabilities 652 584 731 974 1,157 1,042 1,054 1,061
Capital stock 403 406 411 416 421 426 426 426
Retained earnings 205 344 519 709 893 1,051 1,194 1,354
Contributed surplus 1 3 7 9 11 13 14 16
Total Shareholder's Equity 610 753 936 1,134 1,325 1,489 1,633 1,795
Total Liabilities & Shareholders' Equity 1,262 1,337 1,668 2,108 2,482 2,532 2,687 2,856
Debt / Total capital 0.32 0.18 0.22 0.31 0.33 0.27 0.25 0.23
Net Debt / Total capital 0.32 0.18 0.22 0.27 0.33 0.26 0.23 0.20
Equity / Total capital 0.68 0.82 0.78 0.69 0.67 0.73 0.75 0.77
Total Debt / Equity 0.47 0.22 0.29 0.45 0.50 0.36 0.34 0.29
Net Debt / Equity 0.47 0.22 0.28 0.39 0.49 0.35 0.31 0.26
Adjusted Debt/EBITDAR 3.0x 2.1x 2.3x 2.7x 3.0x 2.9x 3.1x 2.9x
Interest Coverage (EBIT) 8.0x 14.9x 17.2x 14.0x 9.8x 8.7x 8.7x 10.1x
Interest Coverage (EBITDA) 10.0x 18.2x 20.6x 17.3x 12.7x 12.3x 12.8x 14.6x
ROA 7.7% 10.6% 11.7% 10.1% 8.1% 6.3% 5.5% 5.8%
ROE 15.7% 20.3% 20.7% 18.4% 15.1% 11.2% 9.1% 9.4%
ROIC 11.0% 15.2% 16.5% 13.4% 10.2% 7.9% 6.8% 7.1%
Book Value per Share 5.74 6.63 8.20 9.89 11.49 12.88 14.12 15.52
Adjusted Book Value per Share (Ex-goodwill) 4.23 5.19 5.99 7.13 7.55 8.93 10.17 11.58
$8
$6
May-04
May-06
May-08
Mar-04
Mar-06
Mar-08
Dec-02
Nov-03
Nov-04
Dec-04
Nov-05
Nov-06
Dec-07
Oct-02
Nov-08
Feb-03
Apr-03
Oct-03
Aug-03
Feb-05
Apr-05
Oct-05
Feb-07
Apr-07
Oct-07
Jun-03
Jan-04
Jul-04
Sep-04
Jun-05
Aug-05
Jan-06
Jul-06
Sep-06
Jan-07
Jun-07
Aug-07
Feb-08
Jul-08
Sep-08
Jan-09
Source: Company reports; Bloomberg.
Our aim here is to try to analyze how the two main home improvement stocks,
Home Depot and Lowe’s, typically behave in a given business cycle, particularly
the timing of their trough relative to the official contraction dates as defined by the
National Bureau of Economics (NBER), and relate this back to RONA, which has
been public only since 2002.
Despite the fact that both Home Depot and Lowe’s have been public companies
through four official recessions (including the current one), we are unable to
include all of these periods due to the particular circumstances of the stocks.
During the recession of July 1981-November 1982, both companies were in their
infancy. In the July 1990-March 1991 recession, both were growing rapidly (and
their stock prices reacted accordingly). As a result, the only recession that may
give us some indication of what is in store for home improvement stocks in the
current downturn, is the March 2001-November 2001 recession. But, it is not really
comparable to the one we are experiencing now. The recession in 2001 was mainly
a business investment recession that followed periods of excessive investment.
Consumer spending remained strong during 2001 (a pattern unlike most post-
World War II recessions, when consumer spending typically declined), the
unemployment rate remained relatively low, and personal income continued to
increase, adding to consumers' purchasing power.
We have therefore broadened our analysis and looked at a few indices and select
consumer discretionary stocks that we feel are comparable to RONA in their
relation to the housing market. Unfortunately the scarcity of comparable Canadian
public companies prior to the mid-1990s, has forced us to focus on U.S. data. Pure
play Canadian building products companies such as Royal Group, Masonite and
CFM Majestic would have formed a good proxy to look at, but these companies
are no longer around. As such, the indices that we looked at include U.S. Building
Acknowledging that economists may be optimistic in their expectations for the end
of the current recession, we look at the return performance of these same indices,
three and six months prior to their trough. Despite the stocks being bought early,
we found that the returns produced through the recovery were sufficient for
investors to generate positive returns absolutely and relative to the market.
