UPDATE 2-Rona profit drops, says 'progress interrupted'

Wed Nov 7, 2012 10:14am EST

* Adj earnings C$0.27/shr vs C$0.36/shr a year earlier

* Revenue down 0.8 percent at C$1.34 billion

* Rona says difficult market weighs on results (Adds same-store sales, background, quote from CEO)

Nov 7 (Reuters) - Canadian home improvement retailer and distributor Rona Inc reported a drop in quarterly profit on Wednesday after cutting prices to limit sales declines in a tough market.

Rona, whose shares fell sharply in early trading, launched a turnaround plan earlier this year and also refused a takeover by U.S.-based competitor Lowe's Cos Inc. It said in its results release that its turnaround plan would proceed.

"Rona saw its progress interrupted in a quarter marked by a decline in the Canadian hardware-renovation industry as a whole," the Boucherville, Quebec-based company said. "The drop in sales, coupled with more intense competition, put pressure on gross margins."

Sales at established stores fell 1 percent, pulled down by retail operations, where same-store sales were 1.8 percent lower. Distribution sales rose on a same-store basis.

Lowe's takeover proposal, which never made it to the formal offer stage, became a hot-button issue during this year's provincial election in Quebec, where Rona has deep roots. Politicians from both the incumbent Liberal Party and the election's eventual winner, the Parti Quebecois, both opposed the plan.

Rona was founded in Quebec in 1939 by independent hardware stores keen to ditch their powerful wholesalers. The French-speaking province is still home to about half of its 30,000 employees.

In its turnaround plan, the company is refocusing on smaller outlets that it says customers prefer, and it said earlier this year that it would close 10 of its biggest outlets and split up 13 others by the end of 2013. In their place, it is opening smaller "proximity" and "satellite" stores.

But on Wednesday Rona said it had postponed the closing of five big-box stores to better coordinate with the new openings, and reduce the financial impact of the move.

"The new store formats are generating very promising results in line with the favorable trend observed in recent quarters for smaller stores, in spite of challenging market conditions," said Chief Executive Robert Dutton in the release.

"I'm certain that we are one step ahead of our competitors in this period of great change in our industry."

Net income fell to C$5.1 million ($5.1 million), or 4 Canadian cents a share, from C$47.8 million, or 36 Canadian cents, a year earlier.

Excluding one-time items, profit was C$33.1 million, or 27 Canadian cents a share. Analysts, on average, had been expecting earnings of 40 Canadian cents a share, according to Thomson Reuters I/B/E/S.

Rona said revenue fell 0.8 percent to C$1.34 billion, compared with the consensus forecast of C$1.36 billion.

Rona's stock was down 5 percent at C$9.64 in early trading on the Toronto Stock Exchange.

($1=$0.99 Canadian) (Reporting by Allison Martell; editing by John Wallace; and Peter Galloway)

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