Morningstar DBRS Confirms Sobeys Inc. at BBB, Stable

DBRS Limited (Morningstar DBRS) confirmed Sobeys Inc.'s (Sobeys or the Company) Issuer Rating and Senior Unsecured Debt credit rating at BBB with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends acknowledge Sobeys' resilient operating performance over the last 12 months ended February 3, 2025, considering an operating environment that remains highly competitive and challenging considering lingering pressures on consumers. The credit rating actions also reflect Morningstar DBRS' view that Sobeys will continue to comfortably navigate this environment within the context of the BBB credit rating category, given the Company's relatively inelastic product offering.

CREDIT RATING DRIVERS
Morningstar DBRS could take a positive credit rating action should Sobeys' business risk profile materially strengthen, and key credit metrics improve to the BBB (high) level in aggregate on a normalized and sustainable basis because of growth in earnings (i.e., debt-to-EBITDA of approximately 2.5 times (x)). Conversely, should Sobeys' key credit metrics deteriorate for a sustained period (i.e., debt-to-EBITDA increase to materially above 3.5x) because of weaker-than-expected operating performance and/or more aggressive financial management, the credit ratings could be pressured.

EARNINGS OUTLOOK
Morningstar DBRS forecasts Sobeys' revenues to be approximately $31.2 billion for the full year ended in May 2025 (F2025) and rise to roughly $32.0 billion in F2026, from $30.7 billion in F2024. Morningstar DBRS expects the growth in revenue to be primarily driven by low-single-digit same-store sales growth. This reflects Morningstar DBRS' assumption of modest food inflation and relatively stable volumes considering lingering pressures on consumers, particularly in light of Sobeys' relatively lower level of discount banner penetration. Furthermore, Sobeys' revenue growth should also continue to benefit from the Company's growth initiatives, including new stores, renovations and conversions, as well as e-commerce, which now also includes Uber and Instacart in addition to the Company's inhouse platform, Voila. Morningstar DBRS forecasts Sobeys' EBITDA margins to remain relatively stable, with operating leverage gains as well as efficiency and cost reduction efforts to offset the negative effects associated with the Company's e-commerce roll-out, store remodeling and conversion efforts, as well as general cost pressures. Consequently, Morningstar DBRS forecasts EBITDA (as calculated by Morningstar DBRS) to grow to modestly above $2.3 billion in F2026 from approximately $2.2 billion in F2024.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates Sobeys' financial profile to remain appropriate for the current credit ratings as key credit metrics should gradually strengthen over time with growth in earnings and some debt repayment. Morningstar DBRS forecasts operating cash flows (as calculated by Morningstar DBRS) to continue to generally trend in line with earnings and be above $1.7 billion in F2025 and F2026. Morningstar DBRS expects capital expenditures to be roughly $700 million for the full year F2025 and rise to above $800 million in F2026, with expenditures focusing on store investments as well as technology and logistics infrastructure. Annualized dividend payments to Empire Company Limited are expected to continue to gradually increase and average approximately $600 million in each of F2025 and F2026. Morningstar DBRS anticipates Sobeys to use the Company's remaining free cash flows primarily for lease principal payments and some debt repayments. As such, key credit metrics should remain appropriate for the Company's current credit ratings.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): Sobey's CBRA of BBBH/BBB reflects the Company's number two position in the Canadian food retailing market, its diversification across the country, and relatively inelastic product offering, balanced by the intensely competitive operating environment.

Comprehensive Financial Risk Assessment (CFRA): Sobeys's CFRA of BBBH/BBB reflects its relatively stable key credit metrics (i.e., debt-to-EBITDA, of approximately 3.0x).

Intrinsic Assessment (IA): The IA of BBB 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, or Governance factors 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 (May 16, 2025) https://dbrs.morningstar.com/research/454196.

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/455188.

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 ESG Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196

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 rating was initiated at the request of the rated entity.

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

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

This is a solicited credit rating.

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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