S&P Building Products Index nmf 5 49% 117% 46% 23% 28%
S&P Home Building Index nmf 5 79% 189% 90% 75% 61%
Average Home Building and Building Mat. nmf 5 64% 153% 68% 49% 45%
S&P Automotive Index nmf 3 14% 56% -8% 15% -16%
Overall Average nmf 5 47% 120% 43% 38% 25%
S&P 500 23% 56% 29% 13% 22%
2
Canadian Consumer Discretionary Index 12 6 24% 48% 14% 2% -13%
S&P TSX 13% 32% 14% -4% 2%
2,3
Canadian Consumer Discretionary Index 9 8 12% 18% 36% 40% -2%
S&P TSX 9% 52% -10% -15% -14%
2
Canadian Consumer Discretionary Index 12 6 24% 48% 14% 2% -13%
S&P TSX 23% 61% 41% 27% 20%
At 9.7x forward PE, RONA is currently trading at a 36% (or 5 point) discount
to its two closest comparables and is actually at the widest spread relative to
both competitors since shortly after its IPO. Applying the historical multiple
discount versus its two competitors, yields a forward multiple closer to
12.0–12.5x for RONA. It is also worth noting that the stock commanded a
premium valuation of 13.7x P/E and an average share price of $21.80 in 2007,
when RONA generated EBITDA of $400 million. We see the company trending
back to these levels, with forecast EBITDA of $390 million in 2010, and would
therefore expect the valuation to reflect the recovery in earning power.
Exhibit 38. RONA inc.: P/E Spread Relative to Home Improvement Comparables
Historical Trailing P/E Historical Forward P/E
30 X 25 X
Average Spread ('03 to-date):
Average Spread ('03 to-date): RON vs. HD: (16%)
25 X RON vs. HD: (7%)
20 X RON vs. LOW: (25%)
RON vs. LOW: (21%) RON vs. Avg. HD & Low: (21%)
RON vs. Avg. HD & Low: (15%) 16.1x
20 X
15 X
15 X 14.4x
10 X
10 X HD & LOW
HD & LOW 9.7x
trough
trough
5X 5X
Current
37530
37622
37712
37803
37895
37987
38078
38169
38261
38353
38443
38534
38626
38718
38835
38929
39021
39113
39202
39294
39386
39478
39568
39660
39752
37622
37712
37803
37895
37987
38078
38169
38261
38353
38443
38534
38626
38718
38835
38929
39021
39113
39202
39294
39386
39478
39568
39660
39752
Current
RON HD LOW RON HD LOW
S&P/TSX Consumer Discretionary STCOND $770 10.5x 12.0x 10.2x na 7.6x 7.4x 6.7x na
S&P/TSX Composite SPTSX $9,047 10.0x 12.1x 9.9x na 9.8x 10.3x 9.1x na
RON RONA Inc. Dec CAD $11.85 $1,371 8.4x 8.7x 9.7x 8.6x 24% -12% 5.0x 5.1x 5.4x 4.9x 1.3x 0.3x
Premium (Discount) to Home Depot & Lowe's -27% -33% -36% -35% -20% -23% -26% -24%
Premium (Discount) to DIY Retailers -20% -24% -27% -26% -17% -18% -20% -19%
Premium (Discount) to Select North American Retailers -30% -28% -21% -13% -22% -21% -15% -13%
1
Stock price converted to US$ using current
Note: Earnings for companies with fiscal year-end on or prior to June 30 included in previous year's column
The stock is currently trading at 9.7x forward P/E relative to its historical forward
P/E multiple of 12.0x. Aside from a few exceptions, the stock has historically
traded in line with consensus EPS expectations. We refrain from using an
EV/EBITDA valuation as comparisons with Home Depot and Lowe’s are difficult
owing to the differing real estate ownership models (RONA owns 25% of its real
estate, versus 90% for both Home Depot and Lowes).
