Fitch Affirms AutoZone's Long-Term IDR at 'BBB'; Outlook Stable

CHICAGO--Fitch Ratings has affirmed AutoZone, Inc.'s (AutoZone) ratings as follows:

--Long-term Issuer Default Rating (IDR) 'BBB';

--Bank credit facility 'BBB';

--Term loan 'BBB';

--Senior unsecured notes 'BBB';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

The Rating Outlook is Stable. AutoZone had $2.4 billion in debt outstanding at May 9, 2009.

The ratings reflect AutoZone's dominant position in the retail auto parts and accessories aftermarket, increasing private label penetration strategy and solid operating performance and credit metrics. The ratings also consider the continued decline in the number of miles driven as a result of the weak economy and potential increase in gasoline prices as well as the company's share repurchase activity and ownership by ESL Investments, Inc. (ESL).

With 4,172 stores in the continental United States and Puerto Rico and 168 stores in Mexico as of May 9, 2009, AutoZone has the #1 market share in auto parts and accessories retailing in the United States. The company's retail operations accounted for 83% of fiscal 2008 revenues of $6.5 billion. AutoZone has the highest EBITDA margin among its peers, at approximately 20%, partly due to selling more private label products which carry slightly higher gross margins. The company is benefitting from the auto maintenance aspect of its business combined with the current economic climate which has motivated consumers to fix their vehicles. Also, while the number of miles driven has continued to decline, the pace of the decline has slowed to -0.8% in the first five months of 2009 versus -3.6% in 2008. As a result, revenues and EBITDA have grown and free cash flow generation has increased.

Fitch anticipates comparable store sales to be in the low single digit range in the intermediate term supported by the number of older vehicles (seven years or older) on the road and despite possible increased gasoline prices and a continued weak economy. In addition, Fitch expects the company's operating initiatives implemented since 2007, such as improving the in-stock position of late model parts and increasing its private label offerings and direct imports, will continue to help AutoZone achieve profitable growth.

AutoZone's credit metrics have remained relatively steady as the company has balanced its operating performance with higher debt balances to fund share repurchases. In the last twelve months (LTM) ending May 9, 2009, the company's adjusted debt/EBITDAR and EBITDAR/interest and rent ratios are 2.5 times (x) and 5.1x, respectively. Fitch anticipates that AutoZone will manage its share repurchase activity in the context of managing around the company's 2.5x (2.8x based on Fitch's calculation of (total debt + 8x rent)/operating EBITDAR) leverage target.

Of note is that as the company repurchases additional shares and the level of ownership in AutoZone by ESL increases from its current level of 37.5%, ESL's voting rights will be limited by established thresholds of 40% through December 2009 and 37.5% thereafter. However, if ESL acquires AutoZone stock to increase its economic ownership to more than 50%, the agreement can be renegotiated.

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