Morningstar DBRS Upgrades Dollarama Inc.'s Credit Ratings to BBB (high), Stable

DBRS Limited (Morningstar DBRS) upgraded Dollarama Inc.'s (Dollarama or the Company) Issuer Rating and Senior Unsecured Notes credit rating to BBB (high) from BBB, both with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The upgrades reflect the gradual strengthening of Dollarama's business risk profile over the last decade, driven by the Company's track record of executing on growth initiatives and delivering strong operating performance, including driving positive same-store sales growth for each full-fiscal year over this period. The upgrades also reflect Morningstar DBRS' increased confidence that the Company will be able to maintain key credit metrics, including potential incremental debt to fund strategic investments, at a level supportive of a BBB (high) credit rating, on a sustained basis.

On July 4, 2024, Morningstar DBRS confirmed Dollarama's credit ratings at BBB with Stable trends. At the time, Morningstar DBRS stated that Morningstar DBRS could take a positive credit rating action should Dollarama's business risk profile continue to strengthen and key credit metrics continue to improve in line with growth in earnings, such that Morningstar DBRS gains increased confidence that key credit metrics, including potential incremental debt to fund shareholder returns and/or the acquisition of additional stakes in Dollarcity, would remain at levels acceptable for a BBB (high) credit rating. 

Since then, Dollarama continued to deliver strong operating performance, benefitting from solid demand as consumers continued to seek value against the backdrop of a challenging macroeconomic environment. In line with expectations, the Company's revenues growth normalized from exceptionally elevated levels experienced over the last two years, but remained strong, with sales growing to $6.5 billion in the last 12 months ended May 4, 2025 (LTM Q1 F2026), and $6.4 billion in F2025 from $5.9 billion in F2024. Revenue growth for the LTM Q1 F2026 was driven by same-store sales growth of 4.9% in Q1 F2026 and 4.6% in F2025, benefitting from sustained consumer demand, especially for everyday essentials, and positive seasonal offering performance, as well as 22 and 65 net-new stores openings in Q1 F2026 and F2025, respectively. EBITDA margins for the LTM Q1 F2026 improved modestly to 31.3% versus 31.1% in F2025 and 30.4% in F2024, including due to benefits from lower logistics costs as well as operating leverage gains. Consequently, EBITDA (excluding equity earnings or cash distributions from Dollarcity) for the LTM Q1 F2026 increased to above $2.0 billion versus just below $2.0 billion and $1.8 billion in F2025 and F2024, 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 remained relatively flat at levels that are supportive of a BBB (high) credit rating, with debt-to-EBITDA (as calculated by Morningstar DBRS, including cash distributions from Dollarcity) of 2.2 times (x) at the end of the LTM Q1 F2026 compared with 2.3x and 2.4x at the end of F2025 and F2024, respectively. Furthermore, given the strengthening of Dollarama's business risk profile over the last number of years, Morningstar DBRS has become comfortable affording Dollarama incremental headroom related to the key credit metric levels acceptable for a BBB (high) credit rating, as outlined in the credit rating drivers.

Morningstar DBRS notes that on March 26, 2025, Dollarama announced that the Company entered into an agreement to acquire the outstanding shares of The Reject Shop Limited (TRS) for roughly $230 million (the Acquisition). TRS is Australia's largest discount retailer with more than 390 stores, offering both private-label and branded products. TRS generated approximately $780 million in sales and $115 million in EBITDA in the last 12 months ended December 29, 2024. Looking ahead, Dollarama aims to leverage the Company's expertise around operational performance and driving growth, with plans to increase TRS' store footprint by close to 80% to 700 stores through 2034. The transaction is expected to close in the second half of 2025 and is subject to customary closing conditions, including regulatory approvals.

Morningstar DBRS believes that the Acquisition will not have a material near-term effect on Dollarama's overall credit risk assessment. As it relates to Dollarama's business risk assessment, while the Acquisition will increase Dollarama's effective size and geographic diversification on close, Morningstar DBRS believes that the effects are not material enough to drive meaningful change because of TRS' relatively small size in relation to Dollarama's existing business, with TRS generating just roughly 5.5% of Dollarama's EBITDA. Furthermore, Morningstar DBRS notes that over the near term some of these benefits are partially offset by integration and execution risks associated with the Acquisition. That said, should the Company be successful in executing on its growth plans, the Acquisition could have an increasingly meaningful impact on Dollarama's business risk profile, over the medium to longer term. As it relates to Dollarama's financial risk profile, even if the Company were to be fully debt financed the roughly $230 million consideration associated with the Acquisition and accounting for approximately $200 million in lease liabilities at TRS, the Acquisition would have a negligible impact on Dollarama's key credit metrics, with pro forma debt-to-EBITDA leverage increasing by less than 0.1x.

