Fitch Rates AutoZone's Senior Unsecured Notes 'BBB'
OREANDA-NEWS. 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.
--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.
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.
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.