AUTOZONE, INC. Clip the coupon HARDLINES RETAIL. (AZO $448.55* Outperform)

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1 HARDLINES RETAIL Sector Weight Market Overweight AUTOZONE, INC. (AZO $448.55* Outperform) Clip the coupon Initiate with Outperform AZO s business model has rapidly become the envy of the retail industry. It is growing at a comfortable and sustainable pace. Margins, while high, still have an upward bias. And when it comes to the balance sheet, AZO is the gold standard. Our year-end 2014 target of $500 demands a P/E of only 12.4x CY 15 EPS. More like a bond than a stock -- Since excess cash flow is consistently returned to shareholders via repurchase, AZO s yield is akin to the coupon on a bond. Having thrown off $1B in Free Cash Flow last year, AZO shares currently yield 6.7%. An investment grade equity yielding more than junk -- AZO is an investment grade company, but its equity yields a 150bps premium to similar credits. Surprisingly, AZO s yield is also higher than junk yields. Growth and participation in the business (via equity ownership) are incremental and effectively free. 15% growth algorithm Despite a few limiting factors, we still see a very high likelihood that AZO will achieve consistent 15% EPS growth. Management is excellent and may be able to solve for a faster growth algorithm if it thrives in the Commercial segment. Best-in-class financial metrics -- At $274, sales per square foot are best in class. That edge is even more pronounced if we include distribution center space in the calculation. Gross and EBIT Margin also lead the industry, though we think both have room to move higher. EPS (US$) 1Q 2Q 3Q 4Q FY FC Cons P/E 2012 $4.68 $4.15 $6.28 $8.46 $ x 2013 $5.41 $4.78 $7.27 $10.42 $ x Prior 2014E $31.98 $ x Prior 2015E $36.30 $ x Prior FC Cons = First Call Consensus, P/E based on WR estimates *Priced as of 11/8/13 market close Trading and Fundamental Data Target Price YE 14 $500 Upside/Downside 11.5% 52-Week Range $342-$452 Market Cap. (MM) $15,090 Dividend/Yield $0.00/N/A Avg. Daily Vol. (000) 270 Debt/EBITDAR 2.5x Short-Interest Ratio 9.8 Free Cash Flow Yield 6.6% Fiscal Year End Aug-2014 Price Performance YTD LTM AZO 27% 17% S&P % 27% Estimates ($B) FY13 FY14 FY15 Sales $9.1 $9.5 $10.1 EBITDA $2.0 $2.1 $2.3 EV/Sales 2.2x 2.1x 2.0x EV/EBITDA 10.2x 9.6x 9.0x $442 $422 $402 $382 $362 $342 Source: FactSet/Wolfe Research Aram Rubinson (646) ARubinson@wolferesearch.com Chris Bottiglieri CFA, CPA (646) CBottiglieri@wolferesearch.com Carol A. Krakowski (646) CKrakowski@wolferesearch.com DO NOT FORWARD DO NOT DISTRIBUTE DOCUMENT CAN ONLY BE PRINTED TWICE This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications, Important Disclosures and Other Disclosures. WolfeResearch.com Page 1 of 12

2 Investment Conclusion We are initiating coverage of AZO shares with an Outperform rating and a year-end 2014 price target of $500. AZO s model is extremely cash generative. That, together with excellent management and a relentless focus on share buybacks are AZO s most attractive investment merits. The story isn t perfect, but in arriving at our investment conclusion we are careful to toe the line between thinking and thinking too hard. AZO s history of capital returns is exemplary. At the same time, we find AZO s valuation to be compelling versus both equity and fixed income alternatives. EPS growth of 15% is highly visible and we believe management will solve for an even faster growth algorithm over time. Our target of $500 demands a P/E of only 12.4x our CY 15 EPS estimate and would still offer investors a trailing Free Cash Flow yield of 6.5%. Exhibit 1 Wolfe vs. Cons. EV/EBITDA, P/E a Exhibit 2 Historical valuation (on Cons.) AZO EV/EBITDA P/E FY Wolfe Cons. Wolfe Cons. 2012A 11.1x 11.1x 19.1x 19.1x 2013A 10.2x 10.3x 16.1x 16.1x 2014E 9.6x 9.8x 14.0x 14.4x 2015E 9.0x 9.3x 12.4x 12.8x Note: Priced as of 11/8/2013 Source: Consensus from Factset Research systems, based on First Call Consensus; Wolfe Research estimates; Company reports. Company description AutoZone is a Tennessee based aftermarket retailer of automotive parts. The company serves both the Do-It- Yourself ( DIY ) and Do-It-For-Me ( DIFM ) segments of the market. It is the market leader in DIY, which represent 84% of sales. The remaining 16% are sales to Commercial customers, or DIFM. AutoZone has over 5,200 stores of which 374 are in Latin America. AZO Works in both Good Times and Bad Metric NTM/EV EBITDA NTM P/E AZO