Fitch Rates AutoZone's New Senior Notes 'BBB'; Outlook Stable
Fitch Ratings has assigned a rating of 'BBB' to AutoZone, Inc.'s (Autozone) $300 million of 2.875% senior unsecured notes due January 2023. The Rating Outlook is Stable. The proceeds will be used towards refinancing the $300 million 5.875% senior unsecured notes due October 2012. AutoZone had $3.9 billion in debt outstanding at Aug. 25, 2012. A full list of ratings follows at the end of this release.
The rating 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 compound annual growth rate (CAGR) over the five-year period from fiscal year (FY) 2007 through 2012 of 6.9% 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 margin of 19.3% in FY 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 consists of either maintenance or replenishment of failed products, for which demand is relatively stable. AutoZone has produced strong sales growth and cash flows over the past three years, pointing to the counter-cyclical nature of its business.
Working against the company is persistent high unemployment, high gasoline prices and a rise in new vehicle sales. Despite this, the company's comparable store sales increased 3.9% in fiscal 2012, following a 6.3% increase in fiscal 2011. 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 held steady year over year at 2.7x for FY 2012 (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 at year end and $528 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 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.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Analysis of U.S. Corporate Pensions' (Aug. 5, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Analysis of U.S. Corporate Pensions
Philip M. Zahn, CFA, +1-312-606-2336
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Augustinus Wong, +1-212-908-0762
John Culver, CFA, +1-312-368-3216
Brian Bertsch, New York, +1 212-908-0549