DBRS Morningstar Confirms Loblaw Companies Limited at BBB (high), Stable

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Medium-Term Notes and Debentures ratings of Loblaw Companies Limited (Loblaw or the Company) at BBB (high) and also confirmed Loblaw’s Second Preferred Shares rating at Pfd-3 (high), all with Stable trends. The confirmations and Stable trends reflect DBRS Morningstar's view that Loblaw’s earnings profile will remain supportive of the Company's current ratings, benefitting from solid same-store sales growth on a three-year basis combined with expanding EBITDA margins year over year, despite a continued moderation of food retail volumes from elevated pandemic levels and inflation-driven pressures on operating results because of input costs and wage increases. The BBB (high) ratings also reflect the Company’s strong business risk profile, including its position as Canada’s largest food and drug retailer, and continue to consider the intense competition in Canadian food retail.

DBRS Morningstar forecasts Loblaw's revenue growth for 2022 to be subdued, as growth in drug retail is expected to be countered by declines in food retail, with consolidated revenues forecast to modestly grow toward $54.0 billion in 2022 and to approximately $55.0 billion in 2023 from $53.2 billion in 2021. DBRS Morningstar believes food retail same- store sales growth will decline modestly in the low single digits in 2022 despite inflation-driven price increases, given volume declines from elevated pandemic levels. Conversely, DBRS Morningstar expects drug retail same-store sales to grow in the low to mid-single digits in 2022, benefitting from a rebound in categories that were depressed during the pandemic. DBRS Morningstar believes Loblaw will be able to pass on a large part of the inflation-driven input cost and wage increases through pricing, profit from a return to a more normalized drug retail sales mix, and benefit from efficiency-improvement initiatives, as well as lower Coronavirus Disease (COVID-19)-related health and safety costs; consequently, DBRS Morningstar believes the Company's EBITDA margins will modestly expand in 2022. As such, DBRS Morningstar forecasts the Company’s EBITDA to grow to approximately $5.8 billion in 2022 and approximately $6.0 billion in 2023 from $5.6 billion in 2021.

DBRS Morningstar believes Loblaw's financial profile will remain appropriate for the current ratings, supported by the Company's free cash flow (FCF) generating capacity and relatively stable debt levels. DBRS Morningstar expects that cash flow from operations will continue to track operating income, while capital expenditures and dividends are expected to increase to approximately $1.5 billion and more than $500 million, respectively, in 2022 and 2023. As such, DBRS Morningstar forecasts Loblaw’s FCF (before working capital changes and principal lease payments) to remain well above $2.0 billion. The acquisition of Lifemark Health Group aside, DBRS Morningstar believes the Company will continue to primarily use its FCF for share buybacks. Consequently, DBRS Morningstar expects credit metrics to remain appropriate for the Company’s current ratings (i.e., adjusted debt-to-EBITDA below 3.25 times (x) on a sustained basis). DBRS Morningstar could take a positive rating action should Loblaw’s credit metrics improve such that debt-to- EBITDA strengthens to below 2.25x on a normalized and sustainable basis as a result of growth in earnings.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental- social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodologies are Rating Companies in the Merchandising Industry (July 26, 2021; https://www.dbrsmorningstar.com/research/382073) and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

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

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

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