SP500 AZO SP500 Current 9.2x 8.6x 14.1x 14.9x 5 -YR average 8.2x 7.6x 13.0x 13.0x 10 -YR average 7.8x 8.5x 12.5x 13.9x 5-YR Low 6.3x 6.5x 9.9x 10.5x 5-YR High 9.5x 8.8x 15.4x 14.9x The auto parts business is mildly counter-cyclical. For that reason, AZO was a stand-out performer from During the downturn, AZO shares performed strongly. Not only did they act as a safe haven (like a bond) in an otherwise turbulent economy, but AZO s fundamentals actually benefited as well from a frugal consumer. Comps grew by 4.5%, 5.4% and 6.3% in FY09, FY10 and FY11, respectively. Those gains were spurred by an aging fleet of cars thanks to a steep decline in new car sales and a tendency for drivers to hold on to vehicles longer than normal. Not surprisingly, older cars require more maintenance and repair. That was a boon for AZO. WolfeResearch.com Page 2 of 12

3 Indexed price performance AutoZone, Inc. Exhibit 3 AZO shares were defensive in the downturn a Exhibit 4 AZO comps proved to be counter-cyclical Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 AZO SP500 8% 6% 4% 2% 0% -2% -4% SSS AZO Average SSS Source: Wolfe Research, Company data, Factset Source: Wolfe Research, Company data & reports 15% Growth Algorithm The defensive nature of AZO shares served it well from But as the market has again gravitated towards risk, AZO shares have performed less strongly. Investors have also had to adjust to the fact that comps have been flat over the past four quarters and are unlikely to return to the mid-single digit range anytime soon. That means AZO may feel more like a 4 cylinder vehicle than a 6 cylinder one, but the investment case remains compelling nonetheless. That is because AZO s business model works well even with modest comps. Despite a number of limiting factors, we still see a very high likelihood that AZO will achieve consistent 15% EPS growth. Our model relies on comps of 2-3% in each year, which entails a continued moderation in the 2- year comp trend. We model gross margin to expand by bps per annum driven by more direct buying overseas. That should more than offset a drag from an increasing mix of Commercial and ecommerce sales. In each of the next two years, the biggest driver of EPS and overall share price performance will continue to be buy-backs, which we have modeled at 7-8% per annum in CY2014 and CY2015. Management is excellent and may ultimately be able to solve for a faster growth algorithm if it ever fully exploits the opportunity is has in the Commercial segment. The shares are compelling in either case. AZO s Business Model is the Gold Standard AutoZone s business model has rapidly become the envy of the retail industry. When growth was abundant many years ago, retailers fashioned themselves after Staples, Home Depot and Petsmart which were all growing at break-neck speeds. But as maturity set in across the retail landscape, retailers have increasingly begun to look to AZO as a paragon for success. The company is growing at a comfortable and sustainable pace. Margins, while high, still have a modest upward bias. And when it comes to the balance sheet, AZO is the gold standard. Its working capital cycle is negative and its capital structure is optimal. That enables the company to consistently reduce its share count by nearly 8% per annum. AZO s strategy of buying in the company one share at a time has created a virtuous cycle that is difficult to oppose. There are risks to consider, but a 25% ROIC coupled with the prospect for modest EBIT growth and aggressive share repurchases are at the heart of AZO s model. WolfeResearch.com Page 3 of 12

4 More like a Bond than a Stock In many ways, AZO is more like a bond than a stock. Like a bond, AZO produces a predictable cash flow stream. AZO produced $1 billion in FY13 Free Cash Flow and we expect that to grow further in FY14. The key to AZO s cash dynamic is its high margins and a unique working capital element. AZO is one of very few retailers in the U.S that operates with a negative working capital cycle. The combination of DSI, DSP and DSO is negative 32 days. That rivals Amazon s, which stands at negative 36 days. The irony of course, is that Amazon creates a working capital cycle by turning its inventory over 8x per annum. AZO does the same while turning its inventory at only 1.4x per year. Exhibit 5 AZO manages a -32 day Cash Conversion Cycle despite only turning its inventory ~1.5x a year Fiscal Year AutoZone Amazon Costco Inditex DSO DSI DSP Cycle (32) (37) 