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

DBRS has today confirmed the Senior Unsecured Debt rating of METRO INC. (Metro or the Company) at BBB and its Commercial Paper rating at R-2 (high), both with Stable trends. Metro continues to benefit from its strong market positions in Ontario and Québec, despite intense competition. Revenue in the last twelve months (LTM) ended Q3 F2011 was flat, at $11.3 billion, as compared with F2010, on the basis of relatively flat same-store sales. Increased penetration of promotional items and lower generic drug prices due to regulatory reforms combined to offset food price inflation. EBITDA margins remained flat in the LTM ended Q3 F2011 as the Company continued to focus on improving efficiency and reducing operating costs, in order to help minimize the impact of inflation on labour and commodity costs. As such, EBITDA for the LTM ended Q3 F2011 was approximately $744 million versus $747 million in F2010. (Note: DBRS excluded equity earnings from Alimentation Couche-Tard in the consideration of EBITDA and EBITDA margins.)

The Company’s financial profile has remained stable through Q3 F2011, consistent with the current rating category. Operating cash flow of $558 million for the LTM ended Q3 F2011 continued to track operating income and was roughly in line with F2010. Capex continued to decline, as Metro has continued to shift away from building new locations. Dividends have risen steadily each year, but remain relatively modest. As such, free cash flow before changes in working capital remained essentially flat at $347 million as compared with F2010. Through Q3 F2011, Metro continued to use free cash flow to increase shareholder returns, completing share repurchases of $145 million through the period, after completing $160 million of share repurchases in F2010. For the LTM ended Q3 F2011, total balance sheet debt remained relatively unchanged ($1.02 billion) and lease-adjusted debt-to-EBITDAR remained stable at 2.2 times.

DBRS believes that Metro’s earnings profile should remain relatively stable over the longer term, although improvements to profitability may be challenging in F2012 due to rising input and operating costs. Top-line revenue is expected to increase in the low-single-digit range over the near to medium term, based on inflationary pricing and approximately 1% net new store openings. DBRS believes margins may come under pressure through the end of F2011 and into F2012 as rising operating costs (including food, fuel and labour) may be difficult to pass on completely to consumers, given the current economic and competitive environment. As such, Metro’s EBITDA is expected to remain flat in F2012, which DBRS believes should be adequate performance for the current rating category.

In terms of the Company’s financial profile, DBRS expects Metro will maintain a steady financial profile, based on its free cash flow generating capacity and track record of conservative financial management. Operating cash flow is expected to continue to track earnings and remain steady in F2012, in the $500 million to $550 million range. Capex should increase to nearly $200 million in F2012 as the Company seeks to make improvements to its discount banners, a key focus in this difficult consumer environment. Metro’s dividend policy is expected to remain consistent as dividends should increase moderately in F2012. As such, DBRS expects that free cash flow before changes in working capital will remain stable in the $220 million to $270 million range in F2012. Going forward, DBRS believes that Metro will continue to use its free cash flow for share repurchases and/or growth opportunities, which should translate into relatively stable credit metrics through F2012.

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

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.