DBRS Confirms Dollarama at BBB, Stable Trend

DBRS has today confirmed the Issuer Rating and Senior Unsecured Notes rating of Dollarama Inc. (Dollarama or the Company) at BBB, both with Stable trends. The confirmation is based on Dollarama’s strong and stable operating performance in the last year and also takes into account the Company’s more aggressive financial management. The ratings are based on the Company’s strong brand and market position in the growing dollar store segment in Canada, proven track record of growth and efficient operations. The ratings also consider the intensely competitive retail environment in Canada and relatively low barriers to entry in the segment.

Dollarama’s earnings profile continues to benefit from its strong brand, merchandising capability and efficient operations. The dollar store retail segment in Canada is highly underpenetrated and remains one of the few retail segments in Canada where demand exceeds capacity. Revenues continued to grow in the high single digits based on industry-leading same-store sales growth and new store openings. Dollarama’s EBITDA margins increased, as the benefits of operating leverage and improved labour efficiencies were partially offset by cost inflation. As a result of the above, Dollarama’s EBITDA increased significantly to $425 million for the last 12 months (LTM) ended Q2 F2015.

Dollarama’s financial profile is supported by its increasing cash-generating capacity and modest capital expenditure (capex) requirements. The Company used its free cash flow, a portion of its cash balance and incremental debt to complete $459 million of share repurchases in the LTM ended Q2 F2015. As a result, key credit metrics have weakened (i.e., lease-adjusted debt-to-EBITDAR, lease-adjusted EBITDA coverage and free cash flow as a percentage of debt were 2.43 times (x), 9.41x and 14.9%, respectively, compared with 2.18x, 9.86x and 15.5% at the end of F2014).

DBRS expects Dollarama’s earnings profile to improve within the current rating category as the Company continues to benefit from increased scale resulting from mid-single-digit comparable store sales growth and approximately 70 new stores per year. DBRS believes comparable store sales will continue to be driven by larger average basket sizes stemming from a greater proportion of merchandise sold at higher price points. DBRS expects EBITDA margins will remain in the 19% range as the Company maintains its targeted gross margin of 36% to 37% and the benefits from further productivity initiatives are offset by increases in wages and transportation costs. As a result, DBRS believes EBITDA should increase to approximately $500 million in F2016.

DBRS expects Dollarama’s financial profile to remain steady in the near to medium term, supported by its increasing free cash flow generating capacity and balanced by modest debt-financed share repurchases. DBRS believes Dollarama will generate approximately $200 million of free cash flow in F2016 based on growing operating income, modest capex requirements and dividend increases in line with earnings growth. As the Company is not expected to make any acquisitions in the near to medium term, DBRS expects free cash flow, along with some incremental debt, will be used to repurchase shares such that credit metrics remain relatively stable. However, should lease-adjusted debt-to-EBITDAR increase above 2.5x for a sustained period of time as a result of weaker-than-expected operating income and/or more aggressive financial management, the ratings could be pressured.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.