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Competition, consumer sentiment to weigh on Rona

Tags: Rona

Scotia Capital says the potent combination of a weakening housing market, more competitive retail landscape and slumping consumer confidence are going to take their toll on home improvement retailer Rona (RON-T).

In a recent report, Scotia Capital analyst Anthony Zicha lowered his earnings per share (EPS) estimate for the third quarter to $0.33 from $0.34. He also lowered his one-year price target on Rona stock to $10.50 from $12, while maintaining his 'sector perform' rating on the stock.

"General conclusions indicate that industry players and suppliers are expected to see little to no improvement moving into 2012," Zicha said in his report.

Zicha warns the retail landscape in Canada is about to get much more competitive, with Lowe's maintaining its forecast to open 100 stores across Canada.

"[Lowe's] stated that it is looking at potential acquisitions, in addition to new store openings," Zicha said.

In addition to Lowe's, Target is opening 135 Canadian locations, U.S.-based Big Lots is looking to open 100-plus Canadian stores and Wal-Mart, Crate and Barrel, and Bed Bath & Beyond are all planning on opening new locations. Zicha says that by some estimates, the expansion in the retail sector is equivalent to 300 new Canadian Tire stores.

"We believe the Canadian retail landscape will remain challenging in the medium term given no anticipated increase in demand to offset the growth in retail supply."

Rona CEO Robert Dutton has said the retail sector remains "largely a national, even regional affair" and that Rona and other Canadian retail giants can "succeed in the game." But Canadian consumers are taking a bearish view on the economy. According to Zicha, Canadian consumer confidence fell by 16 percent since February.

"We expect consumer confidence to remain under pressure given high pump prices and rising household debt levels," he says.

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