Morningstar DBRS Changes Trends on Loblaw Companies Limited to Positive From Stable; Confirms Credit Ratings at BBB (high)

DBRS Limited (Morningstar DBRS) changed the trends on Loblaw Companies Limited's (Loblaw or the Company) Issuer Rating, and the credit ratings on the Medium-Term Notes and Debentures to Positive from Stable and confirmed the credit ratings at BBB (high). Morningstar DBRS also discontinued Loblaw's Second Preferred Shares credit rating. This follows their full redemption and is unrelated to the Company's credit risk profile.

KEY CREDIT RATING CONSIDERATIONS
The trend changes reflect the gradual strengthening of Loblaw's business risk profile over the last number of years, driven by the Company's strong operating performance, including notable margin expansion and solid same-store sales growth. The trend changes also reflect the improvement in Loblaw's key credit metrics, to a level supportive of an A (low) credit rating, combined with Morningstar DBRS' expectation that the Company should be able to sustain key credit metrics at a level acceptable for the A (low) credit rating category.

On May 16, 2024, Morningstar DBRS confirmed Loblaw's credit ratings at BBB (high) with Stable trends. At the time, Morningstar DBRS stated, should Morningstar DBRS gain increased confidence that the Company would maintain key credit metrics at levels acceptable for an A (low) credit rating, supported by further growth in earnings and the continued strengthening of the Company's business risk profile, Morningstar DBRS could take a positive credit rating action.

Since then, Loblaw continued to deliver strong performance despite an operating environment that remains intensely competitive. The Company's consolidated revenues grew to $61.6 billion in the last 12 months ended March 22, 2025 (LTM Q1 F2025), from $61.0 billion in F2024, and $59.5 billion in F2023. Revenue growth was underpinned by food same-store sales growth of 2.2% in Q1 F2025 and 1.5% in F2024, driven by volume growth and food inflation; as well as drug retail same-store sales growth of 3.8% and 2.4% during the same periods, respectively, which benefited from prescription volume growth. Consolidated EBITDA margins for the LTM Q1 F2025 remained flat versus the full-year F2024 levels of 11.5% and compared with 11.2% in F2023, attributable to reduced shrink, efficiency improvements, and operating leverage gains. Consequently, consolidated EBITDA in the LTM Q1 F2025 increased to nearly $7.1 billion from $7.0 billion and $6.6 billion in F2024 and F2023, respectively. The Company continued to use its free cash flow (FCF; after working capital and net lease principal payments) primarily for share buybacks. As such, key credit metrics (as calculated by Morningstar DBRS) remained relatively flat, with debt-to-EBITDA (excluding Financial Services) of 2.4 times (x) for the LTM Q1 F2025 compared with 2.3x in F2024 and F2023. Given the strengthening of Loblaw's business risk profile over the last number of years, Morningstar DBRS has become comfortable affording Loblaw incremental headroom related to the key credit metric levels acceptable for an A (low) credit rating, as outlined in the credit rating drivers.

CREDIT RATING DRIVERS
Should Loblaw continue to deliver operating performance generally in line with Morningstar DBRS' expectations while maintaining relatively stable key credit metrics, Morningstar DBRS will upgrade the credit ratings to A (low) from BBB (high) over the next six to 12 months.

Conversely, should Loblaw's key credit metrics deteriorate on a sustained basis to a level below the BBB (high) range in aggregate (i.e., debt-to-EBITDA, excluding Financial Services, increasing toward 3.0 times (x), along with a corresponding decline in the other key credit metrics), as a result of either weaker-than-expected operating performance and/or more aggressive financial management, the trend change could be reversed.

EARNINGS OUTLOOK
Morningstar DBRS forecasts Loblaw's consolidated revenue to increase to approximately $64.5 billion in F2025 and toward $66.0 billion in F2026. This is based on Morningstar DBRS' expectation of food retail same-store sales growth in the low-single digits in F2025, reflecting modest food inflation and relatively stable volumes as consumers continue to remain pressured, acknowledging the benefits associated with Loblaw's high degree of discount banner penetration in the current environment. The forecast also incorporates Morningstar DBRS' expectation that drug retail same-store sales will grow in the low- to mid-single digits in F2025, benefitting from the expansion of pharmacy care clinics. Loblaw's revenue growth trajectory should also benefit from the Company's renewed efforts to grow its square footage share, including a plan to open 80 new stores, largely focused on hard discount and drug retail. Lastly, Morningstar DBRS notes that F2025 will benefit from a 53rd week. Morningstar DBRS anticipates EBITDA margins will see only modest improvement in F2025 and into F2026, driven by gross margin expansion, including through initiatives related to shrink and logistic efficiencies, while operating leverage gains are expected to largely offset inflationary pressures on selling, general, and administrative expense, particularly because of wage increases. Consequently, Morningstar DBRS forecasts Loblaw's consolidated EBITDA to grow to approximately $7.5 billion in F2025 and toward $7.8 billion in F2026.

FINANCIAL OUTLOOK
Morningstar DBRS believes Loblaw's financial profile will continue to gradually strengthen in line with the projected growth in earnings, considering the Company's strong FCF generating capacity and relatively stable debt levels (excluding Financial Services). Morningstar DBRS forecasts Loblaw's consolidated FCF (before changes in working capital, after net principal lease payments and not accounting for any real estate dispositions) to average out to be above $1.5 billion in F2025 and F2026. This is based on Morningstar DBRS' expectation that consolidated cash flow from operations will continue to track operating income, while capital expenditures are anticipated to be $2.2 billion in F2025 and above $2.0 billion in F2026 and dividends will average out to be $650 million, in F2025 and F2026, compared with $2.2 billion and more than $600 million (normalized for payment timings), respectively, in F2024. Morningstar DBRS believes the Company will continue to primarily use its FCF in combination with accumulated cash and potentially some incremental debt primarily for share buybacks, such that key credit metrics remain relatively stable. Morningstar DBRS notes that Loblaw paid $164 million to settle the Company's remaining share of the $500 million class action lawsuit ($96 million was previously paid and $247 million was paid by George Weston Limited) in relation to the bread price-fixing arrangement that occurred between 2001 and 2015. Morningstar DBRS does not believe that the payment has a material adverse effect on the Company's overall credit risk profile.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): Loblaw's CBRA of AL reflects the Company's position as Canada's largest food and drug retailer, relatively inelastic product offering, geographic diversification, dominant loyalty program, leading discount banner footprint, and strong private-label offering, while also reflecting the intense competition in Canadian food retail.

Comprehensive Financial Risk Assessment (CFRA): Loblaw's CFRA of AL reflects its relatively stable credit metrics (i.e., debt-to-EBITDA, excluding financial services, of less than 2.5x), which in aggregate are considered strong for the Company's current credit rating.

Intrinsic Assessment (IA): The IA of BBBH is within the IA Range and is based on the CBRA and CFRA, also taking into consideration peer comparisons, among other factors.

Additional Considerations: The credit ratings include no further negative or positive adjustments resulting from additional considerations.

ENVIRONMENTAL, SOCIAL, AND 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

Further details on the Issuer's IA can be found at https://dbrs.morningstar.com/research/454237.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in Services Industries (February 3, 2025), https://dbrs.morningstar.com/research/447184

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024),
https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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-DBRS@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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