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. While uncertainty related to the intensity and duration of the Coronavirus Disease (COVID-19) pandemic as well as the macroeconomic aftereffects remains, the confirmation and Stable trends reflect DBRS Morningstar’s view that Dollarama is well positioned to navigate the current environment within the BBB rating category. The ratings continue reflect the Company’s strong brand and market position, efficient operations, and national diversification while also considering the competitive retail environment and dependence on supply chain management to maintain low prices.

DBRS Morningstar believes Dollarama's earnings profile, although pressured, will remain supportive of the Company's BBB rating, with the remaining temporarily closed stores reopened during the second quarter ended August 2, 2020 (Q2 F2021), and sales expected to improve from first quarter ended May 3, 2020 (Q1 F2021) levels (Q1 F2021 comparable store sales growth of -2.4% (0.7% excluding temporarily closed stores) and total revenue growth of 2.0%). As such, based on low single-digit and low to mid-single digit comparable-store sales in F2021 and F2022, respectively, combined with sales from new store openings, DBRS Morningstar forecasts sales to grow to approximately $3.9 billion and to above $4.2 billion in F2021 and F2022, respectively. DBRS Morningstar believes some of the costs related to the coronavirus pandemic to moderate by the end of Q2 F2021, including the 10% wage premium, while other expenses, including increased cleaning and sanitization costs, are expected to persist for some time. As such, combined with some gross margin pressure due to mix shift, DBRS Morningstar expects EBITDA margins for F2021 to decline to below 28% but return toward F2020 levels of approximately 29% in F2022. As a result, DBRS Morningstar forecasts EBITDA to remain above $1.0 billion in F2021 and to be approximately $1.2 billion in F2022.

DBRS Morningstar expects Dollarama’s financial profile to remain appropriate for the current rating, supported by the Company's strong cash generating capacity and the expectation of relatively stable credit metrics. DBRS Morningstar forecasts free cash flow (after dividends but before changes in working capital) to be approximately $600 million and $700 million in F2021 and F2022, respectively. As the situation around the pandemic normalizes, DBRS Morningstar believes Dollarama will repay borrowings made to temporarily boost its cash balance and also believes that Dollarama will return to its pattern of using its free cash flow and potentially some incremental debt to repurchase shares such that credit metrics remain relatively stable (i.e., debt-to-EBITDA of around 3.00 times (x) at the end of F2021 and F2022). 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. That said, weaker-than-expected operating performance for a sustained period, resulting in a more permanent shift of the Company's business risk profile, could also result in the requirement to maintain stronger credit metrics to support the same rating.

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 (August 2019) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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