Our $15.50 target is based on 11.0-11.5x our 2010 EPS estimate. This multiple is
also in line with the average forward discount of 20% relative to Home Depot and
Lowe’s. Our target also implies an EV/EBITDA valuation of 6.0–6.5x. Our target
yields a 31% return and, in our view, justifies a BUY rating on the stock.
RON - Forward P/E vs. YoY Growth in Forward EPS RON - Historical Forward P/E
18.0x 70% 18 X
60%
16.0x 16 X
50% 13.8x
YoY Change (%)
14.0x 40% 14 X
30% 12.1x
12.0x 20% 12 X
10% 9.7x
10.0x 10 X
0% 10.5x
8.0x -10% 8X
-20%
6.0x -30% 6X
37622
37712
37803
37895
37987
38078
38169
38261
38353
38443
38534
38626
38718
38835
38929
39021
39113
39202
39294
39386
39478
39568
39660
39752
Current
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Therefore, the stock could experience further weakness in the near term, as the
We believe that investors market awaits visibility on the timing of a rebound (which the challenging macro and
should be invested in
housing market conditions render difficult to predict), and as estimates are potentially
RONA ahead of the SSS
recovery and the bottoming
lowered after Q4 results are released. However, we believe that investors should be
in fundamentals toward mid gradually accumulating positions in RONA at opportunistic prices, in
to end 2009. anticipation of a bottoming in fundamentals toward mid to end 2009, especially
given that home improvement and housing related stocks have typically been
among the first consumer related stocks to rebound. This argument is also
supported by the lack of choice in large cap discretionary consumer stocks in
Canada, which should ultimately attach some scarcity value to RONA’s stock.
Inability to retain and recruit dealers: This is an integral part of RONA’s growth
strategy. Failure to continue recruiting dealers would impair the company’s growth
profile.
Departure of key personnel: President and CEO Robert Dutton has been
associated with the company’s success over the 17 years that he has been in this
position. Any uncertainty over his tenure or succession plans is likely to raise some
concern. We note that there is a provision in his pension plan that allows for early
retirement at age 55 (i.e., in 2010). From conversations we held with management
and the enthusiasm demonstrated by Mr. Dutton for the L/T growth opportunities
at RONA, we have no reason to believe that this option would be exercised.
Labour relations: RONA appears to have stable labour relations and it has not
experienced any major labour conflict at least over the past five years. Given that
about 25% of its workforce is unionized, any related disruptions to operations are
likely to affect financial results.
Store Information
Total # of Stores 679 2,234 1,534 473
# of stores in Canada 679 165 6 473
Square Footage (m) 15 235 174 18
Average Store Size Big Box: 60,000–100,000 105,000 117,000 Concept 20/20 (192 stores): 53,000
Proximity: 5,000–60,000 New-format (189 stores): 32,000
Traditional (92 stores): 16,000
4
Product Mix Building Building
materials, Paint and Paint and Building Leisure
materials, Paint and
lumber flooring flooring materials, 30%
lumber flooring
17% 19% lumber Home
and and
and 14% 40%
millwork millwork
28% Plumbing, 22% millwork
electrical 20%
Plumbing, Plumbing,
and
Hardware, electrical electrical
kitchen Hardware,
seasonal Hardware, and and
20% seasonal Automotive
and other seasonal kitchen kitchen
and other 30%
35% and other 31% 32%
34%
28%
Distribution Centres – 9 DCs (3 in QC, 1 in ON, 4 in AB, – 30 lumber DCs in the U.S., – 13 regional DCs in the US – 3 DCs (2 in ON, 1 in AB)
1 in BC) Canada & Mexico – 14 flatbed DCs in the US – 3.1m sqr ft.
– 39 conventional DCs in the U.S., – 4 import facilities & 3 transloads – 4th DC (in QC) under construction
A Division of TD Securities Inc.
