DBRS Morningstar Confirms Dollarama Inc. at BBB, Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Notes rating of Dollarama Inc. (Dollarama or the Company) at BBB with Stable trends. The rating confirmations and Stable trends reflect DBRS Morningstar's view that Dollarama will continue to deliver a sound operating performance, benefitting from solid revenue growth and modest EBITDA margin expansion, despite inflation-driven pressures on operating results because of input costs and wage increases. DBRS Morningstar believes that the Company has ample room to absorb these inflationary pressures within the context of the current rating category. Furthermore, the rating actions continue to incorporate Dollarama's disciplined expansion plans, which are steadily increasing its scale and geographic diversification, as well as DBRS Morningstar's expectation that the Company will maintain its consistent financial management practices. The ratings also continue to reflect the Company’s strong brand and market position, efficient operations, and geographic diversification while also considering Dollarama's competitive retail environment and dependence on supply chain management to maintain low prices.

DBRS Morningstar forecasts Dollarama's sales to grow to approximately $4.8 billion in F2023 and to rise above $5.1 billion in F2024 from $4.4 billion during the last 12 months ended May 1, 2022 (LTM Q1 F2023) based on approximately 60 to 70 new store openings per year and same-store sales growth in the mid-single-digit range, driven by volume growth and price increases, including the introduction of new price points up to $5.00 through the second half of F2023. DBRS Morningstar believes that, despite inflationary pressures from transportation and input costs as well as wage increases, the Company will be able to modestly expand EBITDA margins in F2023 and F2024 as it benefits from lower pandemic-related costs that had a negative effect of approximately 80 basis point (bps) on F2022 margins, and aims to pass on inflation-driven cost increases to customers through product refreshes and markups combined with margin benefits from the introduction of new price points up to $5.00. As such, DBRS Morningstar forecasts EBITDA (excluding equity earnings from Dollarcity) to grow to approximately $1.4 billion in F2023 and toward $1.6 billion in F2024 from $1.3 billion during the LTM Q1 F2023.

DBRS Morningstar expects Dollarama’s financial profile to remain appropriate for the current rating, supported by its strong cash-generating capacity combined with the expectation that the Company will maintain its consistent financial management practices. DBRS Morningstar expects capital expenditures (capex) and dividends to be approximately $165 million and $60 million per year in F2023 and F2024, resulting in free cash flow (FCF; after dividends but before changes in working capital and lease principal payments) of more than $800 million and $900 million in F2023 and F2024, respectively. DBRS Morningstar expects Dollarama will continue to apply FCF and some incremental debt to repurchase shares such that credit metrics remain relatively stable and appropriate for the current rating. However, should credit metrics deteriorate for a sustained period (i.e., debt-to-EBITDA increase above 3.25 times (x)) as a result of either weaker-than-expected operating performance and/or more aggressive financial management, the ratings could be pressured. DBRS Morningstar could take a positive rating action should Dollarama's business risk profile meaningfully strengthen and credit metrics improve such that debt-to-EBITDA drops below 2.50x on a normalized and sustainable basis.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) 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.

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: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), 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 in the rating process for this rating action. DBRS Morningstar had/did not have 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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