Fitch Rates AutoZone's Senior Unsecured Notes 'BBB'

CHICAGO--()--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 six-year notes. Proceeds from the new issues will be used to repay commercial paper. Fitch rates AutoZone's long-term Issuer Default Rating (IDR) 'BBB'. 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 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 2.8% in fiscal 2014 and were up 4% in the first half of fiscal 2015. 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 22.2% in the 12 months ending Feb. 14, 2015. 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 $1 billion annually over the next two years. Excess FCF, 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.

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 addition of 175-200 units annually.

--Fitch believes there is modest upside to the company's EBITDA margin of 22.2% but that it will be limited longer term by a gradually increasing mix of lower-margin commercial and online sales.

--Fitch expects AutoZone will generate FCF of around $1 billion annually over the next two years.

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

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=983257

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Contacts

Fitch Ratings
Primary Analyst
Philip M. Zahn, CFA
Senior Director
+1-312-606-2336
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Monica Aggarwal, CFA
Senior Director
+1-212-908-0282
or
Committee Chairperson
Michael Weaver, CFA
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Philip M. Zahn, CFA
Senior Director
+1-312-606-2336
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Monica Aggarwal, CFA
Senior Director
+1-212-908-0282
or
Committee Chairperson
Michael Weaver, CFA
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com