DBRS Confirms METRO INC. at BBB and R-2 (high), Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of METRO INC. (Metro or the Company) at BBB and its Short-Term Issuer Rating at R-2 (high), all with Stable trends. The confirmation reflects Metro’s solid operating performance through Q3 F2015, achieving same-store sales and tonnage growth as well as modest margin expansion while maintaining a stable financial profile. Metro’s ratings continue to be supported by its solid market positions, efficient operations and disciplined financial management, balanced by the intense but rational competitive environment and the Company’s ambitions for growth and/or increasing shareholder returns.

Metro’s earnings profile should remain stable over the near to medium term because inflation is expected to continue to drive top-line growth as industry square footage growth normalizes and competition remains rational. Sales are expected to increase in the mid-single digit range in F2016 based on low- to mid-single digit same-store sales growth and approximately ten net new store openings. Same-store sales should be driven primarily by inflationary pricing and modest volume growth. Inflation is expected to be at least partially attributable to the impact of a weaker Canadian dollar. EBITDA margins could improve modestly in the near term, benefiting from further gross margin expansion as there continues to be a shift in mix toward the higher-margin fresh categories. Any improvement in margins could be at least partially offset by inflation in centre-store grocery (a larger proportion of total sales), which is more difficult to pass on to consumers, as well as rising selling, general and administrative expenses from energy, marketing and wages. As such, DBRS expects that Metro’s EBITDA will grow toward the $900 million level in the near to medium term.

Metro’s financial profile is expected to remain stable over the near to medium term based on the Company’s cash-generating capacity, relatively stable financial leverage and disciplined financial management. Cash flow from operations should track operating income, rising toward the $700 million level in the near to medium term, while capital expenditures (capex) are expected to increase notably as the Company completes previously delayed projects, including ten net new store openings as well as renovations and expansions. Dividends should continue to rise as operating income increases, rising toward the $125 million level in F2016. As a result of the expected increases in capex and dividends, free cash flow before changes in working capital should decline moderately to the $250 million to $300 million range. Metro is expected to continue to use free cash flow and possibly incremental debt to complete share repurchases and/or invest in growth (acquisitions). DBRS believes that Metro will be managed to maintain credit metrics at a level considered acceptable for the current rating (i.e., lease-adjusted debt-to-EBITDAR below 2.50 times (x) and lease-adjusted EBITDA coverage above 8.0x).

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Merchandising Industry (August 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.