DBRS Confirms Ratings of Loblaw Companies Limited

DBRS Limited (DBRS) has today confirmed the Issuer Rating, Medium-Term Notes rating and Debentures rating of Loblaw Companies Limited (Loblaw or the Company) at BBB, its Cumulative Redeemable Second Preferred Shares, Series A rating at Pfd-3 and its Short-Term Issuer Rating at R-2 (middle), all with Stable trends. DBRS also confirmed the Senior Unsecured Debt rating of Shoppers Drug Mart Corporation (Shoppers) at BBB with a Stable trend, based on guarantee by Loblaw. The confirmation primarily reflects Loblaw’s continued deleveraging efforts, which should result in credit metrics considered acceptable for the current rating by the end of 2015, as well as, its solid operating performance in 2014.

Going forward, Loblaw’s earnings profile should remain at a level considered strong for the current rating, despite continuing intense competition in the core food retail and pharmacy businesses. Competition, however, is expected to remain rational, as new square footage growth in the food retail industry is normalizing and inflation is helping top-line growth. DBRS believes that, combined, Loblaw’s and Shoppers’ revenue will increase in the low- to mid-single digit range per year in the near to medium term, reaching toward the $45 billion level in the medium term. EBITDA margins should continue to benefit from the consolidation of Shoppers’ higher margin business as well as the achievement of expected synergies, partially offset by pressure on gross margins in food retail. As such, EBITDA should increase toward the $3.7 billion level in the medium term.

DBRS expects that Loblaw’s financial leverage should continue to decline as the Company uses free cash flow to repay debt pursuant to its deleveraging plan following the acquisition of Shoppers. Cash flow from operations should track operating income over the medium term, while capital expenditures (capex) should remain in the current $1.2 billion to $1.4 billion per year with a shifting focus toward retail investments. The cash outlay related to dividends is expected to remain above the $400 million level. DBRS, therefore, continues to believe that Loblaw will generate free cash flow in the $700 million per year range. Loblaw is expected to use free cash flow in the near term primarily for debt repayment. DBRS forecasts that lease-adjusted debt-to-EBITDAR attributable to the retail operations should return below 3.50 times (x) by the end of 2015, a level considered acceptable for the current rating. Over the longer term, DBRS expects that Loblaw will begin using free cash flow to complete share repurchases. Should operating performance remain solid and credit metrics improve further toward the Company’s stated target (i.e., lease-adjusted debt-to-EBITDAR of 3.25x) as a result of growing operating income and/or continuing debt repayment, a positive rating action would likely result.

Notes:
The Senior Unsecured Debt of Shoppers Drug Mart Corporation is guaranteed by Loblaw Companies Limited.

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 methodologies are DBRS Criteria: Guarantees and Other Forms of Explicit Support, Preferred Share and Hybrid Criteria for Corporate Issuers, Rating Companies in the Merchandising Industry and Rating Entities in the Real Estate Industry, which can be found on our website under Methodologies.

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