DBRS Confirms RONA Rating at BB (high), Maintains Negative Trend

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt rating of RONA inc. (RONA or the Company) at BB (high) and the Preferred Share rating at Pfd-4 (high). The trends remain Negative. The recovery rating assigned to the Company’s Senior Unsecured Debt remains RR2.

On March 12, 2013, DBRS downgraded the Company’s Issuer Rating and Senior Unsecured Debt rating to BB (high) from BBB (low) and the Preferred Shares rating to Pfd-4 (high) from Pfd-3 (low) and maintained the Negative trend. DBRS also assigned a recovery rating of RR2 to the Company’s Senior Unsecured Debt.

Same-store sales were flat in 2012, yet net sales increased approximately 1.7% to nearly $4.9 billion versus the previous year based on higher sales in the Commercial and Professional Market segment, new store openings, new dealer-owners and improved same-store distribution sales to affiliate dealers. EBITDA margins were negatively affected by weaker gross margins due to promotional activity in a highly competitive environment and higher selling, general and administrative costs. As such, EBITDA declined by approximately 40% to $171 million, marking the third consecutive year of declining EBITDA.

Balance-sheet debt increased notably in F2012 to approximately $328 million, which combined with weakness in operating income to result in further deterioration of credit metrics. Lease-adjusted debt-to-EBITDAR increased to approximately 3.77 times (x) in 2012 versus 2.54x in 2011 and 2.80x in 2010 (improvement in 2011 was primarily attributable to the early voluntary repurchase of debentures) and lease-adjusted EBIT coverage declined to 1.51x in 2012 versus 2.26x in 2011 and nearly 3.7x in 2010.

Going forward, DBRS believes meaningful recovery in Rona’s earnings profile will remain challenging as the Company is expected to continue to face intense competition and a highly promotional environment while Canadian consumers may remain prudent in the uncertain housing and interest rate environment. On June 27, 2013, the Company announced the next phase of its Transformational Plan, which includes the closure of 11 non-profitable stores in Ontario and British Columbia, as well as additional administrative headcount reduction and other cost-cutting initiatives. DBRS expects that a significant improvement in operating performance will be difficult to realize over the near term but EBITDA could benefit from the successful implementation of the Company’s Transformational Plan over the medium term.

In terms of financial profile, RONA will remain under pressure until it displays sustainable growth in organic operating income and cash flow. Consistent with the strategies outlined in its Transformational Plan, RONA announced that it had entered into an agreement to sell all of the assets of its Commercial and Professional Market division to Talisker Plumbing Corporation on June 20, 2013, for expected net proceeds of $215 million. DBRS expects that RONA will use proceeds from this sale, along with free cash flow generated, for debt repayment, which should result in a material reduction in balance-sheet debt in 2013. If the Company’s Transformational Plan helps to result in a stabilization of operating income and key credit metrics, the ratings outlook could stabilize. However, should RONA’s credit risk profile continue to deteriorate in terms of a decline in same-store sales, operating income and key credit metrics (i.e., lease-adjusted debt-to-EBITDAR over 4.0x and lease-adjusted EBIT coverage materially below 1.5x), a further downgrade to BB and Pfd-4 could result.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers and Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.