DBRS Confirms Sobeys Inc. at BBB (low) with a Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Unsecured Debt rating of Sobeys Inc. (Sobeys or the Company) at BBB (low) with Stable trends. The confirmations are based mainly on Sobeys’ deleveraging, which was expected and incorporated into the ratings following the acquisition of Canada Safeway Limited (Canada Safeway).

Sobeys’ earnings profile remains strong for the current rating, supported by the Company’s size, scale and geographic diversification. Although the Company’s results have improved meaningfully over the prior year due to the benefits of food inflation, store rationalization and cost-reduction efforts, top-line growth has lagged some of its main competitors. Revenues grew by 14.2% to $23.9 billion in F2015, mainly driven by a full-year contribution from Canada Safeway and also same-store sales growth of 1.9% (excluding fuel). The EBITDA margin improved to 4.9% from 4.7% and as a result, EBITDA increased 19.4%, to more than $1.1 billion. Sobeys generated $551 million of free cash flow in F2015 up from $312 million in F2014, and used it along with proceeds from asset sales (Agropur, store divestitures and sale leaseback transactions) to reduce debt by approximately $1.1 billion. This debt reduction was greater than DBRS’s original expectation and credit metrics improved materially as a result (lease-adjusted debt-to-EBITDAR and EBITDA coverage of 3.10 times (x) and 5.63x, from 4.28x and 4.96x respectively).

DBRS forecasts revenue will grow to more than $24.6 billion in F2016, based on same-store sales growth in the 2% range. Same-store sales will likely be driven by price increases, while transaction volumes are expected be flat. Competition is expected to remain rational as new square footage growth in the food retail industry is moderating. EBITDA margins are expected to improve slightly to approximately 5% resulting from the F2015 store closures and additional synergy realization. As a result, DBRS forecasts Sobeys’ EBITDA to increase to above $1.2 billion in F2016. This forecast includes potential operating challenges that could arise as Sobeys begins to shift focus from systems integration to the operational integration of Canada Safeway, including distribution, logistics and store-level harmonization.

DBRS expects that Sobeys’ credit metrics will continue to improve, primarily as a result of steady increases in operating income and potentially modest debt repayment. DBRS anticipates that Sobeys free cash flow will decrease to approximately $460 million in F2016 as capex is expected to increase from the previous year due to project timing. DBRS notes that while the Company does not have any debt maturities in the coming year, there is $200 million remaining on its acquisition facility. Should credit metrics improve, such that lease-adjusted debt-to-EBITDAR drops comfortably below 3.0x and lease-adjusted EBITDA coverage increases toward 6.0x, as a result of increased operating income and/or further debt reduction, a positive rating action could result. Should DBRS become confident that credit metrics would remain at these levels on a sustainable basis, DBRS believes Sobeys’ ratings would be more appropriately placed in the BBB rating category.

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.

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

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

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.