AutoZone’s Stock

AutoZone’s shareholders had enjoyed strong price appreciation since 1997, with an average annual
return of 11.5%. Over the previous five years, AutoZone’s stock price has increased dramatically. On
February 1. 2012 the stock price was $348 compared to the $125 on February 1. 2007. The strong
price appreciation resulted from several occurrences; some of them are U.S. economy recession and
share repurchase program. Auto-part business was somewhat counter-cyclical. Company’s growth
and stock price were directly related to the economy and number of miles a vehicle had been driven.
As the age of car increased, more repairs were required. Because of these reasons, AutoZone’s
stock price was significantly improving from 2008. AutoZone’s financial statements reflect the stock
price performance. Net sales have increased for 30.85% from 2007 to 2011. Cost of sales also
increased during that period, but at lower rate of 27.30%, what helped in additional improvement of
gross profit.

AutoZone’s increasing operating profit indicates the efficiency and profitability of the company.
Further, the increase of operating profit led to the slight increase of operating margin, from 17.10% in
2007 to 18.52% in 2011. One financial measure that is strongly related to the stock price performance
is EPS. EPS, a key driver of stock price, have been increasing at an extremely high rate. From 2007
to 2011, basic EPS have increased for 131%, and diluted EPS have increased for 128%. Another
important financial measure is PEG ratio. PEG ratio is been constantly decreasing, which is a good
sign for the company and investors. Decrease of PEG ratio signals a greater value for AutoZone’s
company, because its investors are going to pay less for each unit of earnings growth.

How does a stock repurchase work?

Why would a company use this tactic?
What impact does it have on: EPS? ROIC?

Stock repurchase is one of the methods of returning cash back to its investors. A company buys back
its own shares either from marketplace or from their own shareholders who want to sell their shares.
Buying a shares back, company is reducing the number of shares outstanding, increasing the
shareholders’ value and raising the price of the stock. Company can also use this method to: prevent
a hostile takeover

cover up poor performance

create more attractive financial ratios
signal the market that the company is strong
create tax efficient way to return investors’ money

The biggest impact of share repurchasing program is evident in EPS of the company. EPS is
calculated as Net Income divided by the average outstanding shares. Since buying back its own

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shares is reducing the number of shares outstanding, it automatically increases the EPS. In 2007,
AutoZone’s Net Income was $595,672 and the number of shares outstanding was 69,844. This
resulted in $8.53 EPS. If we suppose that the income is going to stay the same, but the number of
shares outstanding is going to decrease for 5,000, then we get a higher EPS of $9.19. This is how a
share repurchase work. It reduces the number of shares outstanding, resulting in improved EPS.
Share repurchase also affect the ROIC, which is one of the best metrics to evaluate corporates
performance. ROIC eliminates much of the non-economic accounting noise and impacts of financial
leverage. AutoZone’s management was very focused on this measurement, because ROIC was a
primary way to measure value creation for the company’s capital providers. On the balance sheet, a
share repurchase will reduce a company’s cash holdings, and therefore reducing the total assets and
total shareholders’ equity. As a result, ROIC will improve subsequent to a share repurchase.

It is noticeable that the growth was accelerated from 2008, when the economy recession occurred.
Together with share repurchase program, this two effect had a large impact on creating a desirable
ROIC. Taken all of these into account, AutoZone’s ROIC is indicating that the company offers a
strong returns for its investors.

How much of AutoZone’s stock price performance should we

attribute to the share repurchase program?
Share repurchase program is strongly related to the increase of AutoZone’s stock price. Share
repurchase program, as mentioned above, reduces the number of shares outstanding, and therefore,
creates a strong EPS and increases the price of the stock. EPS is one of the most important
measures that investors look at because EPS measures company’s performance. In 2007, AutoZone
had 69,844 shares outstanding, while in 2011 the number of shares was reduced to 43,603. This led
to an increase of 128% in EPS, from $8.53 in 2007, to $19.47 in 2011. Next, the stock price increased
from $120 to $298 in the same time period. Given the same capital value for AutoZone Company,
more shares outstanding will result in lower share price, while reduced number of shares outstanding
will impact the price of a share to grow. Q#4. Assume that AutoZone is planning to stop its share
repurchase program. What would be the best alternative use of those cash flows? Why?

If we assume that AutoZone is going to quit its share repurchase program, the best alternative to use
the cash flows would be to expand its business, either by opening a new stores or by acquisition. The
first proposition considers opening a new stores in domestic and foreign markets. The expansion is
necessary to override the competition and to keep its position of leading retailer of automotive
replacement parts and accessories in the United States. Leading retailer position in the U.S. gives
AutoZone more motivation to expand overseas. AutoZone already owns some stores outside the
U.S., in Puerto Rico and Mexico. Those stores have been operating successfully, giving a company
more reasons to continue with its overseas investments. Next AutoZone’s target is Brazilian market.
Company’s plan is to expand there over the next several years. Overseas investments can be very
profitable for AutoZone, but they also bear a lot of risk.

All investments should be developed very carefully, with a high level of cautions and with expertise
person for targeted markets in their management. The second proposition is growth by acquisition.
U.S. market became oversaturated with auto part stores in the last couple of years. Even though
AutoZone’s management was not seeing any signs of oversaturation at that time, that doesn’t mean
that they will not see it in the near future. I believe there are still some free attractive locations in the

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 U.S., but at some point, most of the good locations will be covered by the auto parts retail stores, and
the remaining locations would not be a profitable investment. Another reason for acquisition is that
such stores would be profitable much more quickly than it would be opening of a new stores. The
return time for AutoZone would be shorten. So far, AutoZone has acquired over 800 stores from
competitors.

What should Johnson do about his holdings of AutoZone

shares?
Johnson had one of his largest holdings in AutoZone’s company. The fact that Johnson was
concerned about is that Lampert, AutoZone’s main shareholder, was rapidly liquidating his stake in
the company. Johnson was concerned about the future performance of the stock price. He was not
sure what the Lampert’s reason for liquidating his stake was. This can also have a negative influence
on other investors. Lumpert’s liquidation is not necessarily a bad sign. The reason for his liquidation
might be the need for funds or some other personal reasons. I believe that Johnson should keep
his holdings in AutoZone’s company.

AutoZone’s financial measures indicates that the company is been constantly improving. The most
important measures for investors, EPS, ROIC and stock price, are been increasing at a desirable
rates. AutoZone’s investors have been enjoying strong price appreciation, and I believe they will enjoy
it also in the future. Lumpert’s liquidation should not affect the share repurchase program. Company
should continue with its share repurchase program even after Lampert liquidates all his stake. There
is no signs in financial statements that the company is going to have a decrease in the stock price.
AutoZone has created a desirable value for the company over the long time period and I believe in
the continuing future growth of this company.

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