Fitch Rates AutoZone 'BBB/F2'; Outlook Stable

June 27, 2008 3:44 PM EDT

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has assigned ratings on AutoZone, Inc. (AutoZone) as follows:

    --Long-term Issuer Default Rating (IDR) 'BBB';

    --Bank credit facility 'BBB';

    --Term loan 'BBB';

    --Senior unsecured notes 'BBB';

    --Short-term IDR 'F2';

    --Commercial Paper 'F2'.

The Rating Outlook is Stable. AutoZone had $1.9 billion in debt outstanding at May 3, 2008.

The ratings reflect AutoZone's leading position in the retail auto parts and accessories aftermarket, its broad geographic reach, and stable operating performance and cash flow generation. The ratings also consider the challenging operating environment, AutoZone's proposed recapitalization which will result in weaker than historical credit metrics, and ESL Investments, Inc.'s increasing ownership of the company.

With 4,032 stores across the continental United States and Puerto Rico and 130 stores in Mexico as of May 3, 2008, AutoZone is the No.1 auto parts and accessories retailer in the U.S. The company's retail operations account for 84% of fiscal 2007 revenues with an average ticket per transaction of $19. AutoZone benefits from a greater number of older vehicles (seven years or older) on the road, which leads to higher maintenance requirements. However, higher gasoline prices have had a negative impact on the number of miles driven. Same store sales have been flat to slightly negative with third-quarter fiscal 2008 same store sales of negative 0.3%, and Fitch expects AutoZone's same store sales performance could remain pressured.

AutoZone continues to generate an industry-leading EBIT margin of 17.2% for the latest 12 months (LTM) ended May 3, 2008. Fitch expects the company's operating initiatives implemented in the past year, such as improving the in-stock position of late-model parts and increasing private label offerings and direct imports, will help offset revenue and cost pressures. As a result, free cash flow generation ($642 million for the LTM ended May 3, 2008) is expected to remain strong.

AutoZone has announced a new share repurchase authorization and a higher leverage ratio target of around 2.5 times (x) (2.8x based on Fitch's calculation of (total debt + 8x rent)/operating EBITDAR) compared to 2.1x previously. The company intends to execute debt-financed share repurchases through open market transactions over the next three quarters to reach its targeted leverage ratio. In the event that AutoZone's operating results are weaker than expected, Fitch expects the company to reduce the level of share repurchases to manage around its 2.5x target.

Of note is the level of ownership in AutoZone of ESL Investments, Inc. (ESL) which is currently at 36.2%. ESL will have increased influence on the company with the share buyback and board of directors representation (30% including one ESL representative and two directors identified by ESL). However, ESL's voting rights will be limited by established thresholds of 40% through December 2009 and 37.5% thereafter, unless ESL acquires or divests of AutoZone stock.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

Source: Fitch Ratings

Stocks Mentioned

Related Entities

• Edward Lampert
• ESL Investments
• Fitch Ratings

Add Your Comment

Name

Subject

Body

Verification can't see the text?
click here to refresh the image.
what's this?