Fitch Rates AutoZone's Proposed Unsecured Notes Offering 'BBB'

Published: 2025-04-11 05:17:19 ET AZO

Fitch Ratings has assigned a 'BBB' rating to AutoZone, Inc.'s proposed senior unsecured notes offering, which Fitch expects to be about $500 million.

Proceeds will be used for general corporate purposes, which may include repaying debt, capex or share repurchases.

AutoZone's 'BBB'/Stable Long-Term Issuer Default Rating (IDR) reflects its leading position in auto parts retail, steady sales and EBITDA growth over time, high profit margins and stable credit metrics. Fitch expects EBITDAR leverage to remain in the high 2x range over the long term.

AutoZone benefits from benign direct peer competition and the industry's resilience to discount and e-commerce competition due to inventory investment needs, a heavy service component and immediate purchase requirements. The ratings also consider the company's financial policy, with expectations that debt may increase to support its share buyback program, in line with its publicly articulated financial policy.

Key Rating Drivers

Store Expansion Drives Near-Term Growth: Fitch expects AutoZone's total comparable store sales (comps) trends to flatten in fiscal 2025 (ending August 2025) due to deferred spending by lower-income customers and moderating inflation. This follows strong growth during the pandemic and domestic comps of 3.4% in fiscal 2023 and 0.4% in fiscal 2024.

The company plans to accelerate store growth, aiming to increase its 7,432-store base from 213 net store openings in fiscal 2024 to up to 500 annually by fiscal 2028. In fiscal 2025, Fitch expects store growth to offset weaker comps, although losing a 53rd week of business will result in flat top-line growth, leading to a modest decline in EBITDA to around $4.1 billion. Longer-term, Fitch expects low single-digit comps growth and low-to-mid single digit EBITDA growth driven by store expansion.

Strong Operating Results: AutoZone maintains a long track record of good operating results, with sales and EBITDA growth in each of the past 10 years, predicated on positive comps averaging 3% annually before the pandemic. As the leading player in the auto parts retail industry, the company benefits from its size, national retail footprint and benign competitive dynamics, including generally rational pricing actions by peers and limited competitive incursions from new entrants.

Strategic initiatives have effectively boosted commercial segment sales, now accounting for around 25% of revenue and achieving a compound annual growth rate (CAGR) of around 15% over the last five years. Additionally, international growth in Mexico and Brazil is likely to play a more significant role in AutoZone's growth strategy over time.

Discounter and E-Commerce Resiliency: The auto parts and accessories market is more resilient to discount and online competition than the average retail segment. Extensive inventory needs across various auto manufacturers, parts and model years results in low turnover, deterring investment from discounters. Heavy service requirements, purchase immediacy and shipping restrictions on key items like batteries further strengthen this resilience. Fitch estimates online penetration for auto parts remains below retail averages, with growth mainly in discretionary, performance and cosmetic enhancement products, a small portion of the overall industry.

Limited Economic Sensitivity: Auto parts retail has demonstrated stability through economic cycles given its inelastic demand for non-discretionary products and an aging auto fleet. AutoZone performed well in the 2008-2009 recession, with positive comps of 0.4% in fiscal 2008 and 4.4% in fiscal 2009, respectively. An aging fleet may further limit sensitivity in a recessionary environment, as consumers keep existing cars longer. Base technology offerings for new vehicles have advanced, increasing the complexity of systems and associated maintenance.

Fragmented Industry: AutoZone benefits from operating in a fragmented industry where the top 10 competitors hold around 50% of U.S. market share, led by AutoZone. Independents, which continue to hold significant market share, have struggled as AutoZone opened stores with a larger inventory investment and developed relationships with retail and commercial customers. This has helped the company gradually gain market share without engaging in unhealthy price competition.

Stable Credit Metrics: AutoZone's credit metrics remain stable, including partly debt-financed share repurchases. Fitch estimates that EBITDAR leverage was 2.6x at the end of fiscal 2024, in line with the company's commitment to maintain company-defined adjusted leverage around 2.5x (capitalizing leases at 6x). Fitch expects EBITDAR leverage to remain within the 2.5x-3x range over the long term.

Good FCF Generation: Fitch expects AutoZone to generate around $2 billion in FCF annually beginning in fiscal 2025. Excess FCF, along with incremental borrowings, will likely be allocated to share buybacks. Fitch anticipates that debt levels will grow in line with EBITDAR, enabling the company to maintain its current leverage profile longer-term.

