S&P Lwrs AutoZone Lng-Term Rtgs, Off Watch; Outlk Neg
18 February 2000
S&P Lwrs AutoZone Lng-Term Rtgs, Off Watch; Outlk Neg
NEW YORK--Standard & Poor's--Feb. 17, 2000-- Standard & Poor's today lowered its long-term corporate credit, senior unsecured debt, and bank loan ratings on AutoZone Inc. to triple-'B'-plus from single-'A'-minus.Standard & Poor's also lowered its preliminary rating on the company's Rule 415 shelf registration of senior unsecured debt to triple-'B'-plus from single-'A'-minus and its preliminary subordinated debt rating on this shelf to triple-'B' from triple-'B'-plus. These ratings are removed from CreditWatch, where they had been placed with negative implications on Dec. 10, 1999.
At the same time, Standard & Poor's affirmed its 'A-2' short-term corporate credit and commercial paper ratings on AutoZone. These ratings were not on CreditWatch.
The outlook is negative.
The downgrade reflects the company's more aggressive financial policy driven by greater-than-expected share repurchase activity and lower return on permanent capital.
Memphis, Tenn.-based AutoZone is the largest retailer of automotive parts in the U.S., with more than 2,800 stores. The company has become increasingly more aggressive over the past two years with regard to its share repurchases. During this time frame, the company has repurchased about $500 million of its common stock, most of which was funded with debt, leaving about $300 million of additional availability. Operating margins and return on permanent capital have declined due to the lower store-level profitability of its recent acquisitions. Although these acquisitions enabled AutoZone to gain a sizable presence in new markets, the unit economics of many of the stores are not as strong as AutoZone's organically developed store base. The company has already made significant improvement in these operations, but performance still lags the company's historical results. Nonetheless, AutoZone's 16% lease-adjusted operating margins are solid for the rating, and its 20% return on permanent capital, though down from 23% in 1998, is still the highest in the industry.
OUTLOOK: NEGATIVE
Standard & Poor's believes the company may continue to be aggressive with share repurchases, especially given the discount that the stock has been trading at in relation to the overall market. The resulting increase in leverage would leave little downside protection at the current rating level and could result in a downgrade, especially if the company should experience weakness in operating performance. -- CreditWire