DBRS Morningstar Confirms METRO INC. at BBB with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of METRO INC. (Metro or the Company) at BBB, both with Stable trends. DBRS Morningstar has also discontinued and withdrawn Metro’s Short-Term Issuer rating. DBRS Morningstar notes that the discontinuation does not reflect any change in DBRS Morningstar’s view of Metro’s credit quality. The confirmations and Stable trends reflect a strengthening of Metro's earnings profile within the rating category through F2020, as evidenced by solid operating performance, including margin improvements and continued same-store sales growth, both before and during the Coronavirus Disease (COVID-19) pandemic. While uncertainties related to the intensity and duration of the coronavirus pandemic as well as the macroeconomic aftereffects remain, the confirmations and Stable trends also reflect DBRS Morningstar’s view that Metro is well positioned to manage the current environment within the BBB rating category. Metro's ratings continue to reflect its well-established brand and market position in Ontario and Québec, diversified formats and banners, and disciplined financial management. The ratings also consider the intensely competitive environment, Metro’s geographical concentration, and the high level of union penetration.

DBRS Morningstar expects Metro’s earnings will continue to benefit from elevated volumes in F2021, despite some continued costs related to the health and safety of customers and employees. That said, DBRS Morningstar believes Metro's sales growth will moderate in F2021, given the lapping of exceptionally strong sales for most of F2020, with sales forecast to grow in the low single digits to modestly above $18 billion in F2021 from just below $18 billion in F2020. DBRS Morningstar expects food same-store sales growth to be approximately 10% in Q1 F2021, given the lapping of a pre-pandemic quarter combined with renewed restrictions in Ontario and Québec. That said, DBRS Morningstar anticipates food same-store sales growth to moderate meaningfully toward the end of Q2 F2021, given the lapping of exceptionally strong same-store sales growth in F2020. DBRS Morningstar expects pharmacy same-store sales growth to largely normalize and be in the low- to mid-single-digit range in F2021. DBRS Morningstar believes EBITDA margins will remain relatively flat at around 9.5%, with operating leverage and efficiency gains as well as the reopening of higher-margin departments balanced by some continued costs related to the health and safety of customers and employees, competitive pressures, and consumers' return to the discount format as well as costs related to e-commerce. As such, DBRS Morningstar forecasts Metro’s EBITDA to grow to modestly above $1.7 billion in F2021 from just below $1.7 billion in F2020.

DBRS Morningstar believes Metro’s financial profile will remain relatively stable, with the Company's leverage expected to remain relatively flat. DBRS Morningstar expects cash flow from operations to track operating income and be approximately $1.3 billion in F2021, while capital expenditures are forecast to increase from already elevated levels to approximately $600 million and dividend cash outlay is expected to increase to more than $230 million. As such, DBRS Morningstar believes free cash flow (FCF) after dividends and before changes in working capital should be more than $400 million. After changes in working capital and lease principal payments, DBRS Morningstar believes the Company will primarily use its FCF for share buybacks. Therefore, DBRS Morningstar expects that key credit metrics will remain relatively stable and appropriate for the current rating (i.e., debt-to-EBITDA below 3.5 times (x)). DBRS Morningstar could take a positive rating action should Metro’s business risk profile materially strengthen and credit metrics improve, such that debt-to-EBITDA drops below 2.5x on a normalized and sustainable basis as a result of growth in operating income.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Merchandising Industry (July 30, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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