4 (75) Inventory turns 1.4x 8.4x 12.3x 4.5x Note: DSI and DSP calculated off of Wolfe estimate of Merchandise COGS Source: Wolfe Research, Company data Bill me later The secret sauce behind AZO s business model lies in its extended AP days. To be sure, AZO has pioneered a system to extend supplier terms to 255 days. On the surface, that is hard to believe. After all, what vendor is willing to offer AZO nearly 9 months to pay for merchandise? Most retailers need to pay suppliers after only 45 days. However, AZO suppliers are smaller and not as well capitalized as suppliers like P&G and Nestle. AZO therefore wields more leverage in that relationship. For preferred suppliers, AZO agrees to feature their products, which can help with sales. In turn, AZO asks its bank group to pay its vendors with an understanding that AZO will repay the banks at a later date. The banks agree to the deal since they discount the payments made to suppliers in order to compensate them for fronting the capital. Since the Receivable is technically owed to the bank group by AZO (not by the suppliers), the banks agree to discount the amount by only a nominal rate. The arrangement is win-win-win. The supplier receives over 90% of their money after a short wait. The bank makes a reasonable annual spread since the A/R from AZO is reliable. AZO meanwhile frees up cash since it doesn t make the banks whole for nearly 9 months. While AZO pioneered the concept, similar arrangements have been adopted by ORLY and AAP now that they are both considered investment grade. Valuation attractive versus both bonds and stock When it comes to valuation, the stability of cash flow is a critical factor. Not only is AZO s operating model extremely cash generative, but since excess cash flow is consistently returned to the owner in the form of share repurchase, AZO s yield is akin to the coupon on a bond. Even with leverage ratios nearing their upper band at 2.5x lease-adjusted debt to EBITDAR, we expect the company to shrink its share count at an annual rate of ~6%. That return compares very favorably to fixed income alternatives. AZO after all, is an investment grade company with a BBB credit rating from S&P and a Baa2 rating from Moody s. Similar credits trade with a yield of 6.0% in the fixed income markets. Despite AZO s solid track record, that company still yields over WolfeResearch.com Page 4 of 12

5 70bps more than comparable fixed income instruments with a trailing free cash flow yield of 6.6%. Surprisingly, AZO s yield is also higher than Bloomberg s High Yield Corporate Bond Index. Exhibit 6 AZO s trailing Free Cash Flow Yield greater than Corporate High Yield bond Index. 7% 6% 5% 4% 3% 2% 1% 0% AAA BAA High Yield AZO FCF Yield Note: AAA and BAA Index represent Moody Corporate Bond Index Yields. High Yield = Bloomberg/FINRA High Yield Corporate Bond Index. AZO FCF Yield = LTM FCF / Market cap. Priced as of 11/8/13 Source: Wolfe Research, Company data, Factset But equity investors in AZO get a lot more than the consistent 6% annual return (in form of buyback) noted above. Growth and participation in the business (via equity ownership) are incremental and effectively free. Keep in mind, AZO is growing its store count at a pace of 4% per annum and by our estimates AZO is likely to grow its EBIT at a rate of 7% per annum. That growth together with an ownership stake in the business should add even more value to equity holders. AZO is cheap relative to both fixed income and equity alternatives despite stability, growth, excellent capital allocation and highly respected management. Its P/E on our FY 14 earnings stands at only 14.0x. That compares with a median of 17.6x for our coverage universe. Further, AAP and ORLY trade at 12.8x and 18.7x, respectively, on our 2014E EPS. With the prospect for economic improvements on the horizon, investors have been focused on sectors that have more operating leverage or growth. Not surprisingly, they are currently craving companies that are tied to cyclical factors like new car growth rather than counter cyclical stories like auto repair. Nonetheless, that shift has created an opportunity to own AZO shares. DIY Focus Makes For Modest Growth As it stands today, AZO s prospects for growth are good, not great. With 5,210 stores (4,836 in the US) as of the end of FY 13, AZO is already fairly penetrated within the US. Its footprint is larger than ORLY and AAP, which operate 4,100 and 4,000 stores, respectively. AZO s footprint