Other
Average transaction size (C$) $50 $61.7 $72.0 $39.4
Y/Y Growth n/a -2.4% -2.8% 3.0%
Typical # of skus per store 5 Big Box: 40,000 35,000–45,000 40,000 100,000
Proximity: 20,000–25,000
1
All data refers to CTR division, except where indicated
2
Home Depot and Lowe's data per Hardlines; RONA consolidated sales at retail prices
3
RON adjusted SSS (non-constant lumber but ex-holiday/extra week impact); CTR SSS includes sales from Canadian Tire and PartSource stores, sales from CTR’s online web store and the labour portion of CTR’s auto service sales.
4
CTR Home product categories include: tools, home accessories, consumables, home décor, home repair & maintenance, household appliances, safety & security, storage & organization, electronics, and kitchen and bath;
CTR Leisure includes sports and recreation related products
5
CTR Sku count represents total product offer
Note: Data presented as of 2007
53
Home Depot is the largest home renovation centre in North America and the
second largest player in the Canadian home improvement industry. Since
entering Canada in 1994, the company has ramped up to 172 stores to date.
Hardlines estimates that sales grew at a five-year CAGR of 7% to $6.04 billion in
2007 (Home Depot does not segment Canadian sales) and grew an additional 1.0–
1.5% to $6.1 billion in 2008 from new store openings, partially offset by negative
SSS of approximately 3%.
10%
Newfoundland 1 1 1
5.0 8%
Nova Scotia 3 3 3 $5.0
6%
Ontario 67 75 81
$4.5 4.3 4%
Prince Edward Island 1 1 1
2%
Quebec 19 20 21
$4.0 0%
Saskatchewan 2 3 4
2003 2004 2005 2006 2007 2008E
Total Canada 137 155 165
Sales (LHS) YoY Change (RHS)
Distribution Centres 4
In early 2008, due to challenging market conditions, the company reduced its
planned store openings by 50 and announced the closing of 15 underperforming
stores. Home Depot Canada remained committed to opening 11 stores in 2008
(versus an average of 16 stores per year over the past five years), but only plans to
open three stores in 2009. It intends to focus instead on refitting and expanding
existing stores. Like RONA, Home Depot Canada’s store network expansion in
the past several years has been concentrated in Ontario and western Canada;
we believe the company’s presence in Quebec remains limited in part due to
RONA’s well entrenched market leading position.
Shortly after the December 2007 entry of Lowe’s into Canada, Home Depot
Canada opened its first “Project Store” in Ontario to better address DIY
homeowners, and small repair and remodelling contractors wishing to undertake
construction and décor projects. In 2008, several existing stores were remodelled
into the new format. The company also aims to increase its sales to contactors to
approximately 40% of total sales, from less than 25% presently.
One area where Home Depot Canada has been a market leader is product
innovation. In 2007, it was the first company to introduce an exclusive line of
environmentally friendly products in Canada; it also launched its ‘Catch the Sun’
program, which included products utilizing solar energy. In recognizing the
untapped potential of catering to the pro, the company also operates a Contractor
Plus Loyalty Program. In Canada, the contractor business represents approximately
25% of sales and its goal is to get that up to 40% over the coming years.
As it grew bigger in the U.S. (under then CEO Robert Nardelli), Home Depot
shifted from localization to centralization, adopting a purchasing system favouring
national uniformity (thus further improving its buying power) at the expense of
local customer preferences (not having the right product at right place). Much of its
underperformance over the past few years had been linked to this issue. Also, its
U.S. supply chain is in the midst of a significant overhaul (among other things,
Home Depot is greatly increasing its use of rapid deployment centres), which
we suspect in is leading to transitional issues the short term. In the U.S., about
75% of deliveries are direct-to-store from vendors, which is an inefficient model in
a slowdown. As part of the initiatives undertaken, it is looking to have about 75%
of its goods shipped to centralized DCs and increasing its use of rapid deployment
centers (RDCs), thereby ensuring shorter lead times and fuller truck loads and
simplified execution for vendors. It has also been eliminating non-core product
categories such as pet and automotive supplies.
As in the U.S., about 80% of Home Depot Canada’s deliveries are direct-to-store
from vendors, despite its smaller store formats and even further localized
preferences. To address this shortfall, a new Vice-President, Supply Chain, Canada
appointed last summer is evaluating the possibility of reconfiguring DCs to RDCs.
