DBRS Morningstar Confirms Loblaw Companies Limited at BBB (high), Stable

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating, the Medium-Term Notes rating, and the Debentures rating of Loblaw Companies Limited (Loblaw or the Company) at BBB (high). DBRS Morningstar also confirmed Loblaw’s Second Preferred Shares rating at Pfd-3 (high). All trends remain Stable. The ratings confirmations and Stable trends reflect DBRS Morningstar's expectation that, given the relatively inelastic nature of Loblaw’s product offering combined with its strong footprint of discount banners and private-label offerings, the Company's earnings profile will remain supportive of the current ratings, despite near-term pressures on operating performance from persistent inflation and consumers' decreasing purchasing power. The BBB (high) ratings also continue to reflect the Company’s strong business risk profile, including its position as Canada’s largest food and drug retailer, and continue to consider the intense competition in Canadian food retail.

DBRS Morningstar forecasts Loblaw's revenue growth for 2023 to slow year over year (YOY), with consolidated revenues forecast to increase to well above $58.0 billion in 2023 and to approximately $60.0 billion in 2024 from $56.5 billion in 2022. DBRS Morningstar anticipates food retail same-store sales growth will be in the low to mid-single digits in 2023 as price increases due to persistent inflationary pressures more than offset volume declines given decreasing consumer spending and a more normalized post-pandemic environment. DBRS Morningstar expects drug retail same-store sales to also grow in the low to mid-single digits in 2023, benefitting from continued recovery in cosmetic, over-the-counter, and prescription volumes. DBRS Morningstar believes Loblaw will continue to be able to pass on a large part of the inflation-driven input cost and wage increases through pricing; profit from a return to a more normalized retail sales mix, particularly related to drug retail front store volumes; and benefit from operating leverage gain as well as efficiency-improvement initiatives. Consequently, DBRS Morningstar believes Loblaw's EBITDA margins will modestly expand in 2023 and forecasts the Company’s EBITDA to grow to approximately $6.5 billion in 2023 and approximately $6.8 billion in 2024 from $6.2 billion in 2022.

DBRS Morningstar believes Loblaw's financial profile will remain appropriate for the current ratings, supported by the Company's free cash flow (FCF) generating capacity. DBRS Morningstar expects that cash flow from operations will continue to track operating income, while capital expenditures and dividends are expected to increase to approximately $2.0 billion and approximately $600 million, respectively, in 2023 and 2024. As such, DBRS Morningstar forecasts Loblaw’s FCF (before working capital changes, principal lease payments, and not accounting for $500 million in real estate dispositions) to remain well above $2.0 billion. DBRS Morningstar believes the Company will continue to primarily use its FCF and potentially some incremental debt for share buybacks and possibly further opportunistic acquisitions.

Consequently, DBRS Morningstar expects credit metrics to remain appropriate for the Company’s current ratings (i.e., adjusted debt-to-EBITDA below 3.25 times (x) on a sustained basis). DBRS Morningstar could take a positive rating action should Loblaw’s credit metrics continue to improve such that debt-to-EBITDA strengthens to comfortably below 2.25x on a normalized and sustainable basis as a result of growth in earnings along with a commensurate improvement in the Company's business risk profile.

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/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 (https://www.dbrsmorningstar.com/research/402334; September 2, 2022).

-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (https://www.dbrsmorningstar.com/research/404252; October 20, 2022).

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/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions

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 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 info@dbrsmorningstar.com.

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