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DBRS has announced that it:

has today confirmed the Issuer Rating, Medium-Term Notes and Debentures ratings of Loblaw Companies Limited (Loblaw or the Company) and the Senior Unsecured Debt rating of Shoppers Drug Mart Corporation (Shoppers) at BBB as well as Loblaw’s Short-Term Issuer Rating at R-2 (middle) and its Second Preferred Shares rating at Pfd-3. DBRS has changed the trends to Positive from Stable.
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The trend change reflects the Company’s deleveraging efforts and successful integration subsequent to the acquisition of Shoppers as well as its solid operating performance in both food retail and pharmacy through the end of F2015. The ratings continue to be supported by Loblaw’s business profile which is considered very strong for the current BBB rating, featuring industry-leading size, scale and market positions in retail and pharmacy across Canada. The ratings also incorporate the intense competition in food retail in Canada and the risks associated with drug pricing and pharmacy reforms.
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Loblaw’s financial profile should continue to improve over the medium term, benefiting from growth in earnings and cash flows as balance-sheet debt should remain relatively stable. Cash flow from operations should continue to track operating income while capital expenditures (capex) attributable to the retail operations is expected to decline moderately to approximately $1.0 billion. Retail capex will focus on improving existing stores as well as new food and drug store openings as larger supply chain and IT initiatives have been completed. DBRS believes that dividends on a per-share basis will continue to grow at a steady pace, but the cash outlay for dividends should remain near the $400 million level (as share repurchases are completed). As such, DBRS believes that free cash flow before changes in working capital should increase toward the $900 million to $1.0 billion range. Free cash flow is expected to be used to complete share repurchases. As a result, DBRS believes that balance-sheet debt should remain relatively stable and credit metrics should continue to improve as earnings grow.

If DBRS becomes confident in the next six to 12 months that Loblaw’s operating performance will remain sound and balance-sheet debt will remain fairly stable resulting in continued improvement in credit metrics, a ratings upgrade to the BBB (high) level would likely result.

L.PR.B is a 5.30% Straight Perpetual that commenced trading 2016-3-11 after being announced 2015-6-2. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

This entry was posted on Friday, March 11th, 2016 at 9:36 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.