can expand from here at a modest rate. Keep in mind, NAPA operates over 6,000 stores in North America, so too will AAP (6,784 stores after the GPI acquisition). New store growth at AZO is expected to be consistent at 4%. Comp sales growth is also likely to be in the low single-digit range. That is because the industry in which AZO operates is not growing. AZO generates the vast majority of its sales from the DIY segment of the market, which is likely to face headwinds over time. For one thing, vehicles are becoming increasingly more complex. That makes it harder for DIYers to fix up their own cars without the help of a professional. Penetrating the Commercial segment of the market is therefore important for AZO long-term. WolfeResearch.com Page 5 of 12

6 Exhibit 7 AZO generally experiences low growth just like the industry in which it operates Industry AZO Year Total Total Sales YoY SSS , % (2.0%) , % 0.4% , % 0.1% , % 0.4% , % 4.5% , % 5.4% , % 6.3% , % 3.9% , % (0.0%) 2014E 140, % 2.9% 2015E 145, % 2.0% 2016E 150, % 2.0% Average CAGR CAGR , % -0.3% , % 4.0% , % 2.3% Note: Industry data represents AAIA estimates and 2013 onward are forward looking estimates. Source: Wolfe Research, Company data, AAIA A call option on Commercial AZO has been a latecomer to the Commercial (or DIFM) segment. The DIFM market, which entails selling parts to garage mechanics and service stations, is more attractive and faster growing. AZO s heritage has been in the DIY business, but it has recently begun to make a push towards bridging the Commercial gap. As it stands today, AZO generates only 16% of its sales from the Commercial market. That compares with 38% at both Advance (before its acquisition of GPI/CarQuest), 42% at O Reilly and nearly 75% at GPC s Napa unit. As recently as 2006, Advance Auto did only 23% of sales with Commercial customers. Its move to 40% has been meteoric, but it came with a fair share of challenges. Advance over-spent ahead of the sales and it is again loading up on investment in that segment with its $2.0 billion acquisition of GPI/CarQuest. AZO has the opposite problem. It is diligently managing the ROI of this key endeavor and unintentionally under-investing in the segment. It is therefore not meeting with the same success when it comes to generating sales. Exhibit 8 AZO s commercial productivity is 60% less than peers Units in millions 12/31/2012 8/31/ /31/ FY AAP AZO ORLY DIFM sales/store ($mm) $0.63 $0.29 $0.66 DIFM sales/program ($mm) $0.76 $0.45 $0.73 DIFM weekly sales/program ($'s) $14.7 $8.5 $14.0 % of sales DIFM 38.0% 15.9% 41.0% Retail/Distribution Sq ft Hub Stores / Total stores 8.9% 3.0% 6.0% Source: Wolfe Research, Company data Sales per Commercial program at AutoZone are only $8,500 per week versus ~$15,000 at Advance and $14,000 at O Reilly. What s more, sales per program have stagnated in recent quarters. AZO indicates that WolfeResearch.com Page 6 of 12

7 the immaturity of the program is to blame since 30% of it programs are still three years or under. In our view, immaturity would help explain low volumes, but it would not explain a low growth rate as well. Sales per program should technically be growing faster in immature stores as they ramp. Nonetheless, we think AZO has other ways to improve its performance in this key area. We think AZO will gradually take share from smaller operators and that Commercial sales growth will add 1% to its annual comp rate for years to come. That should bring its total Commercial penetration up to 20%. In order for AZO to reach 25% penetration (which would add 2-3% to comps per annum) or more it will need to invest more aggressively in both sales and distribution. We have assumed AZO grows Commercial penetration slowly so as to avoid large-scale investment. For now, AZO is sticking to a plan of building out Hub stores to satisfy delivery demands. ORLY and NAPA have historically operated a large-scale distribution network to enable next-day delivery. AAP, with its acquisition of GPI/CarQuest will also have a massive distribution footprint. Conversely, AZO s current footprint utilizes only 4.5 million square feet of distribution space versus 9.1 million at ORLY and 5.5 million at AAP (pre-acquisition). Exhibit 9 Sales per Commercial program at AZO need a jump-start 20% 15% 10% 5% 0% -5% F2005 F2006 F2007 F2008 F2009 F2010 F2011 F2012 F % 14% 12% 10% 8% 6% 4% 2% 0% -2% -10% Annual program growth % in sales per program -4% Source: Wolfe Research, Company