DBRS Confirms METRO INC. at BBB, Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of METRO INC. (Metro or the Company) at BBB as well as its Short-Term Issuer Rating at R-2 (high). All trends are Stable. The confirmation acknowledges Metro’s strong operating performance, achieving solid same-store sales growth, tonnage growth and market share gains, combined with disciplined financial management and a stable leverage target. Metro’s ratings continue to be supported by its strong market positions, efficient operations and disciplined financial management. The ratings also reflect the intensifying, but rational competitive environment; Metro’s concentration in Ontario and Québec, the most competitive markets in Canada; and the Company’s ambitions for growth and/or increasing shareholder returns.

Metro’s earnings profile should remain well placed for the current BBB rating over the near to medium term as the benefits from Metro’s presence in discount and its strong execution help to offset the effects of an intensifying, but rational competitive environment. Net sales should increase in the low- to mid-single digits range in F2017 based primarily on low-single digit same-store sales growth and a modest increase in net square footage. Same-store sales growth is expected to be driven by a combination of tonnage growth and a modest increase in prices as inflation continues to decelerate. EBITDA margins should remain relatively stable in the near to medium term as potential pressure on gross margins from intensifying competition and shifts in the proportion of sales toward discount banners (because of consumer preferences and store conversions) should be largely offset by operating leverage and efficiency improvements. As such, DBRS expects that Metro’s EBITDA will continue to grow, rising above the $950 million level in F2017.

Metro’s financial profile is expected to remain stable over the near to medium term based on the Company’s cash-generating capacity, disciplined financial management and stated leverage target, which is considered more than acceptable for the current BBB rating. Cash flow from operations should continue to track operating income while capex is expected to increase further to the $350 million level in F2017 as Metro continues to invest in its store base. Dividend policy should remain consistent targeting a payout of 25% of prior year net income. As a result, DBRS expects free cash flow before changes in working capital to remain relatively flat in the $250 million range in F2017. Metro is expected to continue to use free cash flow and incremental debt to invest in growth (organic and acquisitions) and/or increase returns to shareholders by continuing to repurchase shares. DBRS believes that Metro’s credit metrics will be managed in accordance with the Company’s stated leverage target of lease-adjusted debt-to-EBITDAR of 2.50 times, a level considered more than acceptable for the current BBB rating.

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.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.