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Consumer Products,

Merchandising & Special


Situations
February 12, 2009

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%

Challenge Breeds Opportunity


Market Data Financial Data Estimates
Current Price (C$) $11.85 Fiscal Y/E Dec 2006A 2007A 2008E 2009E 2010E
52-Week Range (C$) $10.03–17.20 Shares O/S (mm) 115.8 Sales (mm) $4,552 $4,785 $4,844 $4,757 $4,963
Market Cap. (C$mm) $1,372 Float Shares (mm) 114.7 EBITDA (mm) $384 $400 $377 $354 $387
Float Cap. (C$mm) $1,359 Net Debt (C$mm) $510 EPS (f.d.) $1.64 $1.59 $1.36 $1.22 $1.38
Avg. Daily Trading Volume1 595 Net Debt / Total Capital 25% FCF / Share (f.d.) $0.50 $0.52 $1.13 $0.27 $0.43
Net Debt / EBITDA 1.3x
ROE 11.5% Valuation
P/E 12.8x 10.8x 8.7x 9.7x 8.6x
EV/EBITDA 7.5x 6.6x 5.1x 5.3x 4.9x
1
over 3 months period
Note: All figures in Canadian dollars unless otherwise specified.

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.

Jessy Hayem, CFA Shane Leech-Porter (Associate)


514 289 0385 514 985 4733
jessy.hayem@tdsecurities.com shane.leech-porter@tdsecurities.com
Table of Contents
Executive Summary ..................................................................................................... 3
Outlook ..................................................................................................................... 4
Valuation and Recommendation............................................................................... 4
Company Profile........................................................................................................... 6
Store Network and Distribution Infrastructure ......................................................... 6
Macro Picture to Weaken Further Before Recovery ................................................ 9
Uninspiring Outlook for Home Improvement in 2009............................................ 12
Industry Overview ..................................................................................................... 14
Growth Strategy ......................................................................................................... 17
Acquisition-Driven Growth in the Past................................................................... 17
Niche Penetration by Acquisition… Opportunistic Tuck-Ins Likely...................... 18
No Large Scale Acquisition Expected in the Short to Medium Term .................... 19
Economic Climate Favours Affiliate Recruitment: A Priority for RONA.............. 20
No U.S. Foray on the Horizon ................................................................................ 21
Optimizing the Existing Business........................................................................... 22
Financial Analysis ...................................................................................................... 31
Q3/08 review .......................................................................................................... 31
Expected future performance.................................................................................. 32
Our Forecast SSS in the Context of the Current Downturn .................................... 34
Strong Balance Sheet, FCF Generation and No Financing Concerns..................... 38
How Has RONA Fared versus Others in the Industry? ......................................... 39
Valuation..................................................................................................................... 46
Looking at Previous Recessions ............................................................................. 46
Justification of Target Price ...................................................................................... 51
Key Risks to Target Price.......................................................................................... 52
Overview of Key Players............................................................................................ 53
Home Depot Inc. (HD-N, not covered)................................................................... 54
Lowe’s Companies Inc. (LOW-N, not covered)..................................................... 56
Canadian Tire Inc. (CTR-T, not covered)............................................................... 57
Home Hardware Stores Ltd .................................................................................... 58
Appendix I. Share Structure and Ownership .......................................................... 59
Appendix II. Management Compensation Aligned With Shareholder Interests.. 60
Appendix III. Key Executives ................................................................................... 61
Appendix IV. Board of Directors.............................................................................. 62
Appendix V. Canada’s Housing Foundation Lacks U.S. Architect ....................... 63
Appendix VI. Long-Term Fundamental Drivers .................................................... 66
APPENDIX A. IMPORTANT DISCLOSURES ..................................................... 69

2 A Division of TD Securities Inc.


Executive Summary

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.

In our opinion, the current state of the economy represents a significant


challenge for RONA’s growth prospects in the short to medium term, as it does
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. About 80% of its revenues are directly related to the renovation industry,
and the balance is tied to new housing construction. Despite the negative near-term
outlook, over the longer term, we believe that the fundamental drivers for increased
home improvement spending remain intact – people spending more leisure time at
home, housing stock becoming older, homeownership rates on the rise, etc.

About half of RONA’s growth over the past decade is attributable to


acquisitions, particularly since 2000. Past acquisitions and affiliate recruitment
have not only fuelled RONA’s growth, but have also greatly diversified its
geographic presence, enhanced its buying power, and enabled it to reach different
types of customers. Relatively speaking, same store sales (SSS) and new store
growth have been lesser contributors to growth. Yet, store renovations, product
mix and merchandising revamping, as well as innovative marketing concepts, are
key to attracting customers. In 2009, RONA remains focused on improving
internal operations. Expansion priority, in our opinion, will center around
dealer recruitment, a profitable way to grow, requiring no capital outlay, and
limited incremental costs. This is favoured by the fact that the Canadian home
improvement industry remains highly fragmented, with the four largest players
commanding approximately 55% of the market and the rest being in the hands of
small independents. Acquisitions, if any, will likely be opportunistic tuck-ins, in
new niche areas. This also reflects our belief that, given the current economic
climate, RONA is tilting toward capital preservation.

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

A Division of TD Securities Inc. 3


have been in place to keep up with increasingly selective and sophisticated
consumers. In addition, in February 2008, RONA unveiled a four-year strategic
plan consisting of two overlapping phases: the PEP, which addresses Productivity,
Efficiency and Profitability, and an accelerated development plan.

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.

A concern on investors’ minds has been Lowe’s Companies, Inc.’s (LOW-N,


not covered) recent entry into Canada, adding a third, potentially national
player in the country. Lowe’s remains committed to opening big-box format
stores, prompting speculation about saturation of the format in Canada. This may
indeed be the case or close to it, per our analysis, suggesting that aside from
possibly stealing market share from RONA and Home Depot, Lowe’s may need to
revisit its commitment to the big-box format, a task that its U.S. rival, Home
Depot, has struggled with. It is important to acknowledge the difficulty that typical
big-box retailers have in squeezing a large number of SKUs into a smaller store
format without a corresponding strong distribution and special order system that is
integral to servicing smaller formats. This is an advantage that RONA has, owing
to its multi-format stores and associated distribution capability.

Outlook

While we expect RONA to continue benefiting from the PEP initiatives, we


believe these will be more than offset by challenging business conditions in 2009
and the ensuing negative leverage. As such, we expect continued deterioration in
sales trends over the next three to four quarters, and our forecasts reflect continued
margin compression through mid-2009. We forecast EPS of $1.22 for 2009, down
approximately 10% from $1.36 in 2008. A rebound is expected in 2010, with EPS
up 13% to $1.38, aided by a return to positive SSS territory and additional benefits
from its PEP program. We caution investors that our 2009 and 2010 EPS estimates
are approximately 10% below Street estimates. We would expect some downward
revisions to those estimates following the release of RONA’s Q4 results on
February 19 and this, in our opinion, may create a better entry point in the stock.

Valuation and Recommendation

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

4 A Division of TD Securities Inc.


found support in the 11–12x P/E multiple range, which would imply a trough
multiple of 9.5–10.0x for RONA (the level it is currently trading at). At 9.7x,
RONA is trading at a 36% discount to these two comparables, the widest spread
since shortly after its IPO. 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 yields a 31% return and, in our
view, supports a BUY rating on the stock.

A Division of TD Securities Inc. 5


Company Profile

RONA is Canada’s largest retailer and distributor of hardware, home


RONA is Canada’s largest improvement and gardening products. The company was founded in 1939 and
retailer and distributor of went public in 2002. It now has 21,000 employees (or 27,000, inclusive of
hardware, home affiliates). It offers about 90,000 products through a multi-format, multi-banner
improvement and network that includes 235 corporate, 23 franchise, and 435 affiliate stores, and 9
gardening products. distribution centers. Products sold are sourced from about 3,000 suppliers (with no
single supplier representing more than 5% of sales), of which 90% are located in
Canada. As a member of A.R.E.N.A., a buying group that accounts for annual
purchases of US$28 billion, RONA has significant purchasing power.

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

Net Sales Breakdown by Division RONA's EBITDA Breakdown by Division


FY07 FY07

Distribution
23% Distribution
Retail
18%
Retail 82%
77%

Source: Company reports.

Store Network and Distribution Infrastructure

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.

Exhibit 2. RONA Inc.: Store and Distribution Centre Network

British Columbia Alberta Saskatchewan Manitoba Ontario Quebec Atlantic Total


Store Types
Big-box 4 7 1 3 20 41 1 77
Proximity 28 27 3 4 25 241 8 336
Specialized–Consumers 15 12 5 8 113 71 16 240
Specialized–ICI 6 0 0 0 23 11 0 40
Total 53 46 9 15 181 364 25 693

Distribution Centres 1 4 1 3 9

Source: Company reports.

6 A Division of TD Securities Inc.


RONA’s 235 corporate stores include those for which the company’s ownership
is above 50%. The 435 affiliate stores are 100% dealer-owned but must adhere to
RONA’s guidelines on marketing, advertising, presentation, and product
purchasing. The 23 franchise stores are majority-owned by dealers. These stores
follow the same guidelines as affiliates; however, RONA also manages their
product selection, supply and assortment, in addition to overseeing leasing and
subleasing agreements for the properties.

Exhibit 3. RONA Inc.: Ownership Structure

# of RONA’s
Type Stores Ownership RONA’s Interest

Corporate 235 >50% - Distribution and retail sales

Franchised 23 0–50% - Royalties of 3.5–5% on sales

Affiliated 435 0% - Distribution sales

Total 693

Source: Company reports.

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.

A Division of TD Securities Inc. 7


Exhibit 4. One Size Does Not Fit All

RONA STORES Banner Size (Sq ft) Products/Other


RONA
Big-Box Stores RONA Le Régional
RONA Home & Garden 60,000–165,000 - Extensive: 40,000 products
RONA L’entrepôt
Réno-Dépôt

Proximity Stores RONA Le Quincaillier


RONA Hardware 5,000–25,000 - Complete range of hardware / painting / seasonal products
RONA L’express

RONA Le Rénovateur
5,000–60,000 - Wide variety with higher proportion in lumber / building materials
RONA Home Centre

Totem 30,000 - Specialized in home renovation products / services


- Exclusively in Alberta

Specialized – Consumers RONA Cashway


RONA Lansing
5,000–60,000 - Specialized in lumber / building materials
RONA Building Centre
RONA L’express Matériaux

BOTANIX 2,000–20,000 - Plants / gardening products / related services

Chester Dawe 30,000 - Building materials / hardware products


- Large presence in Newfoundland and Labrador

Specialized – ICI Matériaux Coupal - Market leader in sales of building materials in Montreal

Curtis Lumber - Market leader in sales of home improvement / hardware products in BC


2,500–60,000
Noble Trade - One of the largest plumbing / heating supply wholesalers in Ontario

Dick’s Lumber - Leading lumber / building materials / hardware specialist in BC

Source: Company reports.

RONA’s distribution infrastructure consists of nine DCs utilizing a sophisticated


management information system for product processing, distribution, and
inventory management. Depending on the size and type of orders, agreements with
suppliers, and the geographical location of stores, RONA also utilizes direct
delivery services from suppliers. RONA’s three primary DCs are located in
Boucherville and Terrebonne, Quebec and Calgary, Alberta.

Exhibit 5. RONA Inc.: Distribution Centres


Indoor Lumberyard
Distribution Centre 000 sq. ft 000 sq. ft Activity
Boucherville, QC 926 DC for hardware products
Terrebonne, QC 380 Flow-through for hardware products
Saint-Hyacinthe, QC 100 125 Hub for forest products / building materials
Halton Hills, ON 45 77 Hub for forest products / building materials
Calgary, AB 320 DC for hardware products
Calgary, AB 104 375 Hub for forest products / building materials
Hopewell, AB 171 DC for hardware products
Edmonton, AB - 185 Hub for forest products / building materials
Surrey, BC 85 378 DC for hardware products; Hub for forest
products / building materials

Total 2,131 1,140

Source: Company reports.

8 A Division of TD Securities Inc.


Macro Picture to Weaken Further Before Recovery

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.

Exhibit 6. Relevant Statistics

Canada vs. US Canada


YoY Change in Existing Home Sales Existing home sales vs Unemployment rate
40.0% 50 14%
30.0% 13%

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 US Unemployment rate (RHS) Existing Home Sales (LHS)

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

YoY GDP Growth (RHS) YoY Change in Existing Home Sales


YoY Change in Home Improvement Spending–Lagged 1 Yr (LHS) YoY Change in Home Improvement Spending–Lagged 1 Yr

Source: CREA, CMHC, Statistics Canada, NAR, TD Economics.