Peer Analysis

Investment-grade hardline retail peers include The Home Depot, Inc. (Home Depot; A/Stable) and AutoNation, Inc. (AutoNation; BBB-/Stable). Home Depot leads the U.S. home improvement space with $160 billion in sales and $25 billion in EBITDA (15.8% margins) for fiscal year-end January 2025. The home improvement sector, like auto parts, faces limited competition from discount and online channels. Home Depot's larger scale and lower leverage profile, with EBITDAR leverage around 2x, differentiate it from AutoZone.

AutoNation is one of the largest U.S. automotive retailers with $27 billion in revenue and $1.4 billion in EBITDA in 2024. Unlike AutoZone, AutoNation operates in a cyclical automotive retail industry with significantly lower operating margins. AutoNation's recent EBITDA margin is around 5% compared with AutoZone around 24%.

Fitch expects AutoNation's EBITDAR leverage to trend at or below 3x over time. During vehicle sales downturns, the company's effective expense management and revenue from alternative revenue streams such as parts and service have helped maintain EBITDA, despite challenges in new vehicle sales.

Key Assumptions

Comps could be flat in fiscal 2025 following good sales growth since the onset of the pandemic. However, Fitch anticipates AutoZone will resume its historical positive low single-digit growth in the longer term;

Revenue is expected to be flat in fiscal 2025 due to the loss of a 53rd week of business but could grow in the low-to-mid single digits longer-term. This assumes low single-digit comps and a more aggressive store opening plan. The company opened 213 stores in fiscal 2024 and aims to ramp up store openings to 500 annually by fiscal 2028, with around 60% being domestic;

EBITDA could decline modestly to $4.1 billion in fiscal 2025 from $4.3 billion in fiscal 2024 and grow in the low-to-mid single digits thereafter, driven by store expansion. EBITDA margins are expected to trend around 22%;

FCF could trend in the $2 billion range beginning in fiscal 2025, assuming around $1 billion in annual capex and neutral working capital. Fitch anticipates heavier capex spending to continue in fiscal 2025, as the company accelerates store openings and the expansion of its distribution center capacity. FCF, along with incremental debt issuance, could be used to support AutoZone's share repurchase program;

EBITDAR leverage is expected to sustain in the high 2x range over the next two to three years;

AutoZone's credit facility has a floating interest rate structure and Fitch assumes around 3.5% to 4.5% SOFR base rates over the forecast horizon. AutoZone's unsecured notes have a fixed interest rate structure.

Fitch has not incorporated any effects from the new U.S. administration's potential changes to tariffs, immigration, or taxation in its assumptions.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Softer operating results, including sales growth that trails the industry, FCF margins below 8%-10% and/or an EBITDA margin below 20% for an extended period, or a change in financial policy resulting in EBITDAR leverage sustained above 3x.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

The company performs in line with Fitch's operating expectations and management commits to maintaining EBITDAR leverage below 2.5x.

Liquidity and Debt Structure

As of Feb. 15, 2025, AutoZone had $301 million of cash and $1.65 billion available under its $2.25 billion revolver due November 2027. This includes $1.7 million of outstanding letters of credit and $602 million in short-term CP borrowings backstopped by the credit facility. The company also issues letters of credit on an uncommitted basis with partnering financial institutions. The company's liquidity profile is supported by its strong cash flow generation, which Fitch projects at around $2 billion annually starting in fiscal 2025.

Pro forma for the proposed note issuance and assuming proceeds repay unsecured notes, debt will total $9.1 billion, including $8.5 billion of unsecured notes and $602 million of outstanding CP. The company used part of the proceeds from this debt issuance to repay outstanding CP. Given Fitch's EBITDA forecast and management's publicly articulated financial policy, Fitch expects debt levels to grow modestly. This growth would maintain EBITDAR leverage in the 2.5x-3x range and support the company's share buyback program.

Issuer Profile

AutoZone is a leading retailer and distributor of automotive parts and accessories. As of Feb. 15, 2025, the company operated 7,432 stores across the U.S., Mexico and Brazil and generated revenue of around $18.7 billion.

Summary of Financial Adjustments

Financial statement adjustments that depart materially from those contained in the published financial statements are disclosed below:

EBITDA is adjusted for stock-based compensation;

Lease-related interest and D&A are reclassified as operating costs in the income statement and as operating cash outflows in the cash flow statement, in accordance with Fitch's Corporate Rating Criteria;

Balance sheet lease liabilities are used as lease-equivalent debt starting in fiscal 2023, in accordance with Fitch's Corporate Rating Criteria dated Dec. 6, 2024. Prior years used an 8x multiple applied to lease expense for lease-equivalent debt.

Date of Relevant Committee

27 September 2024

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

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