DBRS Morningstar Confirms Sobeys Inc. at BBB, Stable

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of Sobeys Inc. (Sobeys or the Company) at BBB with Stable trends. The rating confirmations and Stable trends reflect DBRS Morningstar’s view that Sobeys, given the relatively inelastic nature of the Company's product offering, will be able to navigate the current environment of persistent inflationary pressures and consumers' decreasing purchasing power within the context of the BBB rating category. Sobeys’ ratings continue to be supported by its number two position in the Canadian food retailing market and its diversification across the country, balanced by the intensely competitive environment.

DBRS Morningstar forecasts same-store sales growth for the full-year F2023 to be in the low single digits, with inflation-driven price increases offsetting volume declines related to decreasing consumer spending and the normalization of consumer buying behaviour following the pandemic as well as the negative effects from the Company's cybersecurity event. DBRS Morningstar forecasts same-store sales to grow in the low to mid-single digits in F2024, with gradually easing inflationary pressures expected to offset moderating volume declines. Because of these factors combined with the Company's growth initiatives, DBRS Morningstar expects revenues to grow to approximately $30.5 billion in F2023, despite a 53rd week in F2022, and to more than $31.0 billion in F2024, from $30.2 billion in F2022. DBRS Morningstar believes that Sobeys’ EBITDA margins will remain relatively stable in F2023, but continue to expand in F2024, with the benefits from merchandising initiatives related to Project Horizon, inflation-driven price increases, and operating leverage gains offsetting the negative effects of the Company's cybersecurity event in 2023, front-loaded costs associated with the roll-out of the Company’s e-commerce platform, and store remodelling efforts, including the FreshCo conversions, as well as persistent inflationary pressures on input costs and wages. As such, DBRS Morningstar forecasts EBITDA to remain relatively stable at approximately $2.2 billion in F2023 before increasing to approximately $2.4 billion in F2024.

DBRS Morningstar expects Sobeys’ financial profile to remain appropriate for the current rating as credit metrics are forecast to gradually strengthen over time, with earnings growth more than offsetting incremental lease liabilities, including additional lease liabilities associated with the addition of the fourth customer fulfilment center in Vancouver. Based on DBRS Morningstar’s forecast of operating cash flows of more than $1.7 billion, capital expenditures of approximately $800 million, and annualized dividend payments to Empire Company Limited of more than $500 million, DBRS Morningstar forecasts Sobeys’ free cash flow (FCF; as calculated by DBRS Morningstar before changes in working capital and lease principal payments) to be approximately $400 million in F2023 and grow in line with earnings in F2024. DBRS Morningstar expects the Company to use its FCF primarily for lease principal payments.

Consequently, DBRS Morningstar expects credit metrics to remain appropriate for the Company’s current ratings (i.e., debt-to-EBITDA below 3.50 times (x) on a sustained basis). DBRS Morningstar could take a positive rating action should Sobeys' business risk profile materially strengthen and credit metrics continue to improve such that debt-to-EBITDA drops to comfortably below 2.50x on a normalized and sustainable basis primarily 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 (May 17, 2022).

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

DBRS Morningstar applied the following principal methodology: Global Methodology for Rating Companies in the Merchandising Industry (September 2, 2022) https://www.dbrsmorningstar.com/research/402334.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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