A Division of TD Securities Inc. 9


Not surprisingly, existing home sales have tapered off and recent data released
indicates that the Canadian housing market is squarely on the path of correction. This
too does not bode well for home improvements, as new owners will typically
renovate within three years of purchasing a home. Since February 2008, home sales
have continued to exhibit large year over year declines. Existing homes sold in
Canada declined 1.8% in December month over month to 27,400, on the heels of two
consecutive monthly double-digit declines in November and October. Sales activity
is now at its lowest level since 2000, and on a year-ago basis, sales volume is down
36%. For the year, sales dropped 17%, representing the worst drop since 1990, when
sales fell 22.4%. Looking ahead, TD Economics forecasts that existing home sales
will drop 12.6% in 2009, before rebounding with a 6.5% increase in 2010.

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.

Exhibit 7. A Look at Canadian Housing Stats

Canada – Housing Starts Canada – Existing Home Sales


250 30% 550 30%
230 20% 500
20%
210 450
Units (000)
Units (000)

10% 400 10%


190 350
0% 0%
170 300
150 -10% 250 -10%
-20% 200
130 -20%
150
110 -30% 100 -30%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008E
2009E
2010E

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)

Source: CMHC, CREA, TD Economics.

Historically, homeowners could usually recoup part of their investment later


through the resale market. Housing prices have a large impact on discretionary
income, particularly for home improvements. Until recently, with increasing
home prices, consumers could borrow against the rising value of their homes to
finance projects.

10 A Division of TD Securities Inc.


Exhibit 8. Home Prices Declining in the U.S. and Canada

YoY Change in Home Prices


15%
10%

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

Source: CREA, NAR, TD Economics.

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%.

Exhibit 9. Existing Home Sales in Canada Weakening in All Regions

RONA's Sales Breakdown by Region Canada


FY07 Existing Home Sales by Region

Quebec Atlantic 30%


YoY Change

45% Provinces 20%


2% 10%
0%
-10%
-20%
Western Canada -30%
29% 2008E
2009E
2010E
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

Ontario
24% Western Canada Ontario Quebec Atlantic Provinces

Source: Company reports, CREA, TD Economics.

A Division of TD Securities Inc. 11


Uninspiring Outlook for Home Improvement in 2009
About 80% of RONA’s revenues are directly related to the renovation
industry, with the balance tied to new housing construction.

Exhibit 10. Home Improvement Retailers’ SSS Move in Tandem with Housing Stats

RONA SSS Home Depot & Lowe's SSS


vs. YoY Chg in Canada Existing Home Sales vs. YoY Chg in US Existing Home Sales
13% 18%
10% 14%
7%
YoY Chg (%)

YoY Chg (%)


10%
4% 6%
1%
2%
-2%
-5% -2%
-8% -6%
-11% -10%
-14% -14%

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

Source: Company reports, Bloomberg, CREA, NAR.

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.

U.S. Home Improvement Activity Indicator


Canada Remodelling Expenditures
$45 20% $150 20%
$40 $140 15%

YoY Change (%)


YoY Change (%)

$35 15% $130 10%


$30 $120 5%
US$bln
C$bln

$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

Four Quarter-Moving Expenditures YoY Change 4-Quarter-Moving-Total Expenditures YoY Change

Source: Statistics Canada, Harvard University’s JCHS.

12 A Division of TD Securities Inc.


Typically, remodelling cycles lag homebuilding activity by several quarters
and are less volatile. First-time homebuyers will generally spend less than trade-
Despite the negative near- up buyers, given their lower incomes and the fact that a substantial part of their
term outlook, over the wealth is usually tied up in their new homes. Home improvement spending is
longer term, fundamental driven in part by housing turnover, given that new owners will typically renovate
drivers for increased home within three years of purchasing a home. Despite the negative near term outlook,
improvement spending over the longer term, we believe that the fundamental drivers for increased
remain intact . home improvement spending remain intact. Homeowners take on remodelling
projects to improve their living environment, especially given that people are
spending more leisure time in their homes. Among other factors, the housing
stock is becoming older and homeownership rates are on the rise (for details
see Appendix IV).

A Division of TD Securities Inc. 13


Industry Overview

The Canadian Home Improvement Industry has grown at a 10-year CAGR of


approximately 8.5% to reach $41 billion in 2007. It remains highly fragmented,
with the four largest players (three of which are publicly traded),
commanding approximately 55% of the market. Remaining players are much
smaller, with most generating less than $100 million in annual sales.

Exhibit 12. Canadian Home Improvement Industry

Canadian Retail Home Improvement Industry Canadian Home Improvement Industry


C$41b (2007)
$45 20%
CAGR ('97–07): 8.4% Home
$40 Hardware
15%
$35 11.7%
C$b

$30 10% Other


45.2%
$25 Canadian Tire
5% Retail
$20
13.1%
$15 0%

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

Source: Company reports, Hardlines.

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.

Most participants in the Canadian home improvement industry are members of


buying groups. As of 2007, 10 buying groups represented approximately $13.6
billion in purchases, or approximately 33% of the Canadian industry. However,
faced with increased competition and defections to RONA and Home Depot, as
well as the impact of softening commodity lumber prices, the buying groups
collectively reported a 3% drop in purchases in 2007, the first drop since 2001.

Buying groups continue to face significant challenges, including limited


succession planning underscored by the aging owner demographic, continued
intense competition from the likes of RONA and Home Depot, not to mention
the impact of the weakening economy. In an attempt to remain competitive they
are becoming more proactive. As confirmed by Hardlines, current trends among
buying groups include:

14 A Division of TD Securities Inc.


1. Consolidation: Last year, the Independent Lumber Dealers Co-operative
(ILDC) significantly increased its buying power when it joined forces with
Delroc Industries, Federated Co-operatives, La Cooperative Federee de
Quebec, and the Sexton Group Ltd. Collectively, the group has over 1,000
locations and conducts over $4 billion in purchases. Yet, this pales in
comparison to the US$28 billion in purchases conducted by A.R.E.N.A.
(RONA’s international buying group).

2. Dealer recruitment: Many buying groups have indicated that dealer


recruitment is a primary focus. For example, with the addition of three
new members in early 2008, TIM-BR MART, the largest Canadian
lumber and building materials buying group, has dealers located all across
Canada.

3. New sectors: Similar to retailers, buying groups are looking to further


penetrate the underdeveloped ICI market. Some buying groups already
have a solid presence, such as Allroc and TORBSA; however, others are
just starting to get their feet wet.

4. Enhanced services: Historically, a buying group’s role has almost


exclusively been to maximize the purchasing power of its members.
However, with increased competition, programs such as merchandising,
branding, signage and advertising, in addition to product knowledge and
customer service training are surfacing to improve their members’
competitive position.

A Division of TD Securities Inc. 15


Exhibit 13. Top 50 Dealers and Retail Chains in Canada

Retail # of Y/Y Chg


% Market Sales (C$M) Y/Y Stores in # of
Company Location Share 2007 Change 2007 Stores % DIY % Pro Affiliation

1 RONA QC 15.3% 6,300 10% 679 37 85% 15% A.R.E.N.A.


2 Home Depot Canada1 ON 14.7% 6,040 1% 165 10 85% 15%
3 Canadian Tire Retail2 ON 13.1% 5,382 4% 473 5 85% 15%
4 Home Hardware ON 11.7% 4,800 4% 1,031 6 55% 45%
5 Pro Retail Services ON 2.9% 1,200 0% 800 0 70% 30%
6 TruServ Canada SK 1.6% 670 2% 766 0 80% 20% Mutual
7 Alpa Lumber Group1 ON 1.6% 650 2% 19 0 10% 90%
8 Kent Building Supplies1 NB 1.0% 417 6% 32 2 50% 50% ILDC
9 United Farmers of Alberta1 AB 0.9% 360 13% 35 0 na na Sexton
10 Canac-Marquis Grenier Ltée1 QC 0.7% 296 8% 16 2 72% 28% Mutual (May/07)
11 Windsor Plywood BC 0.6% 235 6% 61 2 50% 50% Delroc
12 Nelson Lumber AB 0.4% 160 3% 5 0 20% 80% Tim-BR-Marts
13 Pacific West Systems1 BC 0.4% 155 5% 8 0 5% 95% Tim-BR-Marts
14 McDiarmid Lumber Ltd. MB 0.4% 151 13% 14 1 40% 60% Tim-BR-Marts
15 Dick’s Lumber1,3 BC 0.4% 147 7% 3 0 15% 85% Sexton
16 The Rockett Group1 ON 0.3% 140 4% 5 0 5% 95%
17 Peavey Industries AB 0.3% 133 8% 29 1 95% 5% Mutual/Mid-States
18 Patrick Morin1 QC 0.3% 127 3% 13 0 50% 50% ILDC
19 TSC Stores1 ON 0.3% 124 10% 39 8 92% 8% Mutual
20 Igloo Building Supplies1 AB 0.3% 119 13% 4 1 0% 100% ILDC
21 Patene Bldg. Supp. Ltd.1 ON 0.3% 115 8% 12 0 3% 97% Tim-BR-Marts/TSG
22 Central Home Improv. Warehouse1 NS 0.2% 92 3% 8 0 60% 40% ILDC
23 François L’Espérance Inc.1,4 QC 0.2% 81 4% 5 0 50% 50% RONA
24 Piercey’s Building Supplies1 NS 0.2% 80 4% 5 0 25% 75% PAL
25 Turkstra Lumber ON 0.2% 79 1% 12 2 20% 80% ILDC
26 Star Building Materials1 MB 0.2% 75 4% 5 2 95% 5% ILDC
27 Jaques Laferté Ltée. QC 0.2% 68 5% 4 0 65% 35% ILDC
28 Copp Building Materials Ltd. ON 0.2% 62 5% 4 0 60% 40% ILDC
29 Potvin & Bouchard Inc.1 QC 0.1% 57 4% 5 0 70% 30% ILDC
30 Builder’s Warehouse1 ON 0.1% 55 4% 1 0 33% 67% BMR
31 Millwork Home Centres ON 0.1% 55 4% 3 0 50% 50% ILDC
32 Davidson Enman Lumber1 AB 0.1% 54 8% 3 0 5% 95% Tim-BR-Marts
33 Groupe Dynaco1 QC 0.1% 54 4% 12 0 n/a n/a BMR
34 Gibson Bldg. Supplies1 ON 0.1% 53 4% 2 0 20% 80%
35 McMunn & Yates MB 0.1% 52 6% 11 0 40% 60% ILDC
36 Notre Dame Agencies NFLD 0.1% 51 9% 9 0 70% 30% Castle
37 House of Tools AB 0.1% 51 6% 13 0 20% 80% Western Tool
38 J&H Builders Warehouse SK 0.1% 47 7% 2 0 35% 65% ILDC
39 United Lumber ON 0.1% 46 0% 4 0 45% 55% Home Hardware
40 Moffat & Powell ON 0.1% 43 8% 5 0 35% 65% ILDC
41 Groupe Gaston Côté1 QC 0.1% 43 5% 7 0 35% 65% ILDC
42 Logic Lumber AB 0.1% 41 21% 2 0 10% 90%
43 Bolt Supply House AB 0.1% 38 9% 14 0 0% 100%
44 J.O. Lévèsque1 QC 0.1% 36 6% 5 0 100% 0%
45 Executive Home Bldg. AB 0.1% 35 9% 1 0 10% 90% Home Hardware
46 Ferlac Inc.4 QC 0.1% 34 6% 4 0 70% 30% RONA
47 Payzant Building Products1 NS 0.1% 34 3% 3 0 45% 55% Home Hardware
48 Quincaillerie R. Durand1,4 QC 0.1% 33 3% 1 0 70% 30% RONA
49 Harron’s RONA Building Centre4 ON 0.1% 30 11% 2 1 3% 97% RONA
50 Lake Scugog Lumber ON 0.1% 27 4% 1 0 30% 70% Castle
5
Total market Size 71.2% 41,062 4,362 80

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

Source: Hardware Merchandising, TD Newcrest.

16 A Division of TD Securities Inc.


Growth Strategy

RONA’s stated four areas of growth can essentially be grouped into two:

1. Acquisitions: Acquiring complementary businesses and recruitment of


independent dealers
2. Organic growth: New store openings and initiatives to drive SSS growth such
as renovations/upgrades as well as a number of programs grouped under its
recently launched strategic plan, including optimizing the supply chain, IT
upgrades, loyalty programs, new store concepts, product rationalization and
increased sales of private label brands.

Acquisition-Driven Growth in the Past

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.

Exhibit 14. About Half of RONA’s Growth Stems from Acquisitions

Approximate Sources of Growth


2002–2007

Organic growth
30%

Acquisitions
Affiliate
50%
recruitment
20%

Source: Company reports, TD Newcrest.

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%.

