DBRS Confirms Dollarama at BBB with Stable Trend

DBRS Limited (DBRS) 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 and consistent financial management. The ratings are based on the Company’s strong brand and market position, proven track record of growth and efficient operations. The ratings also consider the competitive retail environment and dependence on supply chain management to maintain low prices.

Dollarama’s earnings profile continued to improve within the current rating category, as evidenced by industry-leading comparable-store sales growth, margin expansion and increased returns on invested capital. The Company’s comparable-store sales growth of 5.4% in H1 F2018 and 5.8% in F2017 outpaced its major competitors, driving an increase in EBITDA to $766 million in the LTM ended H1 F2018 from $703 million in F2017. Free cash flow increased to $393 million in the LTM ended H1 F2018 from $296 million in F2017 and, along with incremental debt, was applied toward share repurchases. For the LTM ended H1 F2018, lease-adjusted debt-to-EBITDAR, lease-adjusted EBITDA coverage and free cash flow as a percentage of debt were 2.66 times (x), 9.86x and 20.3%, respectively, compared with 2.68x, 9.77x and 17.4%, respectively, at the end of F2017.

DBRS forecasts revenue will grow in the low double digits to more than $3.5 billion in F2019, based on mid-single digit comparable-store sales and approximately 60 to 70 new store openings. DBRS believes comparable-store sales will continue to be driven by larger average basket sizes stemming from a greater proportion of merchandise sold at price points above $1.25. DBRS expects Dollarama to maintain its gross margin in the range of 39% and invest any savings into price. EBITDA margins should remain near current levels as in-store efficiency initiatives and improvements will be partially offset by proposed minimum wage increases in Ontario and Alberta. As a result, DBRS forecasts EBITDA to reach more than $850 million in F2019.

DBRS expects free cash flow after dividends and before changes in working capital to grow to more than $400 million in F2019, as capital expenditure could remain elevated to fund distribution centre improvements and dividends grow in line with earnings. Due to the improvement in the Company’s earnings profile, combined with strong coverage and cash flow metrics, DBRS now believes that lease-adjusted debt-to-EBITDAR up to 3.00x is suitable for the current rating, up from DBRS’s previous threshold of 2.75x. DBRS believes that the Company will continue to use its free cash flow and incremental debt to repurchase shares such that lease-adjusted debt-to-EBITDAR approaches the new threshold of 3.00x. However, should lease-adjusted debt-to-EBITDAR increase above 3.00x for a sustained period of time with a corresponding deterioration in coverage and cash flow metrics, 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 principal methodology is Rating Companies in the Merchandising Industry, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.