DBRS Confirms Dollarama at BBB, Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes rating of Dollarama Inc. (Dollarama or the Company) at BBB, both with Stable trends. The confirmation is based on the significant improvement in Dollarama’s earnings profile, balanced by the expectation for more aggressive financial management in the future.

Dollarama’s earnings profile continues to improve, as evidenced by industry leading same-store sales growth, margin expansion and increased returns on invested capital. The Company’s comparable store sales growth of 7.4% in H1 F2016 outpaced its major Canadian competitors. EBITDA margins continued to improve (20.7% in H1 F2016 from 18.1% in H1 F2015) resulting from gross margin expansion, operating leverage, and labour efficiencies. As a result, EBITDA increased by 29.8%, to $253 million in H1 F2016. The growth in operating income led to significant free cash flow growth, which, along with incremental debt, was applied towards share repurchases. For the last 12 months (LTM) ended Q2 2016, lease-adjusted debt-to-EBITDAR, lease- adjusted EBITDA coverage and free cash flow as a percentage of debt (after dividends and before changes in working capital) were 2.32 times (x), 9.82x and 17.8%, respectively, compared with 2.34x, 9.01x and 16.9% at the end of F2015.

DBRS expects Dollarama’s earnings profile to continue to improve. DBRS forecasts revenue will grow in the low double-digits to more than $2.9 billion in F2017, based on mid-single- digit comparable store sales and approximately 70 new stores per year, all in Canada. DBRS believes comparable store sales will continue to be driven by larger average basket sizes stemming from a greater proportion of merchandise sold at higher price points. DBRS expects the Company to maintain its gross margin target range of 36% to 37% and invest any savings into pricing. EBITDA margin should remain near current levels as efficiency improvements offset the impact of an increase in the Company’s foreign exchange forward contract rate. As a result, DBRS forecasts EBITDA to increase to approximately $600 million in F2017.

DBRS expects Dollarama’s financial profile to remain appropriate for the current rating as improving operating income/free cash generating capacity is balanced by a potential increase in leverage resulting from debt-financed share repurchases. Free cash flow should continue to grow significantly, to approximately $300 million in F2017, as capital expenditures is expected to remain modest relative to the Company’s operating income and the dividend payout ratio remains stable. DBRS anticipates that Dollarama will continue to use its free cash flow and incremental debt to repurchase shares. Due to the strengthening in the Company’s earnings profile, DBRS now believes that lease-adjusted debt-to-EBITDAR up to 2.75x is suitable for the current rating, up from DBRS’s previous threshold of 2.50x.

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.

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

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