A Division of TD Securities Inc. 17


RONA has typically achieved synergies of 3–4% of sales, once acquisitions are
essentially fully integrated, usually by the end of the second year. The average
EBITDA multiple paid, post-synergies, was therefore closer to 3.5–4.0x.
Primary synergistic drivers include improved purchasing terms, the elimination of
overlapping corporate functions, as well as improvements in distribution and
merchandising. The integration of different information technology systems is
usually lengthier and can take up to a couple of years. Wherever possible, RONA
applies best-practices from acquired companies across the rest of its network. This
is especially true for those with experience in ICI, a relatively new area for RONA.

Niche Penetration by Acquisition… Opportunistic Tuck-Ins Likely

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.

Noble Trade Acquisition

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.

18 A Division of TD Securities Inc.


Dick’s Lumber = “Where the Builders Buy!”

In December 2007, RONA acquired Dick’s Lumber, a lumber, building materials


Dick’s Lumber doubled and hardware specialist with three specialized stores in the Vancouver, British
RONA’s presence in ICI
Columbia area. At the time of the acquisition, the company’s annual revenues were
segment and significantly
increased its presence in
about $100 million. Given its focus on lumber and building materials, which
western Canada. typically carry lower margins, its profit margins were slightly below RONA’s
legacy operations. However, RONA argues that owing to the limited investment
required by these businesses, returns on invested capital are equivalent to or higher
than retail operations. We estimate that RONA paid about 6x EBITDA and that the
acquisition was immediately accretive to earnings. This acquisition is RONA’s
third in this segment in British Columbia, giving it the leading position in
western Canada’s contractor building supply market.

Exhibit 15. RONA Inc.: Acquisition History

Transaction Est. Annual Sales /


Total Price Sales Price / Price / Store
Date Company Acquired Location Stores (C$m) (C$m) Sales(1) EBITDA(1) Acquired
Mar-00 Cashway ON 66 $85 $342 0.25x 5.0x $5
Jun-01 Revy Home Centres Inc. ON, MB, SK, AB, BC 51 $220 $805 0.27x 5.2x $16
Sep-03 Réno-Dépôt 2 QC 20 $250 $847 0.30x 5.1x $42
Apr-05 Totem AB 16 $96 $260 0.37x 5.8x $16
Mar-06 Chester Dawe 3 NL 8 $37 $80 0.46x 5.8x $10
Apr-06 51% interest in operating businesses of Matériaux Coupal Inc. 3,4 QC 9 $22 $64 0.35x 5.8x $7
Jul-06 Curtis Lumber 3 BC 6 $28 $80 0.35x 5.8x $13
Aug-06 Mountain Building Centres Ltd. 3 BC 3 $7 $20 0.35x 5.8x $7
Apr-07 Noble Trade Inc. 3 ON 19 $152 $150 1.02x 7.0x $8
Dec-07 Dick’s Lumber 3 BC 3 $48 $100 0.48x 6.0x $33
Dec-07 Centre de Rénovation André Lessard 3,5 QC 1 $5 $15 0.36x 6.0x $15
3
Jan-08 Best-MAR Plumbing and Heating Supplies ON 3 $7 $20 0.36x 6.0x $7
Total 205 $958 $2,782
Average - 0.41x 5.8x $15

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

Source: Company reports, TD Newcrest.

No Large Scale Acquisition Expected in the Short to Medium Term;


Focus on the Pro

We expect RONA to continue targeting acquisitions that further increase its


presence primarily in western Canada and Ontario. Significant opportunities
remain in traditional retail, but we believe the company remains more focused on
the ICI industry, a market estimated at $70 billion and largely in the hands of
independents. In particular, in the near term, we expect RONA to target
companies focused on plumbing and HVAC, similar to the recent Best-MAR
acquisition. These two industries alone are estimated at $13 billion nationally, with
plumbing accounting for $1 billion in Ontario alone.

A Division of TD Securities Inc. 19


In addition to the primary synergistic drivers previously discussed, acquisitions in
the ICI industry would offer some cross-selling opportunities with RONA’s retail
operations and also reduce the overall seasonality of RONA’s business, given that
it is typically less cyclical than retail. Management has indicated it would like to
have a ‘national presence’ for its ICI operations by the end of 2010. We
estimate that a $50 million acquisition (or about $100 million in annual sales)
would add $0.02–0.03 to EPS on an annualized basis. RONA is not alone in
recognizing the potential for increased sales in the underdeveloped ICI market. As
discussed in the section entitled ‘Overview of Key Players’, both Home Depot and
Lowe’s have programs in place catering to the Pro.

In 2009, as RONA remains focused on integrating recent acquisitions and


In 2009, while RONA
improving internal operations (i.e., the PEP, or Productivity, Efficiency and
remains focused on
improving internal Profitability program), we expect the company to target opportunistic tuck-ins,
operations… but will prioritize dealer recruitment. This also reflects our belief that, given
the current economic climate, RONA is tilting toward a ‘capital preservation’
mode. Once economic conditions begin to improve, and as the PEP program nears
completion, we believe that the company could look to make a larger acquisition.
We suspect that both Kent and Home Hardware are on its radar, although RONA
has also successfully been using dealer recruitment as a means to grow its market
share and buying power, while avoiding any potential competition bureau issues,
particularly in the case of Home Hardware.

Economic Climate Favours Affiliate Recruitment: A Priority for RONA

…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.

Exhibit 16. RONA Inc.: Affiliate Recruitment 2003-2008 (year to date)

Home Tim-BR Pro Retail Sexton


Year Hardware MARTS Castle Services Group Other Total
2003 0 1 2 5 0 3 11
2004 1 6 2 4 2 10 25
2005 7 4 2 8 1 9 31
2006 1 6 6 12 2 10 37
2007 2 5 6 6 3 5 27
2008 YTD 7 2 0 8 3 6 26
Total 18 24 18 43 11 43 157

Represents (C$m) 128 118 116 191 28 162 743

Source: Company reports.

20 A Division of TD Securities Inc.


Since 2003, RONA has recruited nearly 160 affiliates, representing over $700
million in annual retail sales. A new affiliate recruited by RONA typically signs
a 10-year agreement and agrees to purchase a minimum of 90% of its merchandise
through RONA – although the company boasts that on average, this percentage is
often closer to 95%. In addition to lower price guarantees, the RONA banner and
private label programs, as well as marketing assistance, affiliates have the
opportunity to share the success through RONA share ownership (typically held as
collateral for the affiliates’ obligations). This is an advantage that buying groups
such as Home Hardware cannot offer. Historically, new affiliates recruited have
recorded on average, a 10–15% increase in sales within the first two to three
years of joining RONA’s network. The company seeks to enlist affiliates with
entrepreneurial owners looking to grow their business; it will also assist them in
drafting their business and growth plans, the success of which ultimately benefits
RONA as well. In fact, as shown in Exhibit 17, RONA affiliates have initiated a
number of projects, ranging from new concepts to store expansions, and, in some
cases, even acquisitions.

Exhibit 17. RONA Inc.: Projects Initiated by Affiliates

2003 2004 2005 2006 2007 2008E Total


# of Projects 90 105 144 166 180 164 849
Value (C$m) 21.0 23.1 48.0 68.8 53.1 33.5 247.5

Source: Company reports.

In the tough economic context, independent dealers may increasingly look to


align themselves with a larger network, such as RONA’s, in search of lower costs
obtained when joining a larger buying group, among other benefits such as improved
In the tough economic merchandising approaches and tested store concepts, wider product assortment, a
context, independents may
national distribution network, and exposure to a recognized banner. This also holds
increasingly look to align
true when taking into account Lowe’s entry into Canada, and the fear of dealers
themselves with a larger
network, such as RONA’s, being further squeezed out. It is also worth noting that a number of these
in search of lower costs. independents do not have formal succession plans in place. In fact, even
uncertainty over succession plans at Home Hardware, with its founder (said to be 87
years old) set to step down in April, are leading a number of its members to consider
alternative options. Note that RONA has recruited the most affiliates from Home
Hardware and Pro Retail Services (which consists of Pro and Ace dealers and has
had a large turnover of executives trying to run the brand in Canada).

No U.S. Foray on the Horizon

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.

A Division of TD Securities Inc. 21


Optimizing the Existing

Addressing the drop in SSS

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.

Exhibit 18. RONA Inc.: SSS Performance

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)

Source: Company reports, TD Newcrest.

Strategic Initiatives To Help SSS, But Economic Recovery a Must

As addressed in an earlier section of this research report, the macro picture is


When the economy
challenging, and there is unfortunately very little in the company’s control to kick-
recovers, SSS should
follow suit; until then, we
start demand for home improvement products in such a tough context. When the
do not expect a material economy recovers, SSS should follow suit; until then, we do not expect a
improvement in this metric. material improvement in SSS. Still, RONA is not sitting idly by.

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

22 A Division of TD Securities Inc.


mere product re-merchandising to full store renovations/expansions. Also, new store
concepts introduced over the past couple of years and continuously fine-tuned have
been met with success, increasing the stores’ appeal to female shoppers. Two such
concepts are the Boutique Concept Stores, with their specialized areas dedicated to
paint, lighting, decorations etc., and RONA by Design, a set of projects in many
categories like bathroom, kitchen and patios, which suggest product combinations,
while enabling the customer to visualize the end-result.

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.

In February 2008, RONA unveiled a four-year strategic plan consisting of two


overlapping phases: the PEP, which addresses productivity, efficiency and
profitability, and an accelerated development plan, focusing on all aspects of
expansion (SSS, new store opening, recruitment of affiliates, acquisitions). While
Phase 1 was originally intended for completion within two years, the company has
recently moderated its expectations, and expects the PEP program to remain the
primary focus until market conditions improve, helping it navigate through the
recession and stem the adverse impact of a worsening consumer environment on
profitability. As such, the current part of the program is less about pursuing organic
growth, than about optimizing the existing cost structure and efficiency. In our
opinion, focusing on the core is the right strategy at this time, as one would expect
from solid operators in preparing to be well positioned for the economic rebound.
We would also point out that this is precisely the same approach that RONA
management had undertaken in prior economic downturns.

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:

Increase Professional Installation Services to 4% of sales by 2011: In 2005,


RONA introduced professional installation services, which today include 11
different categories like flooring, windows and doors. Sales have doubled since
inception, but sill only account for 1.5–2.0% of consolidated sales. We believe that

A Division of TD Securities Inc. 23


RONA’s growth target is realizable, especially given the trend among baby
boomers for more DIFM (do-it-for-me) projects (Appendix IV).

Increase Customer Awareness and Loyalty: RONA claims to have achieved


significant brand awareness in Canada, and that approximately 78% of Canadians
across the country are now familiar with the company. This should continue to be
achieved through several advertising and marketing campaigns, including the
company’s sponsorship of the 2010 Winter Olympics in Whistler, British
Columbia. The exclusive association (relative to competitors) with the Air Miles
rewards program in Canada has also proved fruitful, with 54% of RONA revenues
being derived from Air Miles collectors, who, according to management, spend
35% more on average than other customers. RONA’s goal is to raise the level of
revenues from collectors to 60%.

Profit Enhancement Initiatives Prioritized under the PEP

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.

Aiming for 100 Bps Improvement in Gross Margins: RONA’s goal is to


RONA aims to improve increase its direct global sourcing to 8–10% of revenues sourced from Asia, 5%
gross margins by currently. Increasing its private label offering from 15% of sales to 20% by 2011
increasing global sourcing should improve gross margins; these products are typically priced 5–10% below
and private label offer, national branded products, but carry 10 percentage points more in margins. In
among other initiatives. Q3/08, these already represented 17% of total.

Expand Information Technology Systems: RONA will be investing $40 million


to standardize its IT infrastructure, which involves upgrading human resources,
financial and demand planning platforms. As for the POS system, an IT provider
has been selected and tests are to be conducted in 2009 in several stores. It aims to
eventually upgrade it to allow for greater data-mining flexibility for promotions
and price increase implementation across the network.

Improve Inventory Management and Optimize use of existing DCs: Enhanced


Year to date, significant
inventory reductions were supply logistics, better demand planning and the harmonization of product offers
achieved through improved should reduce overall inventory levels. 2008 to date, the company has realized
inventory management and significant inventory reductions, with same-store and DC inventory levels down
optimized use of DCs. nearly $80 million or 10% year over year. RONA is also analyzing delivery
methods used by 200 of its major suppliers to fine tune its direct-to-store, DC

24 A Division of TD Securities Inc.


or cross-dock deliveries. By having suppliers deliver high-volume products to
RONA’s cross-dock DC rather than direct to store, on-hand inventory levels should
drop. We believe that the company’s existing distribution centers are sufficient to
support organic growth over the forecast period and, in maximizing its cross-dock
use, the Terrebone DC’s volume should double (now operating at 50% capacity).
Calgary DC expansion plans (set to cost about $25 million), as well as the eventual
consolidation of three DCs in Alberta, were recently put on hold until market
conditions improve. RONA also recently appointed Paul Jovian as the new Senior
Vice-President, Supply Chain Management to oversee the optimization if its entire
supply chain, an initiative that stems from its strategic plan. Mr. Jovian has 25
years’ experience, having previously been employed at Canadian Tire, most
recently in the role of Vice-President, Supply Chain, major projects.

