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 Shares rating at Pfd-4 (high). All trends are Stable. The Recovery Rating on the Senior Unsecured Debt remains RR3. The confirmation reflects RONA’s solid operating performance (growth in same-store sales and margin expansion) through the end of Q3 F2015 in the face of macroeconomic headwinds in certain regions of Canada and its reasonable leverage levels, balanced by rising balance-sheet debt used to finance share repurchases and complete the acquisitions of the 20 franchise stores in its network.

DBRS believes that RONA’s earnings profile could strengthen further within the current rating category despite intense competition and regional macroeconomic headwinds, as the Company continues to refine its merchandising strategies and simplify its business with the integration of the recently acquired franchise stores. DBRS forecasts that revenue should grow moderately over the near to medium term, based on low-single-digit same-store sales growth, planned net new store openings and the integration of the acquired franchise stores. EBITDA margins should benefit from operating leverage particularly as same store sales grow. Gross margins will also benefit as the higher margin Retail segment becomes a larger proportion of total sales. As such, DBRS expects that EBITDA should continue to improve toward the $275 million level over the medium term.

DBRS expects RONA’s financial profile will remain commensurate with the current rating over the medium term based on the Company’s cash flow generating capacity and acceptable leverage levels, despite incremental balance-sheet debt used primarily for share repurchases and the acquisition of the franchise stores. Cash flow from operations should track operating income over the medium term, while capex is expected to increase moderately but remain below the $100 million level as RONA continues to accelerate its planned new store openings and invest in IT initiatives. DBRS believes that dividends on a per-share basis could increase modestly over the near to medium term, which, combined with share repurchases, should result in a modest decline in the cash outlay for dividends relative to historical levels. As such, DBRS believes free cash flow before changes in working capital could be in the $75 million to $100 million range in the near term. DBRS expects RONA will use free cash flow and possibly incremental debt to complete share repurchases. As such, DBRS believes RONA will use capacity on its revolving credit facility to repay its upcoming debenture maturity in F2016. Despite the increase in balance-sheet debt, RONA’s credit risk profile and leverage metrics should remain within the range considered acceptable for the current rating over the medium term (i.e., lease-adjusted debt-to-EBITDAR below 4.0 times (x) and lease-adjusted EBITDA coverage above 4.5x).

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 Rating Companies in the Merchandising Industry, DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, and Preferred Share and Hybrid Criteria for Corporate Issuers, which can be found on our website under Methodologies.

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