Lastly, Morningstar DBRS also notes that on June 12, 2024, Dollarama announced the acquisition of an incremental 10.0% stake in Dollarcity, in exchange for the Company's common shares, equating to approximately $750 million. While this increased Dollarama's ownership in Dollarcity to 60.1%, given the joint control arrangement with the founding stockholders, the Company's ownership of Dollarcity continues to be accounted for using the equity method. Dollarama concurrently entered into an agreement to have the option to purchase an additional 9.89% stake in Dollarcity, as well as an incremental 4.945% stake in Dollarcity's Mexico business (currently 80.05% owned) at any time on or before December 31, 2027. The corresponding purchase price and funding intentions are not yet known. That said, based on Dollarama's past practices of conservative financial management, Morningstar DBRS believes that the Company will fund any incremental stakes in a similarly balanced manner, and combined with available leverage headroom, will be able to maintain key credit metrics at levels supportive of a BBB (high) credit rating.

CREDIT RATING DRIVERS
Should Dollarama's key credit metrics deteriorate on a sustained basis to a level below the BBB (high) range in aggregate (i.e., debt-to-EBITDA (as calculated by Morningstar DBRS, including cash distributions from Dollarcity), 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 credit ratings could be pressured. Although unlikely, Morningstar DBRS could take a positive credit rating action should Dollarama's business risk profile materially strengthen, while the Company maintains key credit metrics commensurate with an A (low) credit rating in aggregate. 

EARNINGS OUTLOOK
Excluding the effects of the TRS acquisition, Morningstar DBRS forecasts sales will grow to approximately $6.9 billion in F2026 and roughly $7.4 billion in F2027. Morningstar DBRS expects sales growth to be primarily driven by low- to mid-single-digit same-store sales growth considering sustained demand in the context of lingering pressures on consumers and a modestly elevated level of approximately 70 to 80 net-new store openings in F2026 due to some lease takeover opportunities, versus the usual guidance of roughly 60 to 70 net-new store openings per year. Morningstar DBRS anticipates EBITDA margins will remain relatively stable in F2026 and F2027, with benefits from merchandising and cost-saving initiatives to be balanced by wage increases and general cost pressures. As such, Morningstar DBRS forecasts EBITDA (excluding equity earnings or cash distributions from Dollarcity) will grow to above $2.1 billion in F2026 and approximately $2.3 billion in F2027.

FINANCIAL OUTLOOK
Morningstar DBRS expects Dollarama's financial profile to continue to benefit from its strong cash-generating capacity, including increasing cash distributions from Dollarcity, and balanced financial management practices. Morningstar DBRS anticipates capital expenditures will be in the guidance range of $285 million to $330 million, while cash outlay for dividends should grow to above $100 million. Consequently, again excluding the effects of the TRS acquisition, Morningstar DBRS forecasts free cash flow (FCF, after dividends but before changes in working capital and lease principal payments) will grow in line with earnings and be above an average of $1.3 billion in F2025 and F2026. Morningstar DBRS believes Dollarama will continue its pattern of using its FCF (after changes in working capital and lease principal repayments) to repurchase shares and in combination with likely some incremental debt to fund strategic investments, including the Acquisition, such that key credit metrics remain supportive for the Company's new BBB (high) credit rating.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): Dollarama's CBRA of BBBH/BBB reflects the Company's strong brand and market position, efficient operations, and geographic diversification while also considering a highly competitive retail environment and dependence on strong supply-chain management practices to maintain low prices.

Comprehensive Financial Risk Assessment (CFRA): Dollarama's CFRA of A/AL reflects its relatively stable and solid credit metrics (i.e., debt-to-EBITDA, of less than 2.5x).

Intrinsic Assessment (IA): The IA of BBB (high) 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) at https://dbrs.morningstar.com/research/454196

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/456009

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 (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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