Disposal of non-core assets: To improve profitability, RONA closed four non-


profitable stores in 2008 (none were closed in 2007). We do not expect further
closures in the near term.

Modest New Store Construction Plans. But, Will They Be Curtailed


Further?

In 2007 RONA opened 10 new stores (compared to 15 originally targeted, and


versus 8 in 2006) in Alberta, Ontario and Quebec, for a total investment of $186
million. Six are located in Ontario, where RONA is focused on growing its market
share and strengthening its competitive position, particularly against Lowe’s; in
2007, Lowe’s opened its first six stores in Canada, all of which were located in
Ontario (see the section entitled ‘Overview of Key Players’ for additional details).

Exhibit 19. RONA Inc.: New Store Openings

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

Source: Company reports, TD Newcrest.

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-

A Division of TD Securities Inc. 25


18 million for a Proximity (land, building, inventory and pre-opening expenses
included). Once fully ramped up over 24–36 months, we understand that these
stores typically add sales of $20–40 million and $12–20 million, respectively.

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.

Big Box Format Is Near Saturation, Especially In Ontario. So, Where Is


Lowe’s Going Next?

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

26 A Division of TD Securities Inc.


RONA’s big-box market shares are at risk, especially in light of the results of the
analysis shown in Exhibit 20.

Exhibit 20. Big Box Market Penetration in 2007


Quebec Big Box Penetration by Company Ontario 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 21 0.30 366 Home Depot 81 0.70 158
RONA 41 0.59 187 RONA 20 0.17 640
Kent 0 - - Kent 0 - -
Lowe's 0 - - Lowe's 6 0.05 2,132
Total 62 0.89 124 Total 107 0.92 120

New Additions Possible 1,2 8 New Additions Possible 1,2 9

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

Source: Company reports, Hardlines, TD Newcrest.

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.

A Division of TD Securities Inc. 27


Exhibit 21. Big Box Saturation Analysis in Canada
Canada Big Box Penetration by Company 2007 Canada Big Box Penetration by Company 2008E
Square # of people Square # of people
Population Population # of Footage/ / big-box Population Population # of Footage/ / big-box
(mm) Density big-box Population (000) (mm) Density big-box Population (000)
1
Home Depot 165 0.55 200 Home Depot 172 0.57 194
1
RONA 77 0.26 428 RONA 77 0.25 433
2
Kent 7 0.02 4,704 Kent 7 0.02 4,759
Lowe's 6 0.02 5,488 Lowe's 2 8 0.03 4,164
Total 32.9 3.5 255 0.85 129 Total 33.3 3.5 264 0.87 126
3,4 3,4
New Additions Possible 44 New Additions Possible 39

U.S. 301.1 31 3,917 1.43

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.

Source: Company reports, Hardlines, TD Newcrest.

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.

Exhibit 22. Big Box Saturation Analysis in Ontario

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

(mm) Density big-box Population (000) 100 15 21 26 32


New Stores (000)

Home Depot 1 85 0.73 151


RONA 19 0.16 673 105 9 15 21 27
Kent 0 - -
Lowe's 8 0.07 1,599 110 4 10 16 22
Total 12.9 13.4 112 0.96 114 115 -1 5 11 17
New Additions Possible 2,3 4 120 -6 0 6 12

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.

Source: Company reports, Hardlines, TD Newcrest.

Why We Do Not Believe Lowe’s is Interested in RONA, at Least For Now

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.

28 A Division of TD Securities Inc.


• Lowe’s has not grown by acquisition in the past. Almost all its growth has
been organic, with the exception of one acquisition, of a 32-store hardware
chain in nine western U.S. states in 1998. At that time, it had 465 stores.

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.

So what is to stop Lowe’s from developing smaller store formats in Canada?


Nothing, in our view. But, it has yet to do so in its own backyard, where
independents make up over 45% of the market. The latest developments in the
U.S. indicate that Lowe’s is reconsidering its ‘super-size’ strategy, with about
30% of its store openings in 2009 expected to use a 103,000 sf format rather
than the 117,000 sf format; No indications of going smaller have been
provided. It is also important to acknowledge the difficulty that typical big-
box retailers like Lowe’s and Home Depot have in squeezing a large
number of SKUs into a smaller store format without a corresponding
strong distribution and special order system that is integral to servicing
smaller formats. RONA’s system is constantly fine-tuned and still involves
over 20,000 items being hand-picked per day.

• 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.

• It is also worth mentioning that RONA has a ‘flip-in’ poison pill to


discourage unsolicited takeover bids (adopted in early 2005). Under the plan,
in the event of an unwelcome bid, existing shareholders (except the would-be
acquirer) may acquire additional shares at a 50% discount to the market price
and, in so doing, would significantly dilute the acquirer’s existing position.

A Division of TD Securities Inc. 29


We acknowledge that Lowe’s growth could, to large extent, be achieved by
Lowe’s may steal some big- stealing market share away from Home Depot and RONA; but it seems
box market share away unlikely to expect the totality of its growth to stem from that, especially given
from Home Depot and
the scarcity of prime real estate locations. It is important to recall that when
RONA. But then what?
Lowe’s began to encroach on Home Depot’s big-box market share in the U.S. by
offering a new fresher big-box look, the latter’s existing store network was more
mature and in need of revamping. This does not hold true in the Canadian market,
where the big-box store network is relatively younger. As shown in our big-box
saturation analysis, Lowe’s would likely need to change its approach to new store
development and consider smaller store formats, in which case, the RONA
proposition becomes appealing. The one main issue remains RONA’s extensive
dealer network, which is fully integrated within its retail distribution structure and
is tough to separate.

30 A Division of TD Securities Inc.


Financial Analysis

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

Consolidated sales vs. EBITDA margins Net Income


6.0 9.0%
180
5.0 8.0% 160
4.0 140
7.0% 120

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

Net Sales EBITDA Margin

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

Sales EBITDA Margin


Sales EBITDA Margin

Source: Company reports, TD Newcrest estimates.

Q3/08 review

In Q3, RONA’s results were weighed down by the deteriorating economic


conditions, despite the progress made on its PEP initiatives. At $0.46, Q3/08
EPS (f.d.) was down 10% from $0.51. Retail segment revenues were essentially
flat, as the positive impact from recent acquisitions and new store openings was
offset by a 3% drop in SSS. Sales declined in most product categories, but average
basket size was up in the quarter. Distribution segment sales were up 9%, owing to
the recruitment of new affiliates, an accelerated conversion process and increased
purchases by existing affiliates due to the introduction of new sales programs.

A Division of TD Securities Inc. 31


Consolidated adjusted gross margins improved 40 bps year over year in Q3/08
driven by 1) a 6% year-over-year increase in private label product sales, which
now account for approximately 17% of overall sales; 2) product management
improvements – logistics costs were reduced by approximately $1 million due to
the continued optimization of RONA’s distribution channels; and 3) improved
product purchasing terms. Retail segment EBITDA margins dropped 90 bps
year over year to 8.9%. However, excluding one-time charges related to store-
closures, margins would have been down only 10 bps as benefits from RONA’s
PEP initiatives partially offset the impact of lower SSS. Management indicated that
the integration of its two most recent acquisitions, Dick’s Lumber and Best-MAR
were going well and that both posted improved EBITDA margins in the quarter. As
for the Distribution segment, EBITDA margins improved 41 bps, driven by
higher sales and supply chain improvements.

Expected future performance

In Q4/08, we foresee organic growth and margin momentum continuing to slide, as


economic conditions worsen. Retail segment revenues are forecast to drop 2.5%,
driven by a decline of 5.5% in SSS, partially offset by the contribution of the past
couple of acquisitions (Best-MAR and Dick’s Lumber). Distribution segment
revenues should fare better, aided by the addition of 25 dealers recruited to date. In
Q3/08, management noted that its affiliate dealers, which typically operate smaller
stores, have been less affected by the economic slowdown than the corporate store
network. We expect consolidated EBITDA margins to drop by 40 bps, which takes
into account previously announced store closure costs of about $3.7 million.
Excluding these costs, EBITDA margins would only drop approximately 10 bps.
Our EPS forecast stands at $0.20, down 22% year over year – remember that Q4 is
seasonally the company’s second weakest quarter after Q1.

In 2009, we are forecasting consolidated revenues to decline by approximately


1.8%, before turning 4% higher in 2010. Within the Retail Segment, we expect
the mid-single-digit SSS decline seen in 2008 year-to-date to continue into 2009,
with forecast SSS growth of -5%, more than offsetting the positive impact from
four new planned store openings. Management had guided for seven new stores in
2009, although we believe that a few of these projects may be postponed in view of
prudently allocating capex in the current economic backdrop.

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.

32 A Division of TD Securities Inc.


Piggybacking on this move, RONA offered a 10% cash-back to be redeemed in
gift cards applied to the cost of materials purchased at RONA or Réno-Dépôt
anywhere in Quebec, for use in a project that is eligible for the government’s tax
credit program. The company will also most likely extend this incentive outside of
Quebec. While this is a step in the right direction, in that it might stimulate some
consumer spending, we do not believe it will materially affect our expectations.
We expect 2010 retail revenues to improve modestly by 2.8%, given our
expectations for a similar new store opening pace in 2009 and 1% SSS growth.

In the Distribution Segment, revenues are expected to rise 5% and 9% in 2009


and 2010, respectively, mainly driven by the continued recruitment of new
affiliates, and despite weak organic sales growth of -1.1% and +1.3%. While we
believe that the current economic environment is supportive of recruitment, we are
conservatively forecasting $150 million in additional retail sales from affiliate
recruitment in 2009, below management’s goal of $200 million.

Consolidated EBITDA margins are expected to drop about 30 bps in 2009 at


7.5% and increase by about 35 bps in 2010. This year, the negative leverage
from weak top line growth should largely offset benefits from profit improvement
initiatives launched, including improved product purchasing terms, increased
private label product sales and inventory management improvements. We expect
new store opening costs to remain a drag on profitability longer than is typical as
revenue growth will also take longer to materialize. Also recall that about 50% of
RONA’s cost base is fixed, in addition to the fact that it is attempting to strike
a balance between reducing its payroll costs, which represent approximately
60% of SG&A, and continuing to provide good customer service – a key
element in the battle with other home improvement retailers, and, along with
price, one of the two top reasons for shopping at a given retailer, after
proximity. Retail Segment 2009 EBITDA margins should drop approximately
40 bps, off of an easy comp in 2008, when RONA recorded close to $15 million in
store closure charges (excluding these charges, margins actually drop 70 bps).
Distribution Segment margins are expected to remain essentially flat.

Exhibit 24. RONA Inc.: LTM EBITDA Margins and EPS to Trough in Mid-2009

LTM EBITDA Margins LTM EPS (f.d.)


9.0% $1.80
LTM EBITDA Margin (%)

$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

Source: Company reports, TD Newcrest.

A Division of TD Securities Inc. 33


While we expect RONA to continue to benefit from the PEP initiatives being
undertaken, we believe this will be more than offset by the challenging
business conditions in 2009 and the resulting negative leverage. Our forecasts
reflect continued margin compression through mid-2009, before rebounding. We
agree with management’s recent statement that it may not achieve its original
objective of low single digit EPS growth over the first half of its 2008–2011 plan.
We forecast EPS of $1.22 for 2009, down approximately 10% from $1.36 in 2008.
Note that 2008 to date, RONA has incurred $15 million in pre-tax store closure
costs segments, which we do not exclude as one-time items, and therefore shave
about C$0.09 per share off our 2008 EPS estimate. We chose not to adjust our EPS
for these costs, given that this is the first year that RONA discloses them and the
fact that business was likely re-routed to other RONA stores nearby. We expect a
rebound in earnings in 2010, with EPS up 13% to $1.39, aided by a return to
positive SSS territory and additional benefits from its PEP program.

RONA is not exposed to material foreign exchange fluctuation. About 10%


purchases are denominated in U.S. dollars (the rest in Canadian dollars). These
purchases consist mostly of seasonal products acquired in Asia and some U.S.
sourcing. Its annual procurement in U.S. dollars is about US$200 million and
management typically hedges 80% of U.S. dollar purchases. Since RONA
conducts it business entirely in Canada, there is no other source of direct foreign
exchange risk.

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.

Our Forecast SSS in the Context of the Current Downturn

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.

