DBRS Confirms Loblaw at BBB, Trend Stable

DBRS has today confirmed Loblaw Companies Limited’s (Loblaw or the Company) Medium-Term Notes and Debentures ratings at BBB, and its Cumulative Redeemable Second Preferred Shares, Series A rating at Pfd-3. At the same time, DBRS has confirmed Loblaw’s Commercial Paper rating at R-2 (middle). All trends remain Stable after the trend on the long-term ratings was revised to Stable from Negative in August 2009. Given the difficult period from 2006 to 2009, the Company has worked hard to hold and strengthen its position in the face of intense competition, food price deflation and a weak economy. Over the past few years, shoppers have come to buy what they need, on sale when possible, and have limited their purchases of luxury items. While supermarkets are resistant to economic downturns, they still must aggressively use promotions and price matching to manage market share.

DBRS changed the Company’s trend back to Stable last year to reflect the early success of a renewal program started in 2007 that outlined management’s new strategic initiatives. The program helped to stabilize the business and maintain market share, while growing revenue and margins. Key credit metrics also stabilized and started moving back to levels that may once again support a higher rating. For 2010, DBRS expects some further progress in growing revenue despite competition, deflation and a soft economy. Margins will remain challenged due to the extra costs to support the renewal program. In fact, the Company is at a critical juncture in rolling out the technology components of the plan that could negatively impact operating income.

The outlook for 2011 and beyond is more encouraging as the Company will have completed the main components of the renewal program and, assuming no delays or setbacks, it should start to provide the anticipated benefits. This will include more streamlined, simpler operations that should bolster customer satisfaction at the store level. All this should improve financial performance and credit metrics. Clearly, this would be positive from a credit rating perspective. The fact that the Company has already realized a number of benefits from the renewal program bodes well for the final outcome.

The benefits thus far have helped underpin the current financial performance and credit metrics. As at June 19, 2010, the adjusted debt-to-EBITDAR had fallen to 2.81 times from 3.14 in 2008. Cash flow-to-debt and debt-to-capital were .24 and 47%, respectively, versus .23 and 48% in 2008. In the future, leverage is expected to decline further. Liquidity is good with cash on hand and unused bank lines.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Food Retailers, which can be found on our website under Methodologies.