DBRS Morningstar Confirms Dollarama Inc. at BBB with 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. This is based on Dollarama’s solid operating performance in the last year and consistent financial management. The ratings continue reflect the Company’s strong brand and market position, efficient operations and national diversification. The ratings also consider the competitive retail environment and dependence on supply chain management to maintain low prices.

Dollarama’s earnings profile remained solid in H1 F2020, evidenced by healthy comparable-store sales and EBITDA growth. Sales increased by 9.2% in H1 F2020 year over year, resulting from comparable-store sales of 5.2% and new store openings. Strong comparable-store sales were mainly because of increased transaction size. Gross margin remained pressured relative to historical levels, as the Company chose to invest in price to maintain its value proposition relative to competitors. This, along with higher logistics costs, caused EBITDA margins, excluding the impact of International Financial Reporting Standard (IFRS) 16, to decrease to 22.8% in H1 F2020 from 24.4% in H1 F2019. Consequently, EBITDA improved marginally to $404 million in H1 F2020 from $396 million in H1 F2019. The Company continued to apply its free cash flow and incremental debt toward share repurchases such that credit metrics remained stable. For the last 12 months ended H1 F2020, lease-adjusted debt-to-EBITDAR and EBITDA coverage and free cash flow as a percentage of debt were 2.81 times (x), 9.20x and 21.3% compared with 2.86x, 9.45x and 18.3%, respectively, as at the end of F2019.

DBRS Morningstar believes the earnings profile will remain stable going forward. DBRS Morningstar forecasts revenue will grow in the high-single-digit range to around $4.0 billion in F2021, based on 60 to 70 new store openings and low- to mid-single-digit comparable-store sales as the Company follows its competitors by passing on price increases and benefits from improved product mix. DBRS Morningstar expects Dollarama to maintain its gross margin (excluding IFRS 16) in the range of 38% to 39% and invest any savings into price. EBITDA margins should remain in the range of 24% as ongoing cost-control initiatives and operating leverage will be offset by rising transportation, logistics and labour costs. As a result, EBITDA is forecast to approach $1.0 billion in F2021.

DBRS Morningstar believes that free cash flow after dividends and before changes in working capital will grow to over $500 million in F2021. DBRS Morningstar’s capex forecast of $140 million in F2021 is related to new store openings and existing store maintenance. Dollarama is expected to continue to use its free cash flow and some incremental debt to repurchase shares such that credit metrics remain relatively stable and supportive of the current ratings. However, should lease-adjusted debt-to-EBITDAR increase above 3.00x for a sustained period of time with a corresponding deterioration in coverage and cash flow metrics because of either weaker-than-expected operating income and/or more aggressive financial management, the ratings could be pressured.

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

The principal methodology is Rating Companies in the Merchandising Industry, which can be found on dbrs.com under Methodologies.

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.com.

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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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