34 A Division of TD Securities Inc.


Exhibit 25. Select Indicators’ Performance Through Past Recessions
1 1
US Existing One Family Home Sales Canada Existing One Family Home Sales

Cycle Peak Cycle Peak


to trough Peak Trough Cycle Peak to trough Peak Trough Cycle Peak
duration Level Level to trough duration Level Level to trough
(in mths) (m units) (m units) performance (in mths) (000 units) (000 units) performance
Recession: 'Jan '80–July '80 (length: 7 months) 12 4.1 2.5 -39% n/a n/a n/a n/a
Recession: 'Jul '81–Nov '82 (length: 16 months) 13 2.7 1.9 -30% n/a n/a n/a n/a
Recession: 'July 90–Mar '91 (length: 8 months) 11 3.3 2.6 -20% continued to increase
Average ex-2001 11 -30% nmf nmf
Recession of Dec 07–? 38 6.3 4.0 -37% 13 43.7 27.4 -37%

(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

Source: BEA, NAR, CREA, Statistics Canada, TD Newcrest.

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.

A Division of TD Securities Inc. 35


Exhibit 26. Components of Year-Over-Year Change in U.S. Residential
Investments

100.0
16.5 (2%) YoY Chg in (17%) YoY Chg in
13.8 Residential Investment Residential Investment
50.0 63.3

YoY Change (US$bln)


8.8
5.4
0.0 -12
14% YoY Chg in Residential
Investment -9.9
-50.0

-115.4

-100.0
-16.8

-150.0
2005 2006 2007

New Construction Spending Improvements Other Investments

Source: BEA.

As for Canada, residential investment as a percentage of GDP has held up


relatively well compared to the U.S. The ratio currently stands at 5.6%, above its
historical average of 4.7%. While we do expect this metric to soften, here again,
we do not believe the downturn should be as pronounced as it has been in the U.S.
Still, using TD Economics’ forecast GDP for Canada and a trough of 4.7% for the
residential investment-to-GDP ratio would yield an expected drop of about 16.0%
for residential investments in Canada in 2009. Taking into account the fact that,
historically, renovation has accounted for approximately 45% of the growth in
residential investments in Canada, home improvement spending could drop about
7% in 2009. Remember that it took 12 quarters for this ratio in the U.S. to move
from its peak to the current trough, whereas our trough estimate for Canada is
reached in only five quarters.

36 A Division of TD Securities Inc.


Exhibit 27. How Far Can Residential and Home Improvement Spending Drop?
Q1/07 Q2/07 Q3/07 Q4/07 Q1/08 Q2/08 Q3/08 Q4/08 Q1/09E Q2/09E Q3/09E Q4/09E 2008 2009E
US Residential Investment (US$b; SAAR) 677 654 618 571 528 505 479 439 427 413 401 433 488 418
GDP (US$b; SAAR) 13,511 13,738 13,951 14,031 14,151 14,295 14,413 14,265 14,237 14,229 14,297 14,408 14,281 14,293
GDP y/y chg 4.2% 6.7% 6.2% 2.3% 3.4% 4.1% 3.3% -4.1% -0.8% -0.2% 1.9% 3.1% - 0.1%
US Residential Investment as % of GDP 5.0% 4.8% 4.4% 4.1% 3.7% 3.5% 3.3% 3.1% 3.0% 2.9% 2.8% 3.0% 3.4% 2.9%

Y/Y Chg in US residential Investment -14%

Historically 45% of the drop is


related to home improvement and
other; the balance to new housing.

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%

Y/Y Chg in Canada residential Investment -16%

Historically 45% of the drop is


related to renovations; the balance
to new housing and other.

Source: BEA, Statistics Canada, TD Economics, TD Newcrest.

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.

Exhibit 28. What If We Are Wrong, For Better or Worse


F09 F10
Worst Base Best Worst Base Best
Case Case Case Case Case Case
Key Assumptions
Net Store Openings 3 4 6 3 7 9
Retail Segment SSS -6.9% -4.9% -2.9% 0.0% 1.0% 2.0%
Annual retail sales added from Affiliate
Recruitments (C$m) 95 149 200 93 149 204
Capital Expenditures 155 160 175 175 200 218

Impact to Consolidated Income Statement


Net Sales (C$m) 4,657 4,757 4,859 4,750 4,963 5,157
EBITDA (C$m) 337 354 373 365 387 407
EBITDA Margins 7.2% 7.5% 7.7% 7.7% 7.8% 7.9%
EPS (f.d.) 1.12 1.22 1.32 1.26 1.38 1.48
YoY Change in EPS -17.5% -10.1% -2.5% 12.7% 12.8% 12.3%

Source: TD Newcrest estimates.

A Division of TD Securities Inc. 37


Strong Balance Sheet, FCF Generation and No Financing Concerns

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.

Exhibit 29. RONA Inc.: Disciplined Use of Cash Flows

Cash Flows Debt vs. Debt / Capital


Noble Trade & Dick's
350 800 Lumber acquisitions 35%
As a result of Totem Totem
300 700 30%
acquisition (acquired acquisition
250 600 25%
April '05) Réno-Dépôt
500
200 20%
C$mm

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

CFO FCF Debt Debt/Capital

Source: Company reports, TD Newcrest estimates.

38 A Division of TD Securities Inc.


How Has RONA Fared versus Others in the Industry?

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.

Exhibit 30. Comparable SSS

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

Source: Company reports, Bloomberg.

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.

With RONA’s focus now centered on improving internal operations through


the PEP program, we suspect the margin gap may narrow. It is important to
note that the company owns approximately 25% of its real estate; in comparison,
Home Depot and Lowe’s both own approximately 90% of their real estate, and
Canadian Tire Retail owns 75%. This factor alone shaves 250-270 bps off RONA’s
margin versus its competitors’. Taking this into account, RONA’s EBITDA margin
gap narrows by 2–3 percentage points relative to Home Depot and Lowe’s average.
Management maintains that it will lean toward owning its real estate whenever
possible; although this task is becoming more difficult owing to the scarcity of
large new development areas and local municipalities’ control over development.

A Division of TD Securities Inc. 39


EPS growth has been quite solid for RONA, with a 5-year CAGR of 24%, faring
better than both Home Depot and Lowe, However, as previously mentioned, to a
large extent, this has been achieved through acquisitions. Interestingly, Home
Depot’s earnings have been on a declining trend over the past two years (-9%) and
we address this further in the discussion on Home Depot in the following section of
this research report. As expected, all three retailers should see a significant drop
in earnings in 2008, the most pronounced being Home Depot (-24.0%)
followed by Lowe’s (-19.5%) and RONA (-14.5%). The same factors mentioned
above serve largely to explain RONA’s lower returns as well. We are unable to
draw any meaningful conclusions from a comparison of inventory turns, as RONA
does not segment its COGS and SG&A expenses.

40 A Division of TD Securities Inc.


Exhibit 31. RONA Inc.: Comparison with Competitors – Key Metrics
Same-Store-Sales
Guidance 5-Year
2002 2003 2004 2005 2006 2007 2008E Average
HD 0.0% 3.8% 5.4% 3.8% -2.8% -6.7% -8.0% 0.7%
LOW 5.8% 6.7% 6.6% 6.1% 0.0% -5.1% -6% to -7% 2.9%
CTC 1.4% 4.2% 2.2% 15.2% 3.5% 0.5% - 5.1%
CTR1 3.2% 4.7% 1.8% 3.4% 3.5% -0.5% - 2.6%
TDE
2
RON 7.0% 3.7% 9.0% 0.4% 0.3% -1.6% -4.9% 2.4%
3
RON 7.0% 3.7% 9.0% 1.0% 1.4% -0.8% -4.9% 2.9%

Canadian Industry4 8.8% 8.2% 8.9% 5.5% 7.3% 4.2% - 6.8%


US Industry5 7.0% 6.3% 12.8% 5.7% 7.5% -0.7% - 6.3%

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 5.5% 6.5% 7.5% 8.3% 8.4% 8.4% 7.8% 7.8%


2
RON–Retail 7.2% 7.6% 8.5% 9.2% 9.2% 8.9% 8.1% 8.7%

F.D. Adjusted EPS


5-Year
6
2002 2003 2004 2005 2006 2007 2008E CAGR
HD (US$) 1.56 1.88 2.26 2.72 2.55 2.27 1.73 7.8%
LOW (US$) 0.92 1.13 1.36 1.73 1.99 1.86 1.51 15.1%
CTC (C$) 2.53 2.95 3.53 3.98 4.31 5.12 4.53 15.1%

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%

RON 8.2% 11.0% 15.2% 16.5% 13.4% 10.2% 7.9% 13.3%

1) Canadian Tire Retail Operations


2) Adjusted SSS (non-constant lumber but ex-holiday/extra week impact)
3) Adjusted SSS (constant lumber prices & comparable y/y # weeks)
4) Canadian Home Improvement Industry (Source: Hardlines)
5) US Home Improvement Industry (Source: HIRI)
6) Consensus figures for comparables; TD Newcrest estimates for RONA
7) Corporate & Franchise Stores Segment
8) YTD figures for competitors; TD Newcrest 2008E estimate for RONA
Note RONA owns ~25% of its real estate vs. ~90% for HD and LOW; Limited information available on CTC

Source: Company reports, Bloomberg, TD Newcrest.

A Division of TD Securities Inc. 41


42

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

Rent Expenses 59 84 104 120 30 34 32 33 130 34 34 38 34 141 141 144


EBITDA 175 277 332 384 41 162 122 76 400 33 157 116 71 377 354 387

Depreciation and amortization 36 50 56 75 22 22 23 23 91 25 29 28 27 109 113 120


EBIT 140 228 277 309 19 139 98 53 309 8 128 88 43 268 241 267

Total Interest Expense 17 15 16 22 7 9 8 7 32 8 9 7 7 31 28 26


EBT before non-controlling interest 122 212 261 287 12 130 90 45 278 0 119 81 37 237 214 240

Provision for (recovery of) Income Taxes 44 74 85 92 4 42 29 14 88 0 37 25 12 73 66 75


Earnings before non-controlling interest & one-time items 78 138 175 195 9 89 61 31 190 0 82 56 25 163 147 166

Non-controlling interest 0 0 0 4 (0) 2 2 1 4 (1) 2 3 1 5 5 5


Net Income before one-time items 78 138 175 191 9 86 59 30 185 1 80 53 24 158 142 161

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

EPS before one-time items


Basic 0.73 1.22 1.53 1.66 0.08 0.75 0.52 0.26 1.61 0.01 0.69 0.46 0.21 1.37 1.23 1.39
Fully Diluted 0.72 1.20 1.51 1.64 0.08 0.74 0.51 0.26 1.59 0.01 0.69 0.46 0.20 1.36 1.22 1.38
YoY growth rate f.d. EPS 34.2% 65.5% 26.1% 8.5% -45.1% 7.4% 5.7% -20.1% -3.1% -88.7% -6.9% -10.2% -22.2% -14.5% -10.1% 12.8%

EPS reported (Inc. one-time items)


Basic 0.73 1.22 1.53 1.66 0.08 0.75 0.52 0.26 1.61 0.01 0.69 0.46 0.21 1.37 1.23 1.39
Fully Diluted 0.72 1.20 1.51 1.64 0.08 0.74 0.51 0.26 1.59 0.01 0.69 0.46 0.20 1.36 1.22 1.38

Weighted Avg. Shares O/S (000s)


Basic 106.2 113.6 114.1 114.7 115.1 115.3 115.3 115.3 115.3 115.5 115.6 115.7 115.7 115.6 115.7 115.7
Fully Diluted 107.9 115.7 116.2 116.5 116.8 116.8 116.7 116.6 116.7 116.7 116.7 116.7 116.7 116.7 116.7 116.7

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%

Source: Company reports, TD Newcrest estimates.


Exhibit 33. RONA Inc.: Income Statement – Segment Information ($mm)

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

Segment sales growth


Retail Segment 26.7% 46.8% 12.5% 18.4% 12.0% 11.2% 8.5% -1.0% 7.5% 6.4% 0.3% 0.4% -2.5% 0.7% -3.8% 2.8%
Distribution Segment 0.8% 15.4% 2.1% -0.7% 4.9% 2.9% 0.6% -17.2% -2.1% -3.5% 0.1% 9.2% 5.6% 2.9% 4.8% 9.1%
A Division of TD Securities Inc.

Segmented EBITDAR Margins


Retail Segment 10.3% 11.2% 12.0% 12.0% 7.8% 14.5% 12.3% 11.1% 11.9% 7.0% 14.1% 11.9% 10.3% 11.3% 11.1% 11.4%
Distribution Segment 5.7% 6.7% 7.7% 8.1% 8.7% 9.6% 8.1% 5.7% 8.2% 8.7% 9.4% 8.4% 7.5% 8.6% 8.4% 8.6%

Segmented EBITDA Margins


Retail Segment 7.6% 8.5% 9.2% 9.2% 3.9% 12.0% 9.8% 7.4% 8.9% 2.8% 11.6% 8.9% 6.8% 8.1% 7.7% 8.1%
Distribution Segment 4.4% 5.2% 5.7% 6.0% 6.8% 7.8% 6.2% 5.5% 6.7% 6.2% 7.8% 6.6% 5.6% 6.7% 6.7% 6.9%

1 Adjusted to exclude impact of extra weeks.


2 Adjusted to exclude impact from holidays.

Source: Company reports, TD Newcrest estimates.


