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. The confirmations are based on Dollarama's solid operating performance in the context of the Coronavirus Disease (COVID-19) pandemic over the last 12 months ended May 2, 2021 (LTM Q1 F2022). The Stable trends reflect DBRS Morningstar's view that Dollarama will continue to deliver sound operating performance in the context of the economic reopening combined with the expectation that the Company will maintain its consistent financial management practices. The ratings continue to 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 will remain supportive of the current BBB rating, incorporating the Company's disciplined expansion plans, which are steadily increasing its scale and geographic diversification. DBRS Morningstar forecasts Dollarama's sales to grow to approximately $4.3 billion in F2022 and to approximately $4.6 billion in F2023 from $4.1 billion during the LTM Q1 F2022, based on approximately 60 to 70 new store openings per year and same-store sales growth in the low- to mid-single-digit range. In terms of margins, DBRS Morningstar believes costs related to the coronavirus pandemic will moderate meaningfully during the second half of F2022 and expects Dollarama to offset inflationary pressures related to increased input and shipping costs through product refreshes and markups, resulting in EBITDA margins to improve to approximately 28.5% and to approximately 29.5% in F2022 and F2023, respectively, from 27.7% during the LTM Q1 F2022 (excluding equity earnings from Dollarcity). As such, DBRS Morningstar forecasts EBITDA to grow to approximately $1.2 billion in F2022 and toward $1.4 billion in F2023 from $1.1 billion during the LTM Q1 F2022 (excluding equity earnings from Dollarcity).

DBRS Morningstar expects Dollarama’s financial profile to remain appropriate for the current rating, supported by the Company's strong cash generating capacity combined with the expectation that the Company will maintain its consistent financial management practices. With the Company's capital expenditures of approximately $165 million in F2022 and F2023, respectively, and relatively stable total cash dividend layouts, DBRS Morningstar forecasts free cash flow (after dividends but before changes in working capital and lease principal repayments) to be approximately $700 million and $800 million in F2022 and F2023, respectively. DBRS Morningstar expects Dollarama will continue its pattern of using its free cash flow (after changes in working capital and lease principal repayments) and some incremental debt to repurchase shares such that credit metrics remain relatively stable and appropriate for the current rating. That said, should credit metrics deteriorate for a sustained period (i.e., debt-to-EBITDA increase above 3.25 times (x)) as a result of either weaker-than-expected operating performance and/or more aggressive financial management, the ratings could be pressured. DBRS Morningstar could take a positive rating action should Dollarama's business risk profile meaningfully strengthen and credit metrics improve, such that debt-to-EBITDA drops below 2.50x on a normalized and sustainable basis.

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/373262.

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

The principal methodology is Rating Companies in the Merchandising Industry (July 30, 2020; https://www.dbrsmorningstar.com/research/364692), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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