data AZO dominates its peers on financial metrics While AZO has room to improve in Commercial, there is no denying that it leads the way in overall financial metrics. At $274, sales per square foot are best in class. That edge is even more pronounced if we include distribution center space in the calculation. On that basis, we calculate sales per square footprint as $245 far higher than the result at AAP ($191) and ORLY ($169). Gross Margin also leads the way at 51.8% on a reported basis. However, we are increasingly viewing AZO s GM as an opportunity. For starters, both AAP and ORLY are within striking distance of AZO s Gross Margin. After adjusting for distribution costs which are reflected in CGS -- it is possible that ORLY s GMs are even higher than AZO. That would be in spite of a Commercial mix that is twice as large and a private label program WolfeResearch.com Page 7 of 12

8 that is half as big. Each of those elements should advantage AZO s GM by 125bps. Long-term, we believe AZO should enjoy an even larger GM advantage than it currently does. Fixed costs like Rent and D&A (or DAR) are lower at AZO. That is partly due to the fact that it owns a greater proportion of its stores, but it is also indicative of great cost management. Variable costs are also the sharpest. Advertising for example, is under 1%. EBIT margins are strong and lead the industry at 19.4%, but considering a sales productivity advantage and a margin mix advantage, we think the advantage can grow over time. The only areas in which AZO is not leading the sector are in Commercial productivity, which we address above. From Exhibit 10 it also appears that AZO is not as cash generative, but that only reflects a snapshot of a single year. In aggregate, AZO s advantage is best highlighted by its industry leading cash conversion cycle. Exhibit 10 How AZO Stacks up Against its Peers Units in millions 12/31/2012 8/31/ /31/ FY AAP AZO ORLY Per square foot Sales per square foot $227.8 $274.0 $224.2 Sales per square footprint $191.1 $244.6 $168.8 Rent (per leased foot) $14.5 $14.6 $12.8 Profitability (% of sales) Gross margin 49.9% 51.8% 50.1% Merch margin (est.) 52.4% 53.3% 55.1% Reported SG&A 39.3% 32.4% 34.3% Adjusted SG&A 41.8% 33.9% 39.3% Variable SG&A (est.) 32.3% 27.9% 31.3% Advertising 1.4% 0.9% 1.2% EBIT margin 10.6% 19.4% 15.8% Balance Sheet DSI DSO DSP Cash conversion cycle 34 (32) 46 Cash Flow metrics CFFO % of EBITDA 80.9% 70.7% 108.4% CapEx % of sales (4.4%) (4.5%) (4.9%) FCF % of EBITDA 48.9% 50.0% 82.4% Per employee Employees per store Sales per employee - store level $126,983 $146,984 $142,327 Sales per employee - total $114,907 $129,752 $120,319 Source: Wolfe Research, Company data Cash Flow Profile Operating Cash Flow at AZO has been in part driven by its reduction of its cash conversion cycle. AZO has successfully reduced its cash conversion cycle from 23 days in Fiscal 2006 to negative 32 days at the end of Fiscal Year However, with an AP ratio already at 115% of inventory, further gains are likely to be smaller. WolfeResearch.com Page 8 of 12

9 AZO has also benefited from prudent capital expenditure spending, which we forecast to continue to grow at 10% per annum. The majority of which we expect to be spent as part of its 4% annual square footage growth and the continued expansion of its Hub network. As a result we expect Free Cash Flow generation to continue to exceed $1 billion for the foreseeable future. Unlike its peers, AZO has thus far resisted an acquisition spree having only purchased AutoAnything earlier this year. With peers taking some of the larger names off of the table (AAP GPI/BWP, ORLY CSK/VIP, GPC Quaker/Exego) we see limited targets that AZO itself could target. Although on some level, Uni-Select and Fisher AWP could make some sense. However, with only $140 million in cash, a BBB credit rating, and 2.5x Debt/EBITDAR (Exhibit 11) we think that is unlikely in the near-term. More likely the company will continue to be a strong steward of capital and return the majority of levered Free Cash Flow to shareholders. Although we don t expect the company to keep up its recent pace of reducing diluted share count by 10.5% per annum (over the past 5 years), we do think a ~6.0% reduction is more likely for the next several years. Exhibit 11 We expect AZO to continue to redistribute its Free Cash Flow to investors Cash Flows 2010A 2011A 2012A 2013A 2014E 2015E Operating Cash Flow $1,196.3 $1,291.5 $1,224.0 $1,414.9 $1,449.1 $1,545.9 