DBRS Limited (Morningstar DBRS) confirmed Dollarama Inc.'s (Dollarama or the Company) Issuer Rating and Senior Unsecured Notes credit rating at BBB with Stable trends.
KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect Dollarama's exceptional operating performance over the last 12 months, benefitting from strong demand as customers seek value against the backdrop of a challenging macroeconomic environment. The Stable trends reflect Morningstar DBRS' expectation that, despite some moderation in consumer demand as economic conditions gradually improve, the Company will continue to deliver sound operating performance. Furthermore, the credit rating actions continue to incorporate Dollarama's disciplined expansion plans, including in South America, which are steadily increasing the Company's scale and geographic diversification, as well as the Company's balanced financial management practices.
Morningstar DBRS notes that, on June 12, 2024, Dollarama announced the acquisition of an incremental 10.0% stake in Dollarcity (the Acquisition) in exchange for Dollarama common shares, equating to approximately $750 million. While increasing Dollarama's ownership in Dollarcity to 60.1%, given the joint control arrangement with the founding stockholders, Dollarama's ownership of Dollarcity will continue to be accounted for using the equity method. While the Acquisition is leverage neutral, modestly increases Dollarama's effective scale, and grows Dollarama's proportionate share of any cash distributions from Dollarcity, Morningstar DBRS believes that the Acquisition does not have a material effect on Dollarama's overall credit risk assessment because of its relatively small incremental benefits.
Furthermore, Dollarama concurrently entered into an agreement to have the option to purchase an additional 9.89% stake in Dollarcity 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 stake in Dollarcity in a similarly balanced manner, maintaining a leverage profile appropriate for the current credit rating category.
Lastly, Morningstar DBRS notes that Dollarama and Dollarcity's founding stockholders have agreed to expand the Dollarcity business to Mexico, with the first store scheduled to open in 2026. Dollarama will have an initial 80.05% ownership interest in Dollarcity's Mexico business and the option to increase its stake by 4.945% on or before December 31, 2027.
CREDIT RATING DRIVERS
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, will remain at levels considered strong for the current credit rating category (i.e., debt-to-EBITDA below 2.50 times (x) on a normalized and sustainable basis). However, should key credit metrics deteriorate for a sustained period (i.e., debt-to-EBITDA increase above 3.25x) as a result of either weaker-than-expected operating performance and/or more aggressive financial management, the credit ratings could be pressured.
EARNINGS OUTLOOK
Morningstar DBRS anticipates Dollarama's sales growth to normalize from elevated levels experienced over the last two years, with sales growing 17% and 16% during the fiscal years ended January 20, 2023 (F2023) and January 28, 2024 (F2024), respectively. Morningstar DBRS forecasts sales to grow to approximately $6.3 billion in F2025 and toward $6.8 billion in F2026. Morningstar DBRS expects sales growth to be driven by low- to mid-single-digit same-store sales growth underpinned by robust consumer demand, including population growth; a higher average price point; and approximately 60 to 70 net new store openings per year. Morningstar DBRS anticipates EBITDA margins to remain relatively stable in F2025 before modestly expanding in F2026, with benefits from operating leverage gains, decreased freight and logistic expenses, as well as 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) to grow to approximately $1.9 billion in F2025 and to above $2.0 billion in F2025.
FINANCIAL OUTLOOK
Morningstar DBRS expects Dollarama's financial profile to remain appropriate for the current credit ratings, supported by its solid cash-generating capacity and balanced financial management practices. Morningstar DBRS anticipates capital expenditures to be in the guidance range of $175 million to $200 million while it expects cash outlay for dividends to grow toward $90 million; as a result, Morningstar DBRS forecasts free cash flow (FCF) (after dividends but before changes in working capital and lease principal payments) to grow in line with earnings and be above $1.0 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) and over the more medium-term potentially some incremental debt to repurchase shares and fund strategic investments, such that key credit metrics remain appropriate for the current credit ratings. Morningstar DBRS notes that key credit metrics are currently at levels considered strong for the current credit ratings, with debt-to-EBITDA (including cash distributions from Dollarcity) at 2.4x for the last 12 months ended April 28, 2024.
CREDIT RATING RATIONALE
Dollarama's credit ratings continue to reflect the Company's strong brand and market position, efficient operations, and geographic diversification, while also considering Dollarama's competitive retail environment and dependence on supply-chain management to maintain low prices.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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 Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.
BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Dollarama, the relative weighting of the BRA factors was approximately equal.
(B) Weighting of FRA Factors
In the analysis of Dollarama, the relative weighting of the FRA factors was approximately equal.
Weighting of the BRA and the FRA
In the analysis of Dollarama, the BRA carries greater weight than the FRA.
Notes:
All figures are in Canadian dollars unless otherwise noted.
Morningstar DBRS applied the following principal methodology:
Global Methodology for Rating Companies in the Merchandising Industry (June 20, 2024),
https://dbrs.morningstar.com/research/434781
Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, 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 Global Corporate Criteria (15 April 2024) https://dbrs.morningstar.com/research/431186
Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030
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/397223.
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.
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 dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
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DOLLARAMA INC. 
