DBRS Confirms METRO INC. at BBB with a Stable Trend

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), with Stable trends. The confirmation of the ratings reflects Metro’s solid operating performance in a difficult consumer and competitive environment, while recognizing that such challenges are expected to continue in the near to medium term. Metro’s ratings continue to be based on the Company’s strong market positions, beneficial locations and diversified formats in the key Ontario and Québec markets. The ratings also reflect the high level of competition in food retailing, particularly with the emergence of new non-traditional players (i.e., Walmart and Target), as well as Metro’s less-developed private labels and high levels of union penetration.

Metro’s revenues increased approximately 2.8% to nearly $11.8 billion for the last 12 months (LTM) ended Q3 F2012 versus F2011 and F2010, based on modest same store sales growth and new square footage, primarily due to the acquisition of Marché Adonis completed in October 2011. EBITDA margins remained relatively flat, as higher gross margins, supported by the Marché Adonis acquisition, were partially offset by higher operating costs (i.e., wages, rents, utilities). As such, EBITDA (excluding earnings from Alimentation Couche-Tard) increased to $771 million for the LTM ended Q3 F2012 versus $731 million and $747 million in F2011 and F2010, respectively.

In terms of financial profile, Metro continues to balance conservative financial management with its focus on growth and returning value to shareholders. Cash flow from operations continued to track operating income, increasing to approximately $600 million for the LTM ended Q3 F2012, while capex increased as Metro undertook store renovations and expansions. Dividends increased steadily, consistent with recent years, but remain modest relative to cash flows. As such, free cash flow before changes in working capital increased moderately to $350 million for the LTM ended Q3 F2012. On October 23, 2011, Metro acquired 55% of the net assets of Marché Adonis, an importer, wholesaler and retailer, specializing in perishable and ethnic foods, for $162.1 million using cash. The Company has also used cash on hand and cash generated to repurchase shares totalling $212.5 million through the first three quarters of F2012. As such, balance sheet debt has remained stable, which, combined with the modest increase in EBITDA, has resulted in an improvement in the key credit metric lease adjusted debt-to-EBITDAR to 2.19x from 2.27x at the end of F2011.

Going forward, DBRS expects that Metro’s earnings profile should remain relatively stable based on the Company’s strong operational execution, despite facing a challenging consumer and competitive environment. Top-line revenue should increase in the low-single-digit range into F2013 based primarily on beneficial inflationary pricing along with a modest increase in square footage. EBITDA margins could come under some pressure due to expected input cost inflation (due to poor weather conditions in North America in 2012), which may be difficult to fully pass-on to consumers in the form of higher prices in a competitive environment. As such, DBRS believes EBITDA will improve modestly or remain relatively flat in the near term.

DBRS believes that Metro’s financial profile should remain stable based on the Company’s historical track record of conservative financial management and strong cash-generating capacity. Cash flow from operations should continue to track operating income, while capex is expected to increase moderately as Metro invests in refreshing stores and possible new store openings. DBRS expects that recent dividend increases should continue, resulting in free cash flow before changes in working capital in the $235 million to $285 million range. DBRS expects that Metro will continue to use free cash flow to complete share repurchases and/or finance growth opportunities rather than to repay debt. As such, with relatively stable balance sheet debt levels, key credit metrics should remain steady in the near term.

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

DBRS excluded equity earnings from Alimentation Couche-Tard in the consideration of EBITDA and EBITDA margins.

The applicable methodology is Rating Companies in the Merchandising Industry (May 2011), which can be found on our website under Methodologies.