Capital Expenditures (315.4) (321.6) (378.1) (414.5) (455.9) (501.5) Free Cash Flow $880.9 $969.9 $845.9 $1,000.4 $993.2 $1,044.5 Debt (repayment)/issuance Levered Free Cash Flow $1,062.4 $1,413.1 $1,262.4 $1,419.2 $1,182.2 $1,317.1 Cash (Acqusitions)/Disposals $0.0 $0.0 $0.0 (116.1) $0.0 $0.0 Dividends paid Share repurchases (1,123.7) (1,466.3) (1,363.1) (1,387.0) (1,042.9) (1,294.4) Uses of Levered Free Cash Flow (1,123.7) (1,466.3) (1,363.1) (1,503.1) (1,042.9) (1,294.4) Levered FCF Surplus/(Deficit) ($61.2) ($53.2) ($100.7) ($83.9) $139.3 $22.7 Cash 2010A 2011A 2012A 2013A 2014E 2015E Beginning cash $92.7 $98.3 $97.6 $103.1 $142.2 $281.5 Levered FCF Surplus/(Deficit) (61.2) (53.2) (100.7) (83.9) Other Investing/Financing Cash Flows Ending cash $98.3 $97.6 $103.1 $142.2 $281.5 $304.2 Leverage 2010A 2011A 2012A 2013A 2014E 2015E Book debt (Inc. Cap leases) $2,908.5 $3,351.7 $3,768.2 $4,187.0 $4,376.0 $4,648.6 Capitalized leases 1, , , , , ,752.2 Adjusted debt $4,082.3 $4,634.8 $5,144.7 $5,665.0 $5,985.3 $6,400.8 EBITDAR 1, , , , , ,602.8 Debt/EBITDAR 2.4x 2.4x 2.4x 2.5x 2.5x 2.5x Source: Wolfe Research, Company data WolfeResearch.com Page 9 of 12

10 Risks to our Thesis DIY Secular Headwinds. DIY industry faces potential secular headwinds from technological advancements in New Cars. Many parts are lasting longer and are more difficult for the average person or hobbyist to replace. As the leader in DIY, AZO has the most exposure to this potential headwind. Aging of the vehicle fleet. With the average vehicle age now over 11 years old, it is possible that a continued elevated new vehicle SAAR could lead to an increased vehicle scrap rate. If this were to happen it could lead to a reduced supply of older vehicles in the market and less need for DIY repairs. However, this process is likely to be glacial in nature rather than causing industry disruption. Slower than expected growth in DIFM. AZO has a major opportunity in front of it to grow its commercial business, which now represents less than 15% of sales. However success in commercial is far from guaranteed and AZO may have to overcome several hurdles including distribution network and sales relationships in order to succeed in this market. Industry consolidation. While the forthcoming merger between AAP and GPI should ultimately present an opportunity for AZO to pick up slippage from the deal, longer-term it may have to deal with an improved competitor once combined. Square footage limits. AZO now has 4,836 domestic stores and 374 in Latin America. It has successfully grown its footprint by over 4% per annum over the last five years. AZO may find it difficult to maintain this pace of growth as its competitors grow and consolidate. WolfeResearch.com Page 10 of 12

11 DISCLOSURE SECTION Analyst Certification: The analyst of Wolfe Research, LLC primarily responsible for this research report whose name appears first on the front page of this research report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the research analysts personal views about the subject securities or issuers and (ii) no part of the research analysts compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this report. Important Disclosures: Wolfe Research, LLC Fundamental Valuation Methodology: Company: Fundamental Valuation Methodology: AZO forward EBITDA Wolfe Research, LLC Fundamental Target Price Risks: Company: Fundamental Target Price Risks: AZO DIY headwinds, aging vehicle fleet, slower growth in DIFM, industry consolidation, sq. footage limits Wolfe Research, LLC Research Disclosures: Company: Research Disclosures: AZO None Other Disclosures: Wolfe Research, LLC Fundamental Stock Ratings Key: Outperform (OP): Peer Perform (PP): Underperform (UP): The security is projected to outperform analyst's industry coverage universe over the next 12 months. The security is projected to perform approximately in line with analyst's industry coverage universe over the next 12 months. The security is projected to underperform analyst's industry coverage universe over the next 12 months. Wolfe Research, LLC uses a relative rating system using terms such as Outperform, Peer Perform and Underperform (see definitions above). Please carefully read the definitions of all ratings used in Wolfe Research, LLC research. In addition, since Wolfe Research, LLC research contains more complete information concerning the analyst s views, please carefully read Wolfe Research, LLC research in its entirety and not