News Column

Fitch Affirms AutoZone's IDR at 'BBB'; Outlook Stable

August 19, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BBB' Long-term Issuer Default Rating (IDR) for AutoZone, Inc. (AutoZone). The Rating Outlook is Stable. 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 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 $47 billion 'Do-It-Yourself' auto aftermarket (83% of AutoZone's sales) and a small but growing player in the $89 billion '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 flat comparable store (comp) sales in fiscal 2013, comp sales were in the 4% range in the past two quarters due in part to wear and tear on vehicles caused by the harsh winter. Going forward, Fitch expects AutoZone can sustain low single digit comps supported by 1 - 2% comps on the retail side of the business and relatively faster growth in the commercial business. Overall sales growth should be in the mid-single digits due to addition of 175 - 200 units annually.

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 EBITDA margin of 22.3% in the twelve months ending May 10, 2014. Fitch believes that there is modest additional upside to this margin, but that it will be limited longer-term by a gradually increasing mix of lower-margin commercial and online sales.

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).

Fitch expects AutoZone will generate free cash flow of around $1.0 billion annually over the next two years. Excess free cash flow, together with some incremental borrowings, are expected to be directed towards 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 $145 million as of Q3 2014 ending May 2014 and $358 million of availability under its $1.25 billion revolving credit facility (net of CP outstanding), which expires in September 2018. The company has an option to increase this revolver to $1.5 billion.

RATING SENSITIVITIES

A negative rating action could be driven by softer operating results, including sales growth that trails the industry, a FCF margin below 8-10% and/or an EBITDA margin below 20% for an extended period, or more aggressive share repurchase activity resulting in an increase in adjusted debt/EBITDAR to the low 3x area.

A positive rating action could be driven by stronger than expected operating results with a commitment by management to manage leverage in the low to mid 2x area.

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' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=853674

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Philip M. Zahn, CFA, +1 312-606-2336

Senior Director

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Secondary Analyst

Monica Aggarwal, CFA, +1 212-908-0282

Senior Director

or

Committee Chairperson

Michael Weaver, CFA, +1 312-368-3156

Managing Director

or

Media Relations:

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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