DBRS Confirms Sobeys at BBB with a Stable Trend

DBRS has today confirmed the Senior Unsecured Debt rating of Sobeys Inc. (Sobeys or the Company) at BBB with a Stable trend. The rating continues to be supported by Sobeys’ market position as Canada’s second-largest grocer while acknowledging the highly competitive nature of the grocery business. DBRS’s rating confirmation reflects the fact that Sobeys has delivered modest sales growth and relatively flat operating income in an increasingly competitive environment. DBRS expects Sobeys to continue with this level of performance while maintaining discipline with regards to growth and financial management.

After experiencing several years of signifcant growth and improved performance, Sobeys’ earnings profile stabilized in F2011 and continued to remain steady in F2012. Adjusting for the impact of Sobeys’ acquistion of 236 retail convenience stores and gas operations from Shell at the end of F2012 and for the additional week of sales in F2011, sales increasd by 3% in F2012. This was driven by same-store sales growth of 1.4% and the addition of three new stores. The moderate growth in sales was primarily driven by inflationary pricing as overall customer count remained flat. Sobeys refrained from more aggressive price increases during the year as a result of the tougher competitive environment, which, when combined with higher operating expenses, led to a slight decline in EBITDA margins from 4.8% in F2011 to 4.7% in F2012. Adjusting for the impact of higher expenses related to the Shell acquistion, EBITDA in F2012 remained relatively flat from a year earlier, at approximately $751 million.

In terms of financial profile, Sobeys’ operating cash flow continued to track EBITDA in F2012. Capex remained at recent elevated levels, albeit slightly lower in F2012 when compared to F2011, as Sobeys continued with its property development initiatives (with the goal of subsequent sale or leaseback transactions) and efforts to remodel, refresh, and rebrand stores. As such, Sobeys generated modest positive free cash flow before changes in working capital, which, along with cash on hand, was used for the Shell acquisition and to modestly reduce balance sheet debt. That said, gross lease-adjusted debt-to-EBITDAR increased to approximately 2.79x from 2.68x a year earlier, due to slightly higher operating leases.

Going forward, DBRS expects Sobeys’ top-line revenue to increase in the low- to mid-single-digit range over the near to medium term, based primarily on pricing rather than signficant volume growth. Margins are expected to come under pressure in the near term, as a heightened competitive environment may force the Company to invest in pricing to maintain market share. As such, DBRS forecasts the Company’s EBITDA to remain flat in F2013.

In terms of financial profile, DBRS expects Sobeys’ operating cash flow to continue to track EBITDA and remain steady at approximately $650 million to $675 million. Capex is expected to increase modestly in F2013 as the Company continues with its property development initiatives, efforts to refresh and rebrand stores, and investment in distribution centres. Free cash flow before changes in working capital should, therefore, be modestly negative in F2013, but should return to positive levels in F2014. As such, DBRS expects Sobeys’ debt level and credit metrics to remain fairly steady over the near-medium term, notwithstanding any major acquisitions.

Notes:
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.