infer the contents from the ratings alone. In all cases, ratings (or research) should not be used or relied upon as investment advice and any investment decisions should be based upon individual circumstances and other considerations. Wolfe Research, LLC Sector Weighting System: Market Overweight (MO): Market Weight (MW): Market Underweight (MU): Expect the industry to outperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months. Expect the industry to perform approximately in line with the primary market index for the region (S&P 500 in the U.S.) over the next 12 months. Expect the industry to underperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months. Wolfe Research, LLC Distribution of Fundamental Stock Ratings (As of September 30, 2013): Outperform: 47% 9% Investment Banking Clients Peer Perform: 40% 0% Investment Banking Clients Underperform: 13% 0% Investment Banking Clients WolfeResearch.com Page 11 of 12

12 Wolfe Research, LLC does not assign ratings of Buy, Hold or Sell to the stocks it covers. Outperform, Peer Perform and Underperform are not the respective equivalents of Buy, Hold and Sell but represent relative weightings as defined above. To satisfy regulatory requirements, Outperform has been designated to correspond with Buy, Peer Perform has been designated to correspond with Hold and Underperform has been designated to correspond with Sell. Wolfe Research Securities and Wolfe Research, LLC have adopted the use of Wolfe Research as brand names. Wolfe Research Securities, a member of FINRA ( is the broker-dealer affiliate of Wolfe Research, LLC and is responsible for the contents of this material. Any analysts publishing these reports are dually employed by Wolfe Research, LLC and Wolfe Research Securities. The content of this report is to be used solely for informational purposes and should not be regarded as an offer, or a solicitation of an offer, to buy or sell a security, financial instrument or service discussed herein. Opinions in this communication constitute the current judgment of the author as of the date and time of this report and are subject to change without notice. Information herein is believed to be reliable but Wolfe Research and its affiliates, including but not limited to Wolfe Research Securities, makes no representation that it is complete or accurate. The information provided in this communication is not designed to replace a recipient's own decision-making processes for assessing a proposed transaction or investment involving a financial instrument discussed herein. Recipients are encouraged to seek financial advice from their financial advisor regarding the appropriateness of investing in a security or financial instrument referred to in this report and should understand that statements regarding the future performance of the financial instruments or the securities referenced herein may not be realized. Past performance is not indicative of future results. This report is not intended for distribution to, or use by, any person or entity in any location where such distribution or use would be contrary to applicable law, or which would subject Wolfe Research, LLC or any affiliate to any registration requirement within such location. For additional important disclosures, please see The views expressed in Wolfe Research, LLC research reports with regards to sectors and/or specific companies may from time to time be inconsistent with the views implied by inclusion of those sectors and companies in other Wolfe Research, LLC analysts research reports and modeling screens. Wolfe Research communicates with clients across a variety of mediums of the clients choosing including s, voice blasts and electronic publication to our proprietary website. Copyright Wolfe Research, LLC All rights reserved. All material presented in this document, unless specifically indicated otherwise, is under copyright to Wolfe Research, LLC. None of the material, nor its content, nor any copy of it, may be altered in any way, or transmitted to or distributed to any other party, without the prior express written permission of Wolfe Research, LLC. This report is limited for the sole use of clients of Wolfe Research. Authorized users have received an encryption decoder which legislates and monitors the access to Wolfe Research, LLC content. Any distribution of the content produced by Wolfe Research, LLC will violate the understanding of the terms of our relationship. WolfeResearch.com Page 12 of 12