Case30 Autozone

Case 30

Autozone Inc.

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Group A Team Member

Juthatip Khaovisate                                 5949005

Phantida Pukpinyo                                   5949007

Kamonchat Vonglodjanaporn                   5949024

Chanjilar Panyakorn                             5949038

Company background

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   Autozone’s first store opened in 1979 under the name Auto Shack however in 1987 the name was changed to Autozone.  The company acts as a retailer and distributor of automotive replacement parts and accessories in the United States. Then in 1991, after four years of steady growth, the company went public and was listed on the New York stock exchange.

  By 2012, the company become the one of the largest retailer of automotive replacement parts and accessories in the United State. AutoZone has come a long way. Today, AutoZone serves customers in 48 states, Mexico, Brazil and with more than 65,000 employees and 4,813 stores.

    The Company's product lines included cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products.

     Autozone’s success in developing category-leading distribution capabilities had resulted in both the highest operating margin for its industry and strong consumer service. Today, Auto Shack is AutoZone - a Fortune 500 company and the leading auto parts retailer in the United States with more than $8.1 billion in annual sales.

Current situation

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     In 2008, the US suffer from the economic recession therefore the market recovery shown unusually slow growth. As the economy struggled and unemployment was high, fewer new cars were purchased and older cars were kept on the road longer, required more frequent repairs. As a result, the auto-parts retail business enjoyed strong top-line growth as auto-parts retailers operated with high-gross margin. However the company experienced high competition as retailers continue to expand the operation. Despite high level of industry intense competition and worries that market will be oversaturation, the company still aims to expand internationally.

How has AutoZone’s stock price performed over the previous five years? What other financial measures can you cite that are consistent with the stock price performance?

 Over the past five years, the stock price has increased significantly, price show a positive trend since 1997.  According to the chart below; on August 1, 2008 the stock price was only $121 compared to $307 on August 1, 2011 with compound annual growth rate at 26%.

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    Strong appreciation come from several reasons. Firstly as mentioned above that in the current economic situation going through a recession. As Auto-part business is a counter-cyclical, are those that do well in economic downturns. The stock price of the companies belonging to counter-cyclical industry has a tendency of downward movement in times of economic growth and goes up during an economic recession company growth is highly related to the economy which will also reflected on the company’s stock price.  As a number of new car purchased was decline, people demand more repairmen as for this reason, the stock price of the company significantly improved since 2008.

   Secondly, the stock price growth come from share repurchase program.  A company buys back its own share and from buying back share, it reducing number of share outstanding and raising the price of stock.  Share outstanding of the company has dropped 39% from 2007 to 2011 and shareholder equity shown negative $1.2 billion in 2011.

 Other financial measures that we can use to the stock price performance;

• Earnings per share increase 131% from 2007 to 2011
• Net sales have increased 31% from 2007 to 2011
• Net income have increased 43% from 2007 to 2011

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  Furthermore the company also continue to create value by investing in new projects. As the management aims to create value for the company’s capital providers. Andy doing that, the company’s return on invested capital (ROIC), revenue, and margin continue to grow substantially together. The net result was that the company’s invested capital had remained positive since 2007 which created attractive ROIC level.

  Autozone’s increasing operating profit implies company efficiency and profitability. To conclude the Autozone’s increased in revenue, good ROIC level, and share repurchase has led to the company’s share price to increase.

2. How does a stock repurchase work? Why would a company use this tactic? What impact does it have on EPS and ROIC?

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Share Issuance and Share Repurchase

Investor refers to a person who commits capital with the expectation of financial returns either in terms of dividends or capital gains.  The company generally gives investors share certificates which represent the ownership of the company.  This process is called “Stock Issuance”

Additionally, the company also has the option to buy back the share certificates from investors at fixed price.  This process is called “Stock Repurchase”

        According to the case, AutoZone aggressively repurchased shares from the marketplace in the past several years by using cash flow from operation and new debt issuance.

Potential Advantages of Share Repurchase

The reasons why AutoZone uses this tactic could be due to two main reasons as follows.

1. To avoid negative signal from unstable dividend payout ratio

According to Dividend Signaling Theory, it suggests that when a company announces an increase in dividend payouts, it is an indication it possesses positive future prospects.^[1]  Conversely, when a company announces a decrease in dividend payouts, it will send a negative signal to investors on the company’s future prospects.  Thus, this theory supports that dividends are sticky from the eyes of an investor.  Investors are expecting to get higher dividend payout or at least stable in each year.