43
Exhibit 34. RONA Inc.: Cash Flow Statement ($mm, except per-share figures)

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)

Increase (Decrease) In Bank Balance (4) 8 (0) 54 (56) 7 38 15


Bank Balance (Indebtedness) At Beginning Of Year 0 (3) 5 4 58 3 10 48
Bank Balance (Indebtedness) At End Of Year (3) 5 4 58 3 10 48 63

CFPS (after non-cash working capital)


Basic 1.07 0.94 1.39 2.47 2.40 2.72 1.65 2.17
Fully Diluted 1.06 0.93 1.37 2.43 2.37 2.69 1.64 2.15

FCF after non-cash working capital 57 150 49 58 60 132 31 51


Free CFPS after non-cash working capital 0.53 1.30 0.42 0.50 0.52 1.13 0.27 0.43

Source: Company reports, TD Newcrest.

44 A Division of TD Securities Inc.


Exhibit 35. RONA Inc.: Balance Sheet ($mm, except per share figures)

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

LIABILITIES & SHAREHOLDERS' EQUITY


Outstanding cheques 3 0 0 0 0 0 0 0
Bank loans 20 19 25 21 20 10 25 25
Accounts payable and accrued liabilities 328 374 413 394 421 417 409 439
Income taxes payable 18 11 5 7 0 0 0 0
Derivative financial instruments 0 0 0 0 1 0 0 0
Future income taxes 0 0 1 3 4 4 4 4
Current Portion of L/T Debt 103 11 12 30 34 30 30 30
Total Current Liabilities 473 416 456 455 480 462 468 498

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

Source: Company reports, TD Newcrest estimates.

A Division of TD Securities Inc. 45


Valuation

Exhibit 36. RONA Inc.: Stock Performance


Jun 6, '05: Lowe's announces
Feb 7, '07:
expansion into Canada
Noble Trade Acq.
$28 Apr 26, '06:
Sep 18, '07:
$26 Curtis Lumber Acq.
Dick's Lumber Acq.
$24 Dec 21, '04:
Nov 6,, '07:
Totem Acq.
$22 SSS turn negative
$20 Feb 25, '04: EPS S&P TSX Index dropped 35%
Upside Surprise Feb 2 '06: Matériaux between Aug. 30 '08–Dec. 31
Aug 18, '06:
$18 Coupal Acq.
Moutnain Building '08
$16 May 1, '03: Feb 17, '06: Centres Acq. S&P 500 Index
$14 Secondary Offering Chester Dawe Acq. dropped 5%
between Oct. 31
$12 Apr 23, '03:
'07–Dec. 31 '07 Jan 9, '08:
Réno-Dépot Acq.
$10 Best-MAR Acq.

$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.

Looking at Previous Recessions

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

46 A Division of TD Securities Inc.


Materials, Home Building and Autos. While we include the 2001 recession in our
work, including some Canadian stocks, for the purposes of our analysis, we rely
mainly on the other recessions for the reasons just mentioned.

Based on information we tabulated, homebuilding stocks tend to reach a trough an


average of four months preceding the end of a recession (Exhibit 37). A similar
conclusion can be reached in looking at the auto sector, which averages six
months. Given that the general consensus among economists is that the U.S.
recession will most likely end in mid to late 2009, homebuilding stocks may be
nearing trough levels, based on the historical relationship of homebuilding stocks
to the general economy. Most importantly, homebuilding stocks tend to
significantly outperform the overall market by roughly 2.5:1.0 or by approximately
34% in the period of the trough through the end of the recession.

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.

A Division of TD Securities Inc. 47


Exhibit 37. A Look at Previous Recessions

Lead Time in Lead Time in Share Price Performance


in Peak in Trough Prior to trough
vs. Start of vs. End of Trough to 12 months after to 12 months after
Recession of Recession End of Recession Trough Recession Ends
Months Months Period Annualized Period 3 mths prior 6 mths prior
Recession: 'Jan '80–July '80 (length: 7 months)
S&P Building Materials Index 4 3 24% 94% 38% 17% 24%
S&P Home Building Index 1 3 42% 168% 63% 14% 51%
Average Home Building and Building Mat. 3 3 33% 131% 51% 15% 38%
S&P Automotive Index 4 2 32% 192% 17% -11% -12%
Overall Average 3 3 33% 151% 39% 7% 21%

S&P 500 19% 58% 33% 21% 20%


S&P TSX 22% 67% 30% 24% 29%

Recession: 'Jul '81–Nov '82 (length: 16 months)


S&P Building Materials Index 1 5 42% 100% 55% 33% 49%
S&P Home Building Index 4 5 113% 271% 168% 101% 68%
Average Home Building and Building Mat. 3 5 77% 186% 111% 67% 58%
S&P Automotive Index 1 12 62% 62% 62% 86% 67%
Overall Average 2 7 72% 144% 95% 73% 61%

S&P 500 29% 88% 52% 43% 38%


S&P TSX 34% 83% 79% 60% 30%

Recession: 'July 90–Mar '91 (length: 8 months)


Home Depot 2 5 84% 201% 191% 184% 212%
Lowe's 1 5 61% 146% 34% 26% 9%
Home Improvement Index1 2 5 83% 199% 185% 175% 198%

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%

Recession: 'Mar '01–Nov '01 (length: 8 months)


Home Depot 15 1 22% 264% -24% -48% -44%
Lowe's 15 2 43% 259% 31% 14% 42%
Home Improvement Index1 15 1 22% 268% -21% -45% -41%

S&P Building Products Index 3 1 7% 81% 8% -15% -7%


S&P Home Building Index 3 2 28% 168% 45% 25% 24%
Average Home Building and Building Mat. 3 2 17% 124% 26% 5% 8%
S&P Automotive Index 11 1 18% 221% -25% -41% -42%
Overall Average 5 1 18% 157% 9% -10% -8%

S&P 500 9% 57% -22% -24% -19%

2,3
Canadian Consumer Discretionary Index 9 8 12% 18% 36% 40% -2%
S&P TSX 9% 52% -10% -15% -14%

Average of all recessions excluding Mar'01-Nov-01


S&P Building Products Index 3 4 38% 104% 46% 24% 33%
S&P Home Building Index 3 4 78% 209% 107% 63% 60%
Average Home Building and Building Mat. 3 4 58% 157% 77% 44% 47%
S&P Automotive Index 3 6 36% 103% 24% 30% 13%
Overall Average 3 5 51% 139% 59% 39% 36%

S&P 500 24% 67% 38% 26% 27%

2
Canadian Consumer Discretionary Index 12 6 24% 48% 14% 2% -13%
S&P TSX 23% 61% 41% 27% 20%

1) Market capitalization weighted; includes Home Depot and Lowe's


2) Market capitalization weighted; includes Sears and Canadian Tire and Masonite
3) Mar '01–Nov '01 recession includes data from CFM and Royal Group Tech

Source: Bloomberg, TD Newcrest.

48 A Division of TD Securities Inc.


RONA’s stock price performance is highly correlated with both Home Depot
(R2 = 60%) and Lowe’s (R2 = 71%). As such, following Home Depot and
Lowe’s stock downturn, its stock performance had started to deteriorate well
ahead of the overall Canadian market downturn (or approximately eight
months before), when its SSS turned negative in Q3/07. RONA has historically
traded at a discount to both companies, averaging about 15% (20% on a forward
basis) since RONA went public (the discount relative to Home Depot has
historically been 16%, and relative to Lowe’s 25%). Interestingly, both stocks
appear to have found support in the 11–12x P/E multiple range (a trough reached
twice, in August 2006 and December 2007), which would imply a trough multiple
of 9.5–10.0x for RONA, which is current the level.

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

Source: Company reports, Bloomberg, Baseline.

A Division of TD Securities Inc. 49


50

Exhibit 39. Comparable Valuation


A Division of TD Securities Inc.

5-Yr 2-Yr Net Debt/ Net Debt/


Market Price/Earnings CAGR Forward Enterprise Value/EBITDA EBITDA Capital
Companies Ticker FYE Cur Price Cap (mm) LTM 2008E 2009E 2010E (EPS) Growth LTM 2008E 2009E 2010E LTM Current

North American DIY Retailers


Canadian Tire CTC.A Dec CAD $39.81 $3,109 8.5x 8.3x 9.1x 8.1x 15% -8% 5.6x 5.5x 5.8x 5.4x 2.0x 0.3x
Home Depot HD Jan USD $23.09 $39,218 11.7x 13.4x 16.1x 14.4x 8% -21% 6.9x 7.0x 7.9x 7.2x 1.4x 0.4x
Lowe's LOW Jan USD $19.01 $27,863 11.4x 12.6x 14.4x 12.3x 15% -16% 5.7x 6.1x 6.5x 5.8x 0.9x 0.2x
Average 10.5x 11.4x 13.2x 11.6x 13% -15% 6.0x 6.2x 6.8x 6.1x 1.4x 0.3x

Select North American Retailers


Alimentation Couche-Tard 1 ATD.B Apr USD $8.49 $1,195 7.6x 7.2x 8.2x 7.8x 30% 6% 3.8x 3.2x 3.6x 3.3x 1.3x 0.3x
Gildan GIL Sep USD $10.64 $1,282 7.3x 7.3x 9.5x 7.1x 27% 2% 5.3x 5.3x 6.3x 5.0x 0.2x 0.0x
Lululemon LULU Jan USD $7.67 $367 11.6x 13.1x 14.1x 9.8x na 10% 4.2x 4.5x 5.1x 5.1x 0.0x 0.0x
Saputo SAP Mar CAD $20.80 $4,294 14.1x 14.9x 12.6x 10.3x 11% 9% 8.6x 8.3x 7.2x 6.2x 0.7x 0.2x
Tim Hortons THI Dec CAD $30.11 $5,514 18.9x 18.6x 16.7x 14.7x na 12% 10.3x 10.5x 9.6x 8.8x 0.6x 0.2x
Average 11.9x 12.2x 12.2x 9.9x 22% 8% 6.4x 6.4x 6.4x 5.7x 0.5x 0.2x

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

Source: Company reports, Bloomberg, Baseline, TD Newcrest estimates.


Justification of Target Price

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.

Exhibit 40. RONA Inc.: Historical P/E

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

Forward P/E (LHS) YoY Growth in Forward EPS (RHS)

Source: Bloomberg, Baseline, TD Newcrest.

In the near term, the macro-environment is clearly challenging, masking the


Our 2009 and 2010 EPS
forecasts stand 8% lower
benefits of the solid efforts and initiatives undertaken by management. As such, we
than consensus; we expect expect continued deterioration in sales trends over the next three to four
downward revisions to quarters, with our EBITDA margin bottoming around Q3/09, and the lack of
Street estimates after Q4 earnings momentum in 2009 limiting multiple expansion. We also believe that
results are released. Street estimates remain high and will be revised ahead of the company’s Q4 results
to be released mid-February. Note that our EPS forecasts stand 8% lower than
2009 and 2010 consensus.

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.

A Division of TD Securities Inc. 51


Key Risks to Target Price

Overall Risk Rating: Medium

Dependence on economic conditions: RONA’s sales are tied to home


improvement and construction spending, which depend on the general health of the
economy including: existing home sales, interest rates, unemployment levels and
disposable income, consumer confidence, demographic trends, and other general
economic conditions, which affect consumer spending. A severe drop in
construction and renovation spending could have an adverse effect on results.

Increased competition: Changes to the competitive landscape could affect


RONA’s ability to garner additional market share. A few examples include
accelerated expansion by Lowe’s in Canada, increasing offer of home
improvement related products by regional/national retailers, and further penetration
by competitors of niche segments targeted by RONA, such as ICI and specialized
customers such as contractors and tradesmen.

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.

Successful acquisition program: Acquisitions are an important part of RONA’s


long-term growth strategy. Failure to complete and integrate acquisitions
successfully would impair the company’s long term 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.

Reputation: RONA sells a variety of products of many different brands, including


its private brand. Deterioration in consumer perception of RONA’s products may
hamper the company’s future growth.

52 A Division of TD Securities Inc.


Exhibit 41. Largest Publicly Traded Competitors

RONA Home Depot Lowe's Canadian Tire 1


Fiscal Year End Dec Jan Jan Dec
Canadian Market Share 15% 15% <1% 13%
Sales
Consolidated Retail Sales (C$b) $6.3 $83.1 $51.9 $5.5
Sales in Canada (C$b) 2 $6.3 $6.0 $0.2 $5.5
Y/Y Growth 5.5% 0.7% nmf 2.2%
Same-Store-Sales 3
2005 0.4% 3.1% 6.1% 3.4%
2006 0.3% -2.8% 0.0% 3.5%
2007 -1.6% -6.7% -5.1% -0.5%
Average Sales per Store (C$m) Big Box: $20–40 $34.2 $33.8 Concept 20/20: $18.7
Proximity: $12–20 New-format: $14.2

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.