Home Depot Canada is implementing a new SAP system across the country that
allows for more sophisticated new planogram techniques that can tailor
assortments on a store-specific basis; Canada has been the ‘test’ ground for the
new SAP system, which Home Depot intends to roll-out across the U.S. over the
next two years.
Lowe’s is the second largest home retailer in the U.S., with a 16% market share
Lowe’s made its first foray of the US$306 billion home improvement industry (versus approximately 23% for
into Canada in 2007, Home Depot). As with Home Depot, and due to challenging market conditions,
opening six big-box stores
Lowe’s also reduced its planned new U.S. stores for 2009 to 75–85 stores, down
in southern Ontario.
from 120 opened in 2008, and 153 in 2007. The company made its first foray into
Canada in 2007, with six big-box stores in southern Ontario. Hardlines estimates that
its sales in Canada were approximately $103 million in 2008.
2008E
2009E
2010E
2011E
2012E
2004
2005
2006
2007
Nunavut 0
Total 473
Canadian Tire has 473 CTRs across Canada, owned by independent dealers and
offering over 100,000 automotive, sports and leisure and home products. The
company utilizes numerous store formats, which it continues to revisit in an effort
to improve market penetration. In July 2008, the company opened its first two
14,000–18,000 sf Small Market Stores, with two more to be opened before year
end. Canadian Tire hopes that this new format will better enable it to expand in
rural communities, where management has identified 100–150 “currently
underserved smaller markets”.
The small store concept is also being used to replace/upgrade the company’s
traditional stores. In November, the company opened its first two Smart Stores.
The Smart Store is the latest concept employed to retrofit existing stores as well as
for network expansion (updated version of the Concept 20/20 introduced in 2003).
These stores are meant to be more ‘consumer friendly’ with, among other things,
more open areas and an emphasis on better-performing product categories. The
company also plans to increase the number of stores with a Mark’s Work
Warehouse incorporated inside.
In an effort to shake off With a 12% market share, Home Hardware is the largest privately held
what some industry player in the Canadian home improvement market. In 2007, the company
observers call “a sleepy added six new stores, for a total of 1,031 stores across Canada. The company,
image”, Home Hardware
which is particularly strong in rural and secondary markets, is dealer owned, with
has attempted to reinforce
its brand.
stores ranging from 2,500 to 60,000 sf. In an effort to shake off what some industry
observers call “a sleepy image”, Home Hardware has attempted to reinforce its
brand through partnerships and marketing programs over the past couple of years.
One such program is a new partnership with Aeroplan. However, we note that a
study conducted on behalf of RONA indicates that Air Miles, for which RONA has
exclusivity in Canada, has a much higher penetration than Aeroplan in the Home
Improvement industry. The study shows that 70% of shoppers are Air Miles
collectors, versus 30% for Aeroplan.
% of Home Hardware
Stores Total Estimated Sales
$4.9 4.8 12%
British Columbia 115 11%
Alberta 116 11% $4.7 4.6 10%
Manitoba 41 4%
Source: Hardlines.
RONA shares went public in October 2002 at $13.50 (pre-split). In June 2003, the
company completed a secondary offering of 12.3 million shares at $16.75,
primarily to finance the acquisition of Réno-Dépôt (8.9 million were issued from
treasury and the remaining sold by ITM Entreprises S.A.). The company’s stock
split on a two-for-one basis in March 2005.
The company has 6 million Class D preferred shares outstanding, which it has to
redeem by the end of 2013. These shareholders are entitled to a 4% pre-tax
cumulative dividend rate.
Major Shareholders
RONA has what we view as a strong management team, with extensive experience
in distribution and retailing. Under the leadership of Robert Dutton (since 1992),
the company’s revenues and net earnings have grown at 10-year CAGRs of over
20% and 30%, respectively. We believe that management’s strong track record
– with 18 years of consecutive earnings growth until 2006 –demonstrates its
discipline and commitment to profitably growing the business. A summary of
Key Executives and composition of the Board of Directors are included in
Appendices III and IV.
