TEXT-Fitch affirms AutoZone ratings

Wed Aug 22, 2012 4:43pm EDT

Aug 22 - Fitch Ratings has affirmed its ratings on AutoZone, Inc. 
The Rating Outlook is Stable. AutoZone had $3.6 billion in debt outstanding 
at May 5, 2012. A full list of ratings follows at the end of this release. 

The affirmation reflects AutoZone's leading position in the retail auto parts 
and accessories aftermarket, and its solid operating performance and credit 
metrics. The ratings also consider the company's 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 
its primary sub-sector, the 'Do-It-Yourself' auto aftermarket and a small but 
growing player in the 'Do-It-For-Me' commercial auto aftermarket. AutoZone's 
revenue CAGR over the five-year period from fiscal year (FY) 2006 through 2011 
of 6.3% has outpaced the industry metrics. 

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
private label offerings have contributed to its industry leading operating EBIT 
margins of 18.8% in the latest 12 months (LTM) ended May 2012. These margins 
should enable AutoZone to generate healthy free cash flow of $800 million to $1 
billion over the next two years, with this cash flow invested in share 
repurchases. 

Approximately 83% of AutoZone's merchandise mix is characterized by either 
maintenance or replenishment of failed products, for which demand is relatively 
stable. AutoZone has produced strong sales growth and cash flow over the past 
three years, pointing to be counter-cyclical nature of its business. 

Working against the company is high unemployment, high gasoline prices and a 
rise in new vehicle sales. Despite this, the company's year to date (through May
5, 2012) comparable store sales increased 4.7%, following a 6.3% increase in 
fiscal 2010. Fitch anticipates comparable store sales will moderate to the low 
single-digit range, consistent with long-term industry growth rates. At the same
time, gross margins may show some modest compression over time as the company 
increases its mix of lower-margin commercial sales. 

AutoZone's credit metrics have been stable despite aggressive share repurchase 
activity that is partly debt-financed. AutoZone's adjusted debt/EBITDAR ratio 
was 2.6 times (x) at May 5, 2012, compared with 2.7x year-end fiscal 2010 
(capitalizing operating leases on an 8x rents basis). These ratios provide a 
degree of headroom in the current ratings, which management has indicated it is 
committed to maintaining. 

AutoZone's liquidity is adequate, supported by a cash balance of $103 million as
of May 5, 2012 and $619 million of availability under its $1 billion revolving 
credit facility (net of CP outstanding), which expires in September 2016. 

Guidelines for Further Rating Actions:

A negative rating action would be caused by 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 
area.

Fitch affirms AutoZone, Inc.'s ratings as follows:

 

--Long-term 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.
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