DBRS Morningstar Confirms Sobeys Inc. at BBB (low) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of Sobeys Inc. (Sobeys or the Company) at BBB (low) with Stable trends. The confirmations and Stable trends reflect the strengthening of Sobeys’ earnings profile within the rating category, as evidenced by margin improvements and continued same-store sales growth, excluding Coronavirus Disease (COVID-19)-related effects on operating results. While uncertainties related to the intensity and duration of the coronavirus pandemic as well as the macroeconomic aftereffects remain, the confirmations and Stable trends also reflect DBRS Morningstar’s view that Sobeys is well positioned to navigate the current environment within the BBB (low) 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 expects Sobeys’ earnings profile to continue to improve over the near to medium term, driven by the benefits of Project Horizon and sound overall operating performance, excluding coronavirus-related effects on operating results. DBRS Morningstar forecasts Sobeys’ revenue to increase to above $27.0 billion in F2021, from $26.6 billion in F2020, based primarily on low- to mid-single digit same-store sales growth for the full year, as same-store sales are expected to gradually moderate from the significantly elevated levels experienced in Q4 F2020 and Q1 F2021. DBRS Morningstar forecasts Sobeys’ EBITDA margins to improve to approximately 7%, from 6.7% in F2020, benefitting from operating leverage gains as well as category resets related to Project Sunrise and merchandising initiatives related to Project Horizon, partially offset by costs associated with the roll-out of Voilà, the conversions to FreshCo, and the coronavirus pandemic. While costs related to the pandemic will moderate with the expiry of Sobeys’ Hero Pay, some expenses, including increased cleaning and sanitization costs, are expected to persist for some time. As such, DBRS Morningstar forecasts EBITDA to grow to approximately $1.9 billion in F2021, from below $1.8 billion in F2020.

DBRS Morningstar expects Sobeys’ credit metrics to improve, based on earnings growth and stable debt levels. DBRS Morningstar forecasts Sobeys’ free cash flow (FCF) after dividends and before changes in working capital and lease principal payments to be approximately $700 million in F2021. This is based on operating cash flow of approximately $1.5 billion, capital expenditure of $650 million to $675 million, and dividend payments of approximately $150 million. After changes in working capital and lease principal payments, DBRS Morningstar believes the Company will primarily use its FCF for share buybacks. As such, DBRS Morningstar expects Sobeys’ credit metrics to continue to improve in line with growth in operating income (i.e., debt-to-EBITDA of approximately 3.6 times (x)). Should credit metrics improve, such that lease-adjusted debt-to-EBITDA drops below 3.5x on a normalized and sustainable basis, mainly as a result of continued growth in operating income in combination with sound operating performance, DBRS Morningstar believes that Sobeys’ ratings would be more appropriately placed in the BBB rating category and a positive rating action could result. Conversely, although unlikely, should credit metrics deteriorate (i.e., debt-to-EBITDA rise above 4.00x on a sustained basis) as a result of either weaker-than-expected operating performance and/or more aggressive financial management, the ratings could be pressured.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Merchandising Industry (July 30, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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 info@dbrsmorningstar.com.

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