In 2007, as part of a new LTIP, the company implemented a share unit plan to
further align executive compensation to company performance. Under the new
plan, the LTIP is evenly split between stock options and share units. Share units are
non-dilutive (paid in common shares purchased on the secondary market or an
equivalent amount of cash) and vest over three years, depending on the company’s
performance based on revenue growth and ROE. Based on these metrics, anywhere
up to 150% of the share units can vest in a given year. As of December 30, 2007, a
total of 79,560 had been granted.
In addition to the LTIP program and options grants, RONA further tries to ensure
that management’s interests are aligned with shareholders’ interest through its
short-term incentive targets and stock ownership requirements. Eighty percent of
the CEO’s bonus is determined by an EBT target; 70% of other executive officers’
bonuses are based on corporate (EBITDA and sales) and business unit (sector
financial performance and customer service) targets. Additionally, all executive
officers must own a minimum number of common shares based on their respective
salaries (3x in the case of the CEO, and 1x for all others).
Robert Dutton, President and Chief Executive Officer, joined RONA in 1977, and
has been CEO since 1992. He was Vice-President and COO between 1990 and 1992.
Related to
Name Position Management Since
Louise Caya VP & Controller, Industrie Fabco Yes May 2002
Doris Joan Daugney Corporate director No May 2007
Pierre Ducros Corporate director No May 2005
Robert Dutton Presiden & CEO Yes March 1990
Jean Gaulin Chairman of the board No May 2004
1 President of Maximat Yes May 2002
Jean-Guy Hébert
J. Spencer Lanthier Corporate director No May 2006
Alain Michel Corporate director No May 2005
James Pantelidis Corporate director No May 2004
Robert Sartor CEO & Director of The Forzani Group No May 2007
Louis A. Tanguay Corporate director No May 1999
2 President & CEO of Vins Arista No May 1998
Jocelyn Tremblay
Jean-Roch Vachon Corporate director No May 2006
1
Also President of Maximat Granby/Horizon Devcow/9060-4976 Québec
2
Also VP, Corporate Affairs, Vins Philippe Dandurand
In 2007, the Globe and Mail ranked RONA 21st among 196 companies rated
for its corporate governance practices, placing it higher than any other
Canadian retailer.
Housing Backdrop
Less Securitization: Canadian banks are much less active than the U.S. in pushing
mortgages off balance sheet via securitization. This means that there is a strong
incentive for Canadian banks to only issue loans that “make sense”, because bad
loans have direct consequences for the bank’s own balance sheet.
Less Exotic: The sub-prime mortgages that did exist in Canada were not of the
truly exotic sort found in the U.S. For instance, Canada had no ARMs (adjustable
rate mortgages) to speak of that increase their costs sharply after an initial teaser
period. In turn, no Canadian households were completely reliant upon rising home
prices so that they could flip the house for a profit before the higher rates set in.
Moreover, Canada’s chartered banks were never allowed to finance more than
100% of the value of a home’s purchase price, and this has recently been scaled
back to 95% (more on this later).
Healthier Banks: Canadian bank balance sheets have not been hit as hard as U.S.
balance sheets by the credit crunch. Indeed, the deposit base has continued to
grow, and mortgage lending has grown moderately as a consequence.
Household Positioning
Less Elastic: On a related note, it stands to reason that the Canadian consumer’s
elasticity in response to home prices is lower than the U.S., given that – as we
noted above – it is easier to extract wealth from one’s house and to thus spend it in
the U.S. This means that a Canadian housing slowdown should not have the same
detrimental impact upon Canadian consumption or GDP as in the U.S.
Variable Volatility: Some 40% of U.S. sub-prime borrowers had variable rate
mortgages that exposed them to volatility in interest rates. In Canada, only about
20% of sub-prime borrowers had the same exposure.
No Recourse: In many U.S. states, there is no recourse for banks if a homeowner gives
up on the mortgage – the borrower can simply mail in the keys and be done with it. In
Canada, there is recourse, which means that homeowners are still liable. In turn, this
both reduces the amount of speculation in the market and means that Canadian
homeowners have additional incentive to continue making mortgage payments.
Lax Tax: In the U.S., the tax deduction on mortgage interest income creates an
incentive to delay paying off one’s mortgage. In Canada, no such deduction exists,
and so the pace of mortgage payments is not artificially stunted. Logically, this
means that Canadian homeowners should build up equity in their homes more
quickly than Americans.
