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 solid operating performance, benefitting from strong demand as customers seek value against the backdrop of a challenging macroeconomic environment. Furthermore, the rating actions continue to incorporate Dollarama's disciplined expansion plans, which are steadily increasing its scale and geographic diversification, as well as the Company's balanced 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 sales to grow to approximately $5.6 billion in F2024 and $5.9 billion in F2025. DBRS Morningstar expects sales growth to be driven by mid-single-digit same-store sales growth benefitting from strong consumer demand, particularly through at least the first half of F2024; a higher average price point; and approximately 60 to 70 net new store openings per year. DBRS Morningstar anticipates EBITDA margins to remain relatively stable in F2024 before modestly expanding in F2025. DBRS Morningstar expects gross margins to benefit from decreased freight and logistic expenses, partially offset by increased sales of lower-margin consumable products. DBRS Morningstar anticipates selling, general, and administrative costs (SG&A) as a percentage of sales to increase with wage pressures more than offsetting operating leverage gains as well as benefits from efficiency and productivity initiatives. As such, DBRS Morningstar forecasts EBITDA (excluding equity earnings from Dollarcity) to grow to approximately $1.6 billion in F2024 and to above $1.7 billion in F2025.

DBRS Morningstar expects Dollarama’s financial profile to remain appropriate for the current rating, supported by its strong cash-generating capacity combined with the Company's balanced financial management practices. DBRS Morningstar anticipates capital expenditures (capex) and dividends to be above $190 million and $70 million per year in F2024 and F2025, respectively, resulting in DBRS Morningstar's forecast of free cash flow (FCF) (after dividends but before changes in working capital and lease principal payments) to grow in line with earnings and be above $900 million in F2024 and F2025. DBRS Morningstar anticipates Dollarama will continue its pattern of using its FCF (after changes in working capital and lease principal repayments) and over the more medium-term potentially some incremental debt to repurchase shares such that credit metrics remain appropriate for the current rating.

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 2.50 times (x) on a normalized and sustainable basis. However, should credit metrics deteriorate for a sustained period (i.e., debt-to-EBITDA increase above 3.25x) as a result of either weaker-than-expected operating performance and/or more aggressive financial management, the ratings could be pressured.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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/416784 (July 04, 2023)

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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