DBRS Confirms Dollarama at BBB with Stable Trend

DBRS Limited (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 confirmations are based on Dollarama’s strong operating performance in the last year, balanced by the increase in leverage within DBRS’s expectation. The ratings are based on the Company’s strong brand and market position in the dollar store segment in Canada, proven track record of growth and efficient operations. The rating also considers the competitive retail environment and dependence on supply chain management to maintain low prices.

Dollarama’s earnings profile continues to improve within the current rating category, as evidenced by industry leading same-store sales growth, margin expansion and increased returns on invested capital. The Company’s comparable store sales growth of 6.1% in H1 F2017 and 7.3% in F2016 outpaced its major Canadian competitors. EBITDA margins continued to improve (23.1% in the last 12 months (LTM) ended H1 F2017 from 22.5% in F2016) and as a result, EBITDA increased to $647 million for the LTM ended H1 F2017, from $597 million in F2016. Free cash flow (after dividends and before changes in working capital) decreased to $296 million in the LTM ended H1 F2017 (from $339 million in F2016) as a result of increased capital expenditures (capex) for a new warehouse. Free cash flow, along with incremental debt, was applied towards share repurchases. For the LTM ended H1 F2017, lease-adjusted debt-to-EBITDAR, lease-adjusted EBITDA coverage and free cash flow as a percentage of debt were 2.65 times (x), 10.42x, and 13.9%, respectively, compared with 2.47x, 10.30x, and 18.2% at the end of F2016.

DBRS forecasts revenue will grow in the low double-digits to more than $3.2 billion in F2018, based on mid-single-digit comparable store sales and approximately 60 new stores per year (up to 1,400 total stores in Canada). 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 above $1.25. The Company recently introduced two new price points of $3.50 and $4.00. DBRS expects Dollarama to maintain its gross margin target range of 37.0% and invest any savings into its pricing. EBITDA margins should remain near current levels as efficiency improvements will likely offset the impact of an increase in the Company’s foreign exchange forward contract rate. As a result, DBRS forecasts EBITDA to reach approximately $725 million in F2018.

DBRS expects free cash flow to grow significantly, to approximately $400 million in F2018, as capex will return to the $100 million range in F2018, following the completion of the new warehouse in F2017, and dividends grow in line with earnings. DBRS anticipates that Dollarama will continue to use its free cash flow and incremental debt to repurchase shares such that credit metrics remain relatively stable. However, should lease-adjusted debt-to-EBITDAR increase above 2.75x for a sustained period of time as a result of either 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.