Canada & Mexico (1.5m sqr ft.)

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

Source: Company reports, Hardlines, TD Newcrest.


Overview of Key Players

Home Depot Inc. (HD-N, not covered)

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%.

Exhibit 42. Home Depot Canada: Snapshot

Home Depot Canada


2005 2006 2007 Estimated Sales
$6.5 18%
Alberta 19 21 23
6.0 6.1 16%
British Columbia 17 22 22 6.0
$6.0 14%
Manitoba 6 6 6

YoY Change (%)


5.5 12%
New Brunswick 2 3 3 $5.5
C$b

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

Note: As of Q3/08, Home Depot had 172 stores in Canada

Source: Company reports, Hardlines.

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.

54 A Division of TD Securities Inc.


Home Depot Canada’s preferred store format is its flagship 100,000+ sf big-box.
However, it has a couple of 60,000+ sf stores in Canada and, in 2008 it opened its
first “rural market” 45,000 sf concept store in Ontario, and a second one in Nova
Scotia. The concept will be tested for several months before any firm plans are
made for more such outlets.

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.

Home Depot’s U.S. operations are undergoing significant changes. It just


Home Depot’s primary
focus remains on the U.S., announced significant headcount reductions of approximately 7,000 employees
where operations are (including 10% in officer ranks) and aims to open 12 stores in 2009 (well below
undergoing significant recent years). In the past few years, the company has been plagued by market
changes. share erosion, deteriorating sales per store, slowing inventory turns, and
declining EPS growth since 2005. Exacerbated by challenging market
conditions, in 2007 the company reported its first ever year-over-year decline
in sales.

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.

A Division of TD Securities Inc. 55


Lowe’s Companies Inc. (LOW-N, not covered)

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.

Looking ahead, Lowe’s has secured 30 additional locations, with 20 of them


considered “A” properties currently in development. It plans to open up to 100
stores within the next 10 years with a focus on Ontario, before expanding into
other provinces. Next, Lowe’s is expected to set its sights on western Canada, and
eventually move to Quebec. To that end, the company reportedly has a site in
Edmonton’s South Common power centre. According to Hardlines, while no store
locations have been confirmed for Vancouver’s Lower Mainland, it appears that
Lowe’s has been in discussions with developers and shopping centre owners there,
with the aim of establishing stores. The company’s ability to pay up and fight for
good real estate locations remains one of the main threats for RONA.

Lowe’s almost exclusively uses a 100,000+ sf big-box store format. In Canada,


it remains committed to build only full-sized stores – of 117,000 sf plus 31,000
sf garden center – with up to 175 full- and part-time staff. However,
acknowledging that the U.S. market is largely saturated by large format home
improvement centers, the company began testing 66,000–80,000 sf stores for
smaller rural areas. No smaller format stores are planned for Canada at this time.
Like Home Depot, the company has centralized its structure and plans for its
smaller stores to “mirror” the look and feel of their larger counterparts.

Relative to Home Depot, Lowe’s appears to place greater emphasis on customer


Relative to Home Depot,
service. Stores have wide uncluttered aisles, flattering display lighting and user-
Lowe’s places increased
emphasis on customer friendly informational how-to signage. In Canada, it appears the company has put
service. increased emphasis on lighting fixtures and has adjusted its offering in the GTA to
reflect European influences on product styles. Of note, relative to Home Depot,
and RONA (which does not carry any), appliances account for a larger portion of
Lowe’s product mix (approximately 10%). After Sears, it is the second largest
appliance retailer in the U.S. This category typically takes up 5,000 sf (compared
to 2,000–3,000 sf in Home Depot’s new store format) and includes such high-end
brands as Bosch and Miele, not seen at other chains. In our opinion, this could pose
a risk in an economic downturn.

56 A Division of TD Securities Inc.


Canadian Tire Inc. (CTR-T, not covered)

Canadian Tire is a diversified company made up of four interrelated businesses: 1)


Canadian Tire Retail (CTR), Canada’s largest general merchandise retailer; 2)
Mark’s Work Warehouse (Mark’s), a clothing and footwear retailer; 3)
Canadian Tire Petroleum, Canada’s largest independent gasoline retailer; and
4) Canadian Tire Financial Services, a provider of a broad range of financial
services. The division relevant to RONA is CTR, which represented 63% of
Canadian Tire’s sales and 29% of EBIT as of 2007. Even within CTR, one
must exclude at least the automotive and leisure segments, which account for
60% of CTR’s sales.

Exhibit 43. Canadian Tire Retail: Snapshot

Canadian Tire Retail Store Network


Canadian Tire Retail
Planned Store Openings
Size # of % of total 20
Province # of stores Type ('000 sq ft) stores Opened retail sq. ft.
British Columbia 52 Concept 20/20 24–89 192 mid 2003–2007 58%
Alberta 46 15
Saskatchewan 13 New-format 16–66 189 1994–mid 2003 34%
Manitoba 14
Ontario 201 Traditional 16 92 1994 and prior 8% 10
Quebec 94
New Brunswick 17
Nova Scotia 20
5
Prince Edward Island 2
NFLD 12
Yukon 1
Northwest Territories 1 0

2008E

2009E

2010E

2011E

2012E
2004

2005

2006

2007
Nunavut 0

Total 473

Source: Company reports.

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.

A Division of TD Securities Inc. 57


Home Hardware Stores Ltd.

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.

Exhibit 44. Home Hardware: Snapshot

% 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%

YoY Change (%)


$4.5
Saskatchewan 48 5% 4.3 8%
$4.3 4.2
C$b

Ontario 440 43%


6%
Quebec 81 8% $4.1
New Brunswick 53 5% 4%
Nova Scotia 67 6% $3.9 3.8
Newfoundland 51 5% $3.7 2%
Prince Edward Island 10 1%
$3.5 0%
Yukon 3 0%
2003 2004 2005 2006 2007
Northwest Territories 6 1%
Sales (LHS) YoY Change (RHS)
Total Canada 1031

Source: Hardlines.

58 A Division of TD Securities Inc.


Appendix I. Share Structure and Ownership

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.

Exhibit 45. RONA Inc.: Insider Ownership

Major Shareholders

'000 Class 'A' % of


Title Shares Shares
Robert Dutton President and CEO 492 0.4%
Jean Gaulin Chairman of the board 85 0.1%
Jean-Guy Hébert Director 43 0.0%
Louis A. Tanguay Director 30 0.0%
Jean-Roch Vachon Director 10 0.0%
Jocelyn Tremblay Director 6 0.0%
J. Spencer Lanthier Director 5 0.0%
James Pantelidis Director 5 0.0%
Alain Michel Director 4 0.0%
Pierre Ducros Director 3 0.0%
Louise Caya Director 2 0.0%
Robert Sartor Director 1 0.0%
Other Executives 413 0.4%
Total Held by All Directors and Executives 1,099 0.9%
Total shares O/S 115,818
Float 114,719

Note: Shares outstanding as at November 7, 2008.

Source: Company reports.

A Division of TD Securities Inc. 59


Appendix II. Management Compensation
Appears Aligned With Shareholder
Interests

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).

60 A Division of TD Securities Inc.


Appendix III. Key Executives

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.

Pierre Dandoy, Executive Vice-President Retail Operations, was promoted to


his current position on November 14. Previously, big-box, Proximity and
Specialized Store operations were managed separately, and Mr. Dandoy held
the position of Executive Vice-President, Big-Box Stores. Prior to joining
RONA in 2002, he was Regional Vice-President, Eastern Canada for Wal-Mart.

Claude Bernier, Executive Vice-President Marketing and Customer Innovation,


joined RONA in 1988. He served as Director of Marketing from 1988 to 1990,
National Vice-President of Marketing from 1990 to 2001, and Executive Vice-
President, Traditional Stores from 2001 until 2005. He was Executive
Vice-President, Proximity and Specialized Stores from 2005 until November 14, 2008.

Normand Dumont, Executive Vice-President Merchandising, joined RONA in


1989. He served as Vice-President, Purchasing between 2000 and 2001, and Vice-
President, Merchandising from 2001 to 2004.

Claude Guévin, Executive Vice-President and Chief Financial Officer, joined


RONA in 1986. He served as corporate controller between 1991 and 1999, and
Vice-President, Finance and Administration from 1999 to 2001.

A Division of TD Securities Inc. 61


Appendix IV. Board of Directors

Management appears committed to maintaining an independent board of directors,


given that only 3 of 13 directors are related to management, which is in line with
corporate governance guidelines. In addition, the role of Chairman and President
and CEO are separate.

Exhibit 46. RONA Inc.: Board of Directors

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

Source: Company reports.

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.

62 A Division of TD Securities Inc.


Appendix V. Canada’s Housing Foundation
Lacks U.S. Architect

We believe that a recent TD Economics publication, entitled Canada’s Housing


Foundation Lacks U.S. Architect, helps explain why Canada’s housing industry is
at reduced risk of following in the U.S. footsteps. Key takeaways include the
following.

Housing Backdrop

Conservative Culture: The Canadian banking sector managed to avoid the


damaging race-to-the-bottom mentality on lending that occurred in the U.S. over
the past decade, mainly due to a combination of a more conservative culture and
government regulations that reduced the threat of outside competition, and thus the
need to actively defend market share.

Sub-Prime Share: As a result, sub-prime mortgage peaked at just a 5% share of


the Canadian market in 2006 (and has since retreated), whereas the share was as
much as 20–25% of the U.S. market.

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).

Better Safeguards: In many instances, U.S. mortgages were issued without a


proper assessment of either the house’s true value, or the proper income and
employment of the prospective buyer. In Canada, there is a more robust
framework for establishing the veracity of these claims.

Mandatory Insurance: Any mortgage issued by a Canadian chartered bank with


less than a 20% down-payment must be insured by CMHC. This means that most
of the risk for this set of buyers is eliminated for Canadian chartered banks.

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.

A Division of TD Securities Inc. 63


Seeds Not Sown: To the extent that the recent housing bubble in the U.S. was
inflated in part by interest rates that were too low for too long at the nadir of the
previous cycle, it is instructive to note that Canadian rates did not go as low (and
nor did they remain low for as long), and so Canada did not sow as many
dangerous seeds for the housing market as the U.S.

Household Positioning

Relying on Renegotiation: In the U.S., it can be a simple matter for mortgage


holders to renegotiate monthly payments downward when interest rates are falling.
Some buyers came to rely upon this and so began to struggle when mortgage rates
rose substantially in the U.S. over the past several years. In Canada, it is much
more costly to renegotiate a mortgage, and so few buyers would have made
purchases expecting to pay less than the initial monthly bill.

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.

Delinquencies: On a related note, Canada’s 90-day mortgage delinquency rate is


still rock bottom at about 0.3%, despite home prices that have fallen over the past

64 A Division of TD Securities Inc.


year. This speaks to homeowners who are currently having very little trouble
sustaining their mortgages.

Personal Savings: More broadly, Canada has sustained a generally positive


(though slim) personal savings rate for years, and – until the past year – rising
home prices and rising equity markets have kept the effective personal savings rate
even more strongly positive. As a result, the overall household wealth position
begins from quite an attractive starting point to weather the downturn that is
clearly occurring in 2008 (and likely 2009) as home prices and equities decline.
We reject the circular argument that Canada’s housing market is in trouble because
household wealth has recently begun to go down, since household wealth is
primarily going down in response to falling home prices.

A Division of TD Securities Inc. 65


Appendix VI. Long-Term Fundamental Drivers of
Home Improvement Spending Still
Appear Solid

Macroeconomic malaise aside, there are numerous indicators that point to


continued positive long-term trends for home improvement spending.

Homeowners typically take on remodelling projects to improve their living


environment, especially given that people are now spending more leisure time
in their homes. In addition, changing styles and technologies prompt owners to
invest in improvements. The level of renovation expenditures is driven largely by
the economic status of the homeowner (e.g., disposable income), demographics of
the household (e.g., age, household composition) and characteristics of the home
(e.g., condition, age, structure type, location).

Homeownership Rates Are on the Rise

Homeownership rates in Canada increased to 68.4% in 2006 from 60.3% in 1971.


In the U.S., despite pulling back from a high of 69.2% in Q4/04, ownership rates
remained at historically high levels of 68% as of Q3/08. This trend toward higher
ownership rates favours increased spending on renovations, as homeowners
account for over 75% of total remodelling spending.

Exhibit 47. Home Ownership Rates

US – Homeownership Rates Canada – Homeownership Rates


70% 70%
69% 68%
67% 66%
66% 64%
64% 62%
63% 60%
61% 58%
1Q-85
3Q-86
1Q-88
3Q-89
1Q-91
3Q-92
1Q-94
3Q-95
1Q-97
3Q-98
1Q-00
3Q-01
1Q-03
3Q-04
1Q-06
3Q-07

1971 1976 1981 1986 1991 1996 2001 2006

Source: U.S. Census Bureau, CMHC.

