Fitch Rates AutoZone's Senior Unsecured Notes 'BBB'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a rating of 'BBB' to AutoZone, Inc.'s (AutoZone) $650 million of new senior unsecured notes composed of a $400 million issue of 10-year notes and a $250 million issue of three-year notes. Proceeds from the new issues will be used for general corporate purposes. Fitch rates AutoZone's long-term Issuer Default Rating (IDR) 'BBB'/Stable Outlook. 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, and competes in two markets. It is the number one player in its primary sub-sector, the $51 billion 'Do-It-Yourself' auto aftermarket (79% of AutoZone's sales) and a small but growing player in the $64 billion 'Do-It-For-Me' commercial auto aftermarket. Approximately 84% of AutoZone's merchandise mix consists of either maintenance or replacement of failed products, for which demand is relatively stable.

Comparable store (comp) sales were up 3.8% in fiscal 2015 and were up 3.6% in the first two quarters of fiscal 2016. 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 the addition of around 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 12 months ending Feb. 13, 2016. 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 (FCF) of around $900 million to $1 billion annually over the next two years. Excess FCF, together with some incremental borrowings, is 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.

KEY ASSUMPTIONS

--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 the addition of around 200 units annually;

--Modest upside to the company's EBITDA margin of 22.3% but limited longer-term by a gradually increasing mix of lower-margin commercial and online sales;

--FCF of $900 million to $1 billion annually;

--Debt levels are expected to grow in line with EBITDAR, enabling the company to maintain its current leverage profile.

RATING SENSITIVITIES

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.

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.

LIQUIDITY

AutoZone has adequate liquidity. The company maintains a $1.25 billion revolving credit facility due December 2019 and a $500 million 364-day facility, primarily to support commercial paper (CP) borrowings, letters of credit and other short-term unsecured bank loans. The available balance is reduced by CP borrowings and certain letters of credit. As of Feb. 13, 2016, AutoZone had approximately $180 million in available capacity. Combined with readily available cash of $208 million, total liquidity amounted to approximately $389 million. AutoZone has the option to increase the 2019 revolver to $1.5 billion.

FULL LIST OF RATING ACTIONS

Fitch currently rates AutoZone, Inc. 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.

Date of Relevant Rating Committee: 27 August 2015

Additional information is available on www.fitchratings.com.

Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:

--Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and exclude restructuring charges. In 2015, Fitch added back $41 million in non-cash stock-based compensation to its EBITDA calculation and excluded $5.4 million in favorable credit card litigation settlement charges.

--Fitch has adjusted the historical and projected debt by adding 8x annual gross rent expense.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002767

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160418006465/en/

Fitch Ratings
Primary Analyst
David Silverman, CFA
Senior Director
+1-212-908-0840
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Monica Aggarwal, CFA
Managing Director
+1-212-908-0282
or
Committee Chairperson
Michael Weaver, CFA
Managing Director
+1-312-368-3156
or
Media Relations:
Hannah James, New York, + 1 646-582-4947
Email: [email protected]

Source: Fitch Ratings

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