Fitch Affirms AutoZone at 'BBB'; Outlook Stable
CHICAGO -- August 21, 2013
Fitch Ratings has affirmed the 'BBB' Long-term Issuer Default Rating (IDR) for
AutoZone, Inc. (AutoZone). The Rating Outlook is Stable. AutoZone had $4.1
billion in debt outstanding at May 4, 2013. A full list of ratings follows at
the end of this release.
KEY RATING DRIVERS
The rating reflects AutoZone's leading position in the retail auto parts and
accessories aftermarket, its strong operating performance, and steady credit
metrics. The ratings also consider the company's recently soft sales trends
and aggressive share repurchase posture.
AutoZone is a leader in the large, growing and fragmented auto parts
aftermarket. AutoZone competes in two markets. It is the number one player in
the 'Do-It-Yourself' retail auto aftermarket (82% of AutoZone's sales) and a
small but growing player in the 'Do-It-For-Me' commercial auto aftermarket.
Approximately 83% of AutoZone's merchandise mix consists of either maintenance
or replenishment of failed products, for which demand is relatively stable.
After generating healthy comparable store sales of 4% - 6% in 2009-2012, the
company's sales have softened over the past four quarters, turning negative in
the last two quarters. This reflects a combination of the economic challenges
facing lower and middle income consumers, lower inflation, and milder weather,
which reduces wear and tear on vehicles. Fitch anticipates comparable store
sales will remain subdued, with faster growth of commercial sales offsetting
slow growth of retail sales.
AutoZone has among the strongest operating margins in the retail sector. The
company's size, national footprint (it owns around half of its real estate),
and retail-orientation have contributed to its industry leading EBIT margin of
19.6% in the twelve months ending May 4, 2013. However, Fitch believes that
there is only modest upside to this margin due to a gradually increasing mix
of lower-margin commercial and online sales, and the deleveraging effect of
slower top-line growth.
AutoZone's credit metrics have been stable despite aggressive share repurchase
activity that is partly debt-financed. AutoZone's adjusted debt/EBITDAR ratio
has remained steady at 2.7x over the past four years (capitalizing operating
leases on an 8x rents basis). These ratios provide a degree of headroom in the
Fitch expects AutoZone will generate free cash flow of $800 million to $900
million annually over the next two years, and that excess free cash flow,
together with some incremental borrowings, will be directed to share buybacks.
Overall debt levels are expected to grow in line with EBITDAR, enabling the
company to maintain its current leverage profile.
AutoZone's liquidity is adequate, supported by a cash balance of $134 million
at quarter end and $753 million of availability under its $1 billion revolving
credit facility (net of CP outstanding), which expires in September 2016.
A negative rating action would be caused by continued softer operating results
and/or more aggressive share repurchase activity resulting in weaker credit
metrics, including an increase in adjusted debt/EBITDAR to the low 3x area.
A positive rating action would be caused by stronger than expected operating
results combined with the intention to manage leverage in the low to mid 2x
Fitch currently rates AutoZone, Inc. as follows:
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Senior unsecured debt at 'BBB';
--Bank credit facility at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Analysis of U.S. Corporate Pensions' (Aug. 5, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Analysis of U.S. Corporate Pensions
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Philip M. Zahn, CFA, +1-312-606-2336
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Monica Aggarwal, CFA, +1-212-908-0282
John Culver, CFA, +1-312-368-3216
Brian Bertsch, New York, +1-212-908-0549
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