Housing Stock Is Getting Older

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

66 A Division of TD Securities Inc.


features can become outdated, prompting owners to remodel. According to a study
conducted by the CMHC, 37% of Canadian homeowners renovated their homes in
2007, at an average cost of about $12,800.

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%

% of total housing stock


75% 78% 76% 78%
% of total housing stock

0.2 80% 71%


16% 16%
14% 60%
0.15 48% 48%
42% 39% 42% 39%
9% 40%
0.1 9%
8% 7% 21%
20%
0.05
0%

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

Source: CMHC, Statistics Canada.

‘Cocooning’ Factor Changing Perception Of Home

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

Increasing DIFM Demand As Baby Boomers Age

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

A Division of TD Securities Inc. 67


Notes

68 A Division of TD Securities Inc.


APPENDIX A. IMPORTANT DISCLOSURES

Company Ticker Disclosures

RONA Inc. RON-T 9, 10, 17

1. TD Securities Inc., TD Securities (USA) LLC or an affiliated company has managed


or co-managed a public offering of securities within the last 12 months with respect
to the subject company.
2. TD Securities Inc., TD Securities (USA) LLC or an affiliated company has received
compensation for investment banking services within the last 12 months with
respect to the subject company.
3. TD Securities Inc., TD Securities (USA) LLC or an affiliated company expects to
receive compensation for investment banking services within the next three months
with respect to the subject company.
4. TD Securities Inc. or TD Securities (USA) LLC has provided investment banking
services within the last 12 months with respect to the subject company.
5. A long position in the securities of the subject company is held by the research
analyst, by a member of the research analyst’s household, or in an account over
which the research analyst has discretion or control.
6. A short position in the securities of the subject company is held by the research
analyst, by a member of the research analyst’s household, or in an account over
which the research analyst has discretion or control.
7. A long position in the derivative securities of the subject company is held by the
research analyst, by a member of the research analyst’s household, or in an
account over which the research analyst has discretion or control.
8. A short position in the derivative securities of the subject company is held by the
research analyst, by a member of the research analyst’s household, or in an
account over which the research analyst has discretion or control.
9. TD Securities Inc. and/or an affiliated company is a market maker, or is associated
with the specialist that makes a market, in the securities of the subject company.
10. TD Securities Inc. and/or affiliated companies own 1% or more of the equity
securities of the subject company.
11. A partner, director or officer of TD Securities Inc. or TD Securities (USA) LLC, or a
research analyst involved in the preparation of this report has, during the preceding
12 months, provided services to the subject company for remuneration.
12. Subordinate voting shares.
13. Restricted voting shares.
14. Non-voting shares.
15. Common/variable voting shares.
16. Limited voting shares.
17. The research analyst has visited the material operations of the subject company.
18. The subject company provided transportation and accommodation during the visit
of the material operations.

Additional Important Disclosures


n/a

A Division of TD Securities Inc. 69


Price Graphs
For full disclosures, please visit our website at www.tdsresearch.com/equities/research.

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%)

Distribution of Research Ratings

Distribution of Research Ratings^ Investment Banking Services Provided*

REDUCE 70%
BUY
6% 55% 60%
60%
50%
40%
30%
34%
20%
10% 6%
HOLD
39% 0%
BUY HOLD REDUCE

Current as of February 2, 2009


^ Percentage of subject companies under each rating * Percentage of subject companies within each of the
category—BUY (covering Action List BUY, BUY and three categories (BUY, HOLD and REDUCE) for which
Spec. BUY ratings), HOLD and REDUCE (covering TD Securities Inc. has provided investment banking
TENDER and REDUCE ratings). services within the last 12 months.

Research Dissemination Policy


TD Newcrest makes its research products available in electronic and/or printed
formats and simultaneously distributes them to its institutional clients who are entitled
to receive them. The Action Notes are distributed by email, and are available in
PDFform on First Call, Bloomberg, Reuters, Capital IQ, FactSet and
TheMarkets.com. Research Reports are distributed by email; they are also printed
and distributed by courier to our entitled clients. PDFs of Reports are available
on First Call, Bloomberg and Reuters. All research is available by password to
entitled institutional clients at https://www.tdsresearch.com/equities.

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.

70 A Division of TD Securities Inc.


Disclaimer
This report is produced entirely by TD Securities Inc. Although the information
contained in this report has been obtained from sources that TD Securities Inc. believes
to be reliable, we do not guarantee its accuracy, and as such, the information may be
incomplete or condensed. All opinions, estimates and other information included in this
report constitute our judgment as of the date hereof and are subject to change without
notice. TD Securities Inc. will furnish upon request publicly available information on
which this report is based. TD Securities (USA) LLC has accepted responsibility in the
United States for the contents of this research. TD Securities Limited has accepted
responsibility in Europe for the contents this report. Canadian clients wishing to effect
transactions in any security discussed should do so through a qualified salesperson of
TD Securities Inc. Canadian retail investors are served by TD Waterhouse Canada
Inc., a subsidiary of The Toronto-Dominion Bank. U.S. clients wishing to effect
transactions in any security discussed should do so through a qualified salesperson of
TD Securities (USA) LLC. European clients wishing to effect transactions in any
security discussed should do so through a qualified salesperson of TD Securities
Limited. Insofar as the information on this report is issued in the U.K. and Europe, it has
been issued with the prior approval of TD Securities Limited and only to persons falling
within Articles 19 and 49 of the Financial Services & Markets Act 2000 (Financial
Promotion) Order 2001, namely persons sufficiently expert to understand the risks
involved. No recipient may pass on the information contained in this report to any other
person without the prior written consent of TD Securities Inc. TD Newcrest is the trade
name that TD Securities Inc., TD Securities (USA) LLC and TD Securities Limited use
to market their institutional equity services. TD Securities Inc., TD Securities (USA) LLC
and TD Securities Limited are wholly owned subsidiaries of The Toronto-Dominion
Bank. TD Securities Limited is authorised and regulated by the Financial Services
Authority. The activities of The Toronto-Dominion Bank under its Financial Services
Licence are regulated by the Australian Securities and Investment Commission in
Australia. Copyright 2009 by TD Securities. All rights reserved.

Full disclosures for all companies covered by TD Newcrest can be viewed at


https://www.tdsresearch.com/equities/disclosures by TD Newcrest’s institutional
equity clients.

A Division of TD Securities Inc. 71


Head of Institutional Equities — Robbie Pryde 416 308 9728
CANADA
RESEARCH Special Situations PREFERRED SHARES
J.P. Benson, CFA, Head of Research 416 983 6714 Damir Gunja 416 983 4186 Sue Enrich, CFA 416 983 2707
Alison Gilbert, Assistant Director of Research 416 944 5345 Jessy Hayem, CFA Montréal 514 289 0385
Investment Strategist Bill MacKenzie, CA, CFA 416 308 3405 ALTERNATIVE INVESTMENT STRATEGIES
John Aitkens 416 307 9366 Michael Tupholme, CFA 416 307 9389 Bruce Langstaff, CFA, Sales 416 307 9342
Alternative Energy Technology Scott MacNicol, Trading 416 982 2674
Sean Steuart, CFA 416 308 3399 Scott Penner, CFA 416 308 3406 Tom Grant, Convertible Trading 416 983 2725
William Cabel 416 983 3551 Chris Umiastowski, P. Eng., MBA 416 983 3599
Research
Biotechnology and Health Care Transportation (Aerospace, Railroads)
Brian Morrison, CA, Research 416 944 6868
Lennox Gibbs 416 308 2213 Bill MacKenzie, CA, CFA 416 308 3405
Chris Rankin, CFA, Research 416 982 2623
Metals & Minerals Michael Tupholme, CFA 416 307 9389
Greg Barnes 416 983 9588 Tim James, CFA 416 308 9773
EQUITY INDEX PRODUCTS Fax: 416 307 8112
Steven J. Green, CFA 416 307 6304
Peter Haynes, CFA 416 944 5385
Daniel Earle 416 308 7906 INCOME TRUSTS
Chris Finora, Trading 416 308 2499
Craig Miller 416 982 2753 William Cabel (Power) 416 983 3551
Trevor Johnson, CFA, Research 902 461 0103
Chemicals & Fertilizers Sam Damiani, CFA (Real Estate) 416 983 9640
Amar Gudka, Trading 416 307 8016
Paul D’Amico, CFA 416 983 2755 Damir Gunja (Diversified) 416 983 4186
Communications Roger Serin, P. Eng. (Oil & Gas) Calgary 403 299 7964
STRUCTURED FINANCE GROUP Fax: 416 307 8112
Vince Valentini, CFA 416 944 7012 Greg Shaw, CFA Calgary 403 292 1204
Dan Carr 416 982 5781
Financial Services Sophia Taylor, CA (Diversified) 416 982 8683
Todd Hargarten, CFA 416 982 3208
Doug Young, CFA 416 308 2361 Blair Levinsky (Sales) 416 308 0862
Vishal Hingorani, CFA 416 983 4980
Jason Bilodeau, CFA 416 308 3741 Adam Robertson (Sales) 416 308 2674
Stuart Laslop, CFA 416 307 9363
Gold & Precious Minerals
John Ley, CFA 416 308 9980
Steven J. Green, CFA 416 307 6304 SALES 800 699 8015
John Millet 416 307 7640
Greg Barnes 416 983 9588 Fax: 416 982 8107
Jason Morrow 416 944 5175
Daniel Earle 416 308 7906 Montréal Fax: 514 289 0569
Constantin Staicu 416 983 0986
Industrial Products Paul M. Martin, CFA 416 982 4874
Bill MacKenzie, CA, CFA 416 308 3405 Benoit Robert Montréal 514 289 0789
DMA & ALGORITHMIC TRADING FAX: 416 307 9379
Michael Tupholme, CFA 416 307 9389 Bruce Shaw 416 308 9729
Ray Tucker 416 944 5145
Paul D’Amico, CFA 416 983 2755 Michelle Soon Shiong, CA 416 308 7907
Ted George 866 700 0125 / 416 307 8255
Media Tim Wiggan, CFA 416 308 9735
John Pryde 866 700 0125 / 416 307 8255
Scott Cuthbertson 416 983 3954 Andrew Lee, CFA 416 944 5678
Merchandising & Consumer Products David Perlman, CFA Montréal 514 289 1268
Jessy Hayem, CFA Montréal 514 289 0385 Marc Fortin Montréal 514 289 1266
Michael Van Aelst, CFA Montréal 514 289 0518 Maria Abwunza 416 308 9730
Oil & Gas Blair Levinsky 416 308 0862
Roger Serin, P. Eng. Calgary 403 299 7964 Adam Robertson 416 308 2674
Greg Shaw, CFA Calgary 403 292 1204 Amy Van Arnhem 416 944 7015
Ryan Savage Calgary 403 299 8586
Greg Heath, P. Eng Calgary 403 299 8658 TRADING 800 267 5482
Paper & Forest Products Fax: 416 982 8107
Sean Steuart, CFA 416 308 3399 Paul Brehl 416 982 2676
Graham Meagher, CFA 416 982 5777 Daniel Bell Montréal 514 985 7777
Pipelines, Power and Utilities Charlotte Daughney 416 982 2632
Linda Ezergailis, P. Eng. 416 983 7784 Matthew Malowney 416 307 9323
Quantitative Analysis George Stratis 416 982 2692
Chris Dutton, CFA 416 308 1554 Greg Uchiyama 416 982 2691
Real Estate & Hospitality
Sam Damiani, CFA 416 983 9640

UNITED STATES UNITED KINGDOM


SALES 800 883 6295 / Fax: 212 827 7264 Jeff Peacock, Managing Dir. 800 775 4755 / 212 827 7392 SALES Fax: 44 (0)20 7374 0226
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Stephen Boss 212 827 7877 Paula Kourian 800 775 4755 / 212 827 7392 John Rathwell 44 (0)20 7786 8418
Shant Madian 212 827 7295 Josh Dixon 800 775 4755 / 212 827 7302 Cory Ready 44 (0)20 7760 8534
Tom Scott 212 827 7269 Paul Dotson 800 775 4755 / 212 827 7392 Vernon Roberts, CFA 44 (0)20 7760 8530
Ted Haley 800 775 4755 / 212 827 7302
TRADING Fax: 212 827 7263 Seth Huber 800 775 4755 / 212 827 7302 TRADING Fax: 44 (0)20 7374 6314
Kim Pino 800 801 8202 / 212 827 7302 Dana Kingstone 800 775 4755 / 212 827 7392 Jay Frazer 44(0)20 7786 8443
Joseph La Sala 800 775 4755 / 212 827 7392 Robert Mercogliano 800 775 4755 / 212 827 7392

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