DBRS Confirms METRO INC. at BBB and R-2 (high), Stable Trends

DBRS has today confirmed the ratings of METRO INC. (Metro or the Company) at BBB and R-2 (high), with Stable trends. Metro’s ratings continue to be supported by the Company’s good market positions in Québec and Ontario, its format diversification and its footprint in Central Canada with many prime urban locations.

Metro has a well-established second-ranking position in both Québec and Ontario. Its store network includes well-known banners in fresh food and discount sectors. The supermarket banners include METRO and METRO Plus in Québec and Metro in Ontario. Discount formats include Super C in Québec and Food Basics in Ontario. The Company also operates 265 pharmacies. During 2009, the Company converted five Ontario supermarket banners (155 stores) to a single Metro banner. In total, the Company has invested $200 million to modernize the store network and carried out a major marketing campaign. The Food Basics discount stores were repositioned, which helped growth in 2009 and 2010. For 2011, the company has set out several priorities to retain and improve its market share: (i) improve customer in-store satisfaction; it plans to use its loyalty program to better understand what drives customer traffic; (ii) further improve employee productivity and reduce operating costs; and (iv) invest in improving store appeal.

Metro should continue to show modest growth in same store sales and operating income. This assumes it maintains market share and the productivity initiatives are successful, particularly in Ontario. Generally, supermarkets are resistant to economic downturns, but they still must protect their market share and customer loyalty. While competition is intense, all out price wars are not the norm, with the swings between price inflation and deflation more based on responses to general economic conditions, promotional pricing and necessary price matching.

Metro’s use of capital has been selective, more focused on improving its store base in Central Canada rather than growing the number of stores or increasing the size of the stores. As a result, retail square footage has remained little changed for a number of years, since the 2005 acquisition of A&P Canada.

Metro’s operating earnings improved during 2009 and into 2010, with higher same-store sales, helped by increased volumes and a rational pricing environment. Metro’s operating margins for the 12 months ended March 31, 2009 (Q2 F2009), improved to 6.6% compared with 6.4% for F2009 and 5.8% for F2008. As well, cash flow from operations has been improving. Even with capex over $200 million, the company generates good free cash flow. This has been invested in tactical acquisitions and share buybacks. Metro has reduced its lease-adjusted debt level to about 45% over the years, which has improved coverage and leverage metrics. Its lease adjusted debt-to-EBITDAR ratio has been steadily improving and is now 2.16 times, which is good for this sector. Over the longer term, DBRS expects that Metro will continue to generate good free cash flow, providing the financial flexibility to further strengthen its position in the BBB category.

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.