DBRS Confirms Dollarama at BBB with a 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 sound operating performance and consistent financial management in the last year, despite a decline in comparable-store sales. The ratings continue to be based on the Company’s strong brand and market position, efficient operations and national diversification. The ratings also consider the competitive retail environment and dependence on supply chain management to maintain low prices.

Dollarama’s earnings profile stabilized in the first half of F2019 (H1 F2019) after many years of steady improvement. Comparable-store sales decreased to 2.6% in H1 F2019 from over 5% in the four previous years as the Company chose to invest in price to maintain its value proposition relative to competitors. Despite this and minimum wage increases, Dollarama was able to maintain stable EBITDA margins as a result of improved product mix, cost-control initiatives and operating leverage. As such, Dollarama’s EBITDA improved to $857 million in the last 12 months (LTM) ended H1 F2019 from $826 million in F2018. The Company continued to apply its strong free cash flow and incremental debt towards share repurchases such that credit metrics remained stable. For the LTM ended H1 F2019, lease-adjusted debt-to-EBITDAR, lease-adjusted EBITDA coverage and free cash flow as a percentage of debt were 2.77 times (x), 9.99x and 18.5%, respectively, compared with 2.74x, 10.00x and 20.0% respectively, at the end of F2018.

DBRS believes the earnings profile will remain stable going forward. DBRS forecasts revenue will grow in the high-single-digit range to more than $3.8 billion in F2020, based on low- to mid-single-digit comparable-store sales and approximately 60 to 70 new store openings. DBRS believes comparable-store sales will partially rebound from the 2.5% range in F2020 as the Company follows its competitors at passing on price increases and benefits from improved product mix. DBRS expects Dollarama to maintain its gross margin in the range of 39% and invest any savings into price. EBITDA margins should remain in the range of 24% as ongoing cost control initiatives and operating leverage will be offset by proposed minimum wage increases in Ontario, Alberta and British Columbia. As a result, DBRS forecasts EBITDA to reach more than $925 million in F2020.

DBRS believes that after a year of elevated capital expenditure (capex), free cash flow after dividends and before changes in working capital will return to the $450 million level in F2020. DBRS’s capex forecast of $160 million in F2020 includes investment related to the expansion of the Company’s distribution center in Québec. DBRS expects that Dollarama will continue to use its free cash flow and some incremental debt to repurchase shares such that credit metrics remain relatively stable and supportive of the current rating. 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 principal methodology is Rating Companies in the Merchandising Industry, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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