DBRS Comments on Sobeys Q2 F2017 Results

DBRS Limited (DBRS) today notes that Sobeys Inc. (Sobeys or the Company) reported Q2 F2017 results that were well below expectations. Revenues of $5.9 billion declined 2.1% year over year based on -2.6% same-store sales (excluding fuel). Excluding the West business unit and fuel sales, same-store sales declined 1.2%. Adjusted EBITDA decreased to $157.9 million, a decline of 46.8% from last year and a decline of 30.8% from last quarter. These results illustrate sustained deterioration in operating performance as well as Sobeys’ continued underperformance of its peers and lost market share. The Company’s most recent performance was meaningfully below DBRS’s expectation, which heightens the concern that a near-term recovery will be difficult to achieve.

On September 15, 2016, DBRS confirmed the Issuer Rating and the Senior Unsecured Debt rating of Sobeys at BBB (low) and changed the trend on both ratings to Negative from Stable. At that time, DBRS anticipated that Sobeys could struggle to grow its revenue in F2017 and that margins could be further pressured by ongoing promotional programs in the intensely competitive environment, combined with the deceleration in food inflation. DBRS stated that, in the next four quarters, if Sobeys was successful in stabilizing its same-store sales in Western Canada and reversing the downward trajectory in operating income toward a run-rate of approximately $1.0 billion per year, the trend could be revised to Stable.

Following the release of Q2 F2017 results, DBRS now believes that the likelihood of Sobeys stabilizing and then improving run-rate EBITDA to an acceptable level in F2017 has diminished. Furthermore, credit metrics could deteriorate to a level that is no longer satisfactory for the current rating category (lease-adjusted debt-to-EBITDAR comfortably below 4.00 times (x)) in a quicker time frame than previously stated. For the last 12 months ended Q2 F2017, lease-adjusted debt-to-EBITDAR weakened to 3.67x from 3.30x. If Q3 F2017 results do not show any signs of stabilization, a downgrade to BB (high) would likely occur.

Sobeys’ ratings continue to be supported by its number-two position in the Canadian food retailing market and its diversification across the country, balanced by intense competition and execution risks with its transformation strategy going forward.

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

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

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