Morningstar DBRS Confirms METRO INC.'s Issuer Rating and Senior Unsecured Debt at BBB (high) with Stable Trends

DBRS Limited (Morningstar DBRS) confirmed its Issuer Rating and Senior Unsecured Debt credit rating on METRO INC. (Metro or the Company) at BBB (high) with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations acknowledge Metro's solid operating performance over the last 12 months ended July 6, 2024. The Stable trends reflect Morningstar DBRS' view that Metro remains well positioned to navigate the negative effects of strained consumer purchasing power and intense competition, supported by the Company's relatively inelastic product offering, well-established discount banner footprint, and private label offering.

CREDIT RATING DRIVERS
Although highly unlikely over the medium term, Morningstar DBRS could take a positive credit rating action should Metro's business risk profile, particularly its geographic diversification, materially strengthen, while maintaining commensurate key credit metrics. Conversely, Morningstar DBRS could take a negative credit rating action should key credit metrics deteriorate to a level below the BBB (high) range in aggregate (i.e., debt-to-EBITDA rising materially above 2.5 times, along with a corresponding decline in the Company's other key credit metrics) because of a weaker-than-expected operating performance and/or more aggressive financial management, without a mitigating improvement in the Company's business risk profile.

EARNINGS OUTLOOK
Morningstar DBRS expects the Company's earnings profile to continue to strengthen within the current credit rating category, supported by sound same-store sales growth and modest EBITDA margin expansion over the medium term. Morningstar DBRS forecasts revenue to be above $21.0 billion for the full-year F2024 compared with $20.7 billion in F2023 (which benefitted from an additional (53rd) week in the year) and grow toward $22.0 billion in F2025. This forecast is based on Morningstar DBRS' expectation of low-single-digit grocery same-store sales growth reflecting moderated inflationary pressures on prices and the effects of strained consumer purchasing power on volumes, while also considering Metro's high degree of discount banner penetration and the benefits associated with population growth. Similarly, revenue should also benefit from low- to mid-single-digit pharmacy same-store sales growth. EBITDA margins for F2024 will be negatively affected by the transition and start-up costs associated with Metro's new automated distribution centre north of Montréal as well as the Company's new automated fresh facility in Toronto (Fresh Phase 2), which opened in November 2023 and June 2024, respectively. That said, as operations ramp up, these should increasingly yield operational efficiencies and margin benefits from F2025 onward. Furthermore, EBITDA margins should benefit from operating leverage gains and mix, considering increases in higher-margin private label and pharmacy sales. This should help to offset persistent pressures on selling, general, and administrative expenses, particularly relating to wages, such that margins should see some modest improvement in F2025. As such, Morningstar DBRS forecasts Metro's EBITDA to be relatively flat at approximately $2.0 billion for the full-year F2024 and to grow to approximately $2.1 billion in F2025.

FINANCIAL OUTLOOK
Morningstar DBRS believes Metro's financial profile will remain appropriate for the current credit rating category, supported by its solid cash-generating capacity. Morningstar DBRS forecasts cash flow from operations (as calculated by Morningstar DBRS) to continue to track operating income, growing toward $1.6 billion in F2025, compared with approximately $1.5 billion in F2023 and for the full-year F2024. Morningstar DBRS anticipates capital expenditures to remain above $600 million in both F2024 and F2025 with the Company continuing to focus on its supply chain infrastructure and existing store improvements. Morningstar DBRS projects dividends of approximately $300 million per year over the next two years. As such, Morningstar DBRS forecasts free cash flow (FCF) after dividends but before changes in working capital and net principal operating lease payments to increase toward $600 million in F2024 and F2025. After changes in working capital and net principal lease payments, Morningstar DBRS anticipates that the Company will primarily use its FCF, and likely some incremental debt, for share buybacks such that key credit metrics in aggregate remain appropriate for the current credit ratings.

CREDIT RATING RATIONALE
Metro's credit ratings continue to reflect its well-established brand and market position in Ontario and Québec, while also reflecting the competitive operating environment in Canadian food retail and Metro's geographical concentration.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

Weighting of BRA Factors 
In the analysis of Metro, the relative weighting of the BRA factors was approximately equal. 

Weighting of FRA Factors 
In the analysis of Metro, the relative weighting of the FRA factors was approximately equal. 

Weighting of the BRA and the FRA 
In the analysis of Metro, the BRA carries greater weight than the FRA. 
 
Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Merchandising Industry (August 14, 2024), https://dbrs.morningstar.com/research/437891.

Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

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

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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