Debt Burden: The burden of debt on Canadian households is far lower than in the
U.S. A direct comparison is difficult because of different debt-service ratio
definitions between the two, but suffice it to say that the U.S. measure is
substantially above its historical norm, while the Canadian number is slightly
below its historical norm. This means that Canadians are dedicating a smaller
share of their income to interest payments on debt than normal; and also that they
are not about to buckle under the pressure of their mortgage burden.
Over the long term, Canada’s aging housing stock should continue to drive
renovation spending. According to the CMHC, 46% of all homes are 30 years
old, compared with approximately 35% 10 years earlier. The situation is similar in
the U.S., where the median house is about 40 years old. Obviously, as a house
ages, spending on replacements and repairs increases. Furthermore, styles and
Exhibit 48. Age of Canadian Housing Stock and Types of Renovation Projects Intended
Age of Canadian housing stock Type of Renovation Intended based on Age of House
0.25 100% 88%
21% 80%
1920 or
1921-
1946-
1961-
1981-
1996-
Total
0
1945
1960
1980
1995
2007
before
1945 or
1946-
1961-
1971-
1981-
1986-
1991-
1996-
1960
1970
1980
1985
1990
1995
2001
before
Repairs Improvements
The ‘cocooning’ factor refers to the trend toward staying closer to home and
creating a safe haven from the outside world. This trend has changed the
perception of the home over the years, and paved the way for increased
spending on home improvements. “Alternately viewed as a pit stop, a castle, a
showplace and a status symbol, the American home is seen now as a refuge, a
haven, a fortress, and a sanctuary from the pressures, demands and dangers of an
unpredictable world. It’s seen as a place to retreat to, spend time in and target
investments to.” 1
Remodelling spending has been spurred largely by the baby boomer generation,
which first entered the market in the 1980s. Even three decades after appearing on
the housing scene, baby boomers still account for 54% of remodelling spending. In
addition, the baby boomers’ lifestyles, spending preferences, and changing family
structure have determined design trends and the way homes are built, and fuelled
growth in both the DIY and professionally installed home improvement markets.
This generation, which is now in its 50s and 60s, is growing out of its prime
remodelling years. Many boomers are transitioning from DIY projects to do-it-
for-me, i.e., DIFM, projects. According to the CMHC, among households that
underwent renovations in 2007, 31% were DIY, 41% by contractors, and the
remainder was a mix of the two. This partly explains the increased focus that
home improvement retailers are placing on the ICI business.
1
Kitchen Bath & Design Magazine, April 2005
Research Ratings
Action List BUY: The stock’s total return is expected to exceed a minimum of 15%,
on a risk-adjusted basis, over the next 12 months and it is a top
pick in the Analyst’s sector.
BUY: The stock’s total return is expected to exceed a minimum of 15%,
on a risk-adjusted basis, over the next 12 months.
SPECULATIVE BUY: The stock's total return is expected to exceed 30% over the next
12 months; however, there is material event risk associated with
the investment that could result in significant loss.
HOLD: The stock’s total return is expected to be between 0% and 15%,
on a risk-adjusted basis, over the next 12 months.
TENDER: Investors are advised to tender their shares to a specific offer for
the company's securities.
REDUCE: The stock’s total return is expected to be negative over the next
12 months.
Overall Risk Rating in order of increasing risk: Low (10.6% of coverage universe),
Medium (29.9%), High (47.5%), Speculative (12.0%)
REDUCE 70%
BUY
6% 55% 60%
60%
50%
40%
30%
34%
20%
10% 6%
HOLD
39% 0%
BUY HOLD REDUCE
Analyst Certification
Each analyst of TD Securities Inc. whose name appears on page 1 of this research
report hereby certifies that (i) the recommendations and opinions expressed in the
research report accurately reflect the research analyst's personal views about any and
all of the securities or issuers discussed herein that are within the analyst’s coverage
universe and (ii) no part of the research analyst's compensation was, is, or will be,
directly or indirectly, related to the provision of specific recommendations or views
expressed by the research analyst in the research report.