S&P Rts AutoZone Re: Acquis
14 July 1998
S&P Rts AutoZone Re: Acquis;Chief Auto's Nts Upgraded Chief Auto Parts Inc.
NEW YORK--Standard & Poor's CreditWire 7/14/98-- Standard & Poor's today assigned its ratings to AutoZone Inc. (see list below). The outlook is stable.
At the same time, Standard & Poor's raised its rating on Chief Auto Parts Inc.'s $130 million senior unsecured notes to single-'A'-minus from single-'B' and removed the rating from CreditWatch, where it was placed May 12, 1998. The upgrade is due to Chief Auto's acquisition by AutoZone and AutoZone's assumption of Chief's $130 million senior unsecured notes. Standard & Poor's also withdrew its corporate credit and bank loan ratings on Chief Auto, as it is likely that that the company's bank facility will be refinanced (see list below). AutoZone completed its acquisition of Chief Auto June 29, 1998 for $75 million in cash and the assumption of $205 million of Chief Auto debt. The ratings are based on AutoZone's leading market position, a strong financial profile, and solid track record in the large, relatively stable auto parts retail aftermarket. These strengths are mitigated by intense competition and the challenges of growing in the maturing "do-it-yourself" (DIY) customer segment. AutoZone's 2,001 auto parts stores primarily serve the DIY customer who repairs his or her own car out of economic necessity.
AutoZone's acquisition of Chief Auto Parts Inc. adds more than 550 stores and gives the company a presence in California, where AutoZone has few stores. Growth in the DIY segment is expected to slow due to the increasing complexity of new cars and better quality of parts. Still, AutoZone is the largest and most efficient retailer in the market, and has typically been able to displace less competitive operators in new markets over time.
This trend is likely to continue through AutoZone's store expansion program or through additional opportunistic acquisitions. The company enjoys economies of scale in purchasing, distribution, advertising, and information systems, which are critical to managing the large and complex inventory. AutoZone's strategy of providing excellent customer service through knowledgeable salespeople and offering good value through everyday low pricing on parts, has been successful for many years. Same store sales growth has ranged from 6% to 15% over the past eight years, while operating margins have averaged 15%. The company's addition of incremental sales to professional installers during the past two years has partially offset the flattening trend of DIY sales. While the commercial business negatively impacted operating margins during its start-up in the past two years, this is expected to level out as the business matures.
AutoZone's 27% return on permanent capital is the highest in the industry. Although this could decline somewhat given increased competition from the expansion of other chains and the potential for continued weak DIY sales. The addition of commercial sales and stringent inventory controls should help soften any downturn. AutoZone's debt leverage ratio of approximately 40% (including debt associated with the Chief acquisition) reflects a large operating lease component that adds more than $300 million in debt equivalents. Standard & Poor's expects that this ratio will remain below 50% as continued strong profitability offsets additional debt needed for further investment in the business. Funds from operations are expected to cover total lease-adjusted debt a strong 40%-45%. The company's mixed securities shelf and revolving credit facility provide the company with solid financial flexibility. AutoZone's $500 million revolving credit facility includes a $350 million five-year facility maturing in December 2001 and a $150 million one-year facility maturing in February 1999. The company's revolving credit facility is rated the same as the corporate credit rating since the facility is unsecured. The bankers will be on a par with the other senior creditors in the event of a default.
OUTLOOK: STABLE
AutoZone's financial strength and strong execution skills should enable it to grow market share within the maturing DIY industry, with incremental profit from the commercial segment expected to support profitability measures. Additional acquisitions are expected to be carried out within the context of a conservative financial policy, Standard & Poor's said.---CreditWire