DBRS Confirms RONA inc. at BB (high)

DBRS Limited (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 have been changed to Stable from Negative. The recovery rating on the Company’s Senior Unsecured Debt has been changed to RR3. The confirmation and trend change reflect improvement in the Company’s operating performance after three consecutive years of poor relative execution in an intense competitive environment. Positive trending same-store sales in the Company’s retail network (-3.4% in Q1, -0.7% in Q2 and +2.0% in Q3) as a result of changed merchandising strategies, the repositioning of the Reno-Depot and Totem banners, and the closure of 17 underperforming stores, combined with significant cost savings from recent reorganization efforts, to result in a notable improvement to EBITDA. The Company’s financial profile also improved at the end of F2013 and into F2014 as RONA used a portion of the proceeds from the sale of its Commercial and Professional division to reduce balance-sheet debt.

Going forward, DBRS believes that RONA’s earnings profile should remain relatively stable based on the continued roll out of the Company’s new merchandising strategy despite continuing intense competition in a difficult economic environment particularly in its core regions of Quebec and Atlantic Canada. DBRS forecasts revenue could grow modestly in the near term based on flat to low-single digit same-store sales growth and five planned new store openings, including the introduction of the new Reno-Depot concept outside of Quebec (with new stores planned in Alberta and Ontario). Margins should remain relatively stable as the Company begins to lap its significant cost reduction initiatives but could benefit significantly from operating leverage over the medium term if RONA can continue to grow same-store sales. As such, DBRS expects that EBITDA should improve modestly in the near term.

RONA’s financial profile should remain relatively stable over the near to medium term based on the Company’s cash generating capacity. Capital expenditures are expected increase moderately to the $85 million level in the near-term as the Company continues to invest in store renovations and a modest number of new store openings (five in F2015) while DBRS believes that cash used for dividend payments should increase modestly as operating income grows. As such, free cash flow before changes in working capital should be in the $40 million to $60 million range in F2015. DBRS expects that RONA will continue to use free cash flow to increase shareholder returns. RONA’s credit risk profile will continue to strengthen within the current rating category if operating performance continues to improve (i.e., same-store sales growth and margin expansion), and key credit metrics remain in a range considered acceptable for the current rating (i.e., lease-adjusted debt-to-EBITDAR well below 4.0x and lease-adjusted EBITDA coverage above 4.5x) in the near-to medium-term.

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 methodology is Rating Companies in the Merchandising Industry which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.