CSK Auto plunges on credit agreement news, analyst downgrade

Will Atkinson | Dec 12, 2007 5:14pm EST | Comment

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CSK Auto Corp. (NYSE: CAO) shares are plummeting after the auto parts retailer disclosed in a regulatory filing that it is seeking an amendment to its credit agreement in order to minimize the possibility it won’t be able to comply with its current credit agreement.

The Phoenix, Ariz.-based company is attempting to lower its fiscal 2008 fixed charge coverage ratio — a proportion that indicates a firm’s ability to meet its financing expenses such as leases and interest — to a range of 1.15 to 1.25, from a current 1.40.

CSK Auto also wants to change its fiscal 2008 leverage ratio — a measurement used to estimate a company’s ability to meet financial obligations — to a range of 4.50 to 6, from its current range of 3.25 to 4.

The company previously disclosed that its second-quarter net sales decreased compared to a year earlier. CSK said it anticipates that its auto segment will not be in compliance with its current credit agreement at the end of the fourth quarter. Although the firm said it expects the auto segment to be able to obtain an amendment to its credit agreement, CSK said “no assurance can be given that the company will be successful in doing so or at what price such amendment can be obtained.”

CSK expects to file its quarterly report on or before Dec. 19.

Cid Wilson, a senior analyst for research firm Kevin Dann & Partners LLC, lowered his rating on the company to “hold” from “buy” with a 12-month price target of $10.

“It appears hitting targets on debt covenants continues to challenge the company,” Wilson said. “The concern here is that the new covenants brings to question what the cash flow situation is.”

High gas prices in California and the subprime mortgage crisis are adversely affecting CSK, he said. Additionally, competitor AutoZone, Inc. (NYSE: AZO) has been refurbishing its stores and Wilson said consumers may be gravitating to AutoZone’s offerings, which consumers believe to be of lower quality. He also said Advanced Auto Parts, Inc. (NYSE: AAP) has been opening stores that directly compete with CSK’s locations.

“Consumers are focusing on what they have to do to keep their car going,” he said. “Consumers are not as picky about quality right now.”

Although it’s a “purely speculative” thought, Wilson said CSK CEO Larry Moodry, who assumed his position on Aug. 15, might trying to start with a “clean slate.”

“Now is the time to put a write-down if you’re a CEO,” he said. “Pep Boys already did with their CEO.”

In today’s trading, CAO shares were down 33.41%, or $3.07, at $6.12. Over the last 52 weeks, shares have ranged from $5.99 to $19.14.