AutoZone first store opened in 1979 under the name Auto Shack in Forrest City, Arizona; while, in 1987 the name was changed to Autozone. Autozone implemented the first electronic auto parts catalog for the retail industry. After four years of steady growth, Autozone went public and it was listed in New York Stock Exchange in 1991. By 2012, AutoZone was one of the biggest leading company in retailing and distributing automotive parts and accessories in the United States with more than 65,000 employees and 4,813 stores located in every state contiguous United States, Mexico, Puerto Rico. In fact, AutoZone has performed well in terms of profitability and stock price appreciation over the previous 15 years.
In specific, this case is about Mark Johnson, a portfolio manager of Johnson & Associates, who was reviewing his holdings, including his position in AutoZone. Johnson was concerned that Edward Lampert’s (a prominent shareholder who had begun liquidating his position in AutoZone) reduced position could lead the company to stop using share repurchases as a method of distributing cash flows to shareholders. In this case, students provide an overview of AutoZone’s stock price performed over the previous five years, and how does a stock repurchase work and its impact on EPS and ROIC as well. Moreover, the case lists a number of alternative uses for the free cash flows generated by Autozone if they decided to stop the repurchases program they are undertaking. At the end, recommendation is given to Mark Johnson about his holdings of AutoZone shares and what should he do to deal with it.
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?
Autozone shareholders had enjoyed strong price appreciation since 1997, with an average annual return of 11.5%. The stock price had dramatically increased in the previous five years reaching $348. In 2008, U.S. economy had gone through the worst recession since the great depression, and the recovery that followed had been unusually slow. Strong appreciation of stock price was a result of the recession of the U.S. economy because auto-part business was somewhat a counter cyclical industry. To illustrate more, the company’s growth and stock price are directly related and connected to the economy and to the number of miles driven by a car. When the economy struggled and unemployment was high, fewer new cars were purchased and older cars were kept on the road longer, requiring more frequent repairs. As a result the auto parts retail business enjoyed strong top line growth.By 2012, AutoZone had become the leading retailer of automotive replacement parts and accessories in the United States with more than 65,000 employees and 4,813 stores.
As illustrated in Exhibit 1,the financial statements of Autozone reflect its stock price performance, net sales increased from $6,169,804 to $8,072,973 from 2007 till 2011 which is equal a 30.85% increase. Moreover, cost of sales also increased from $3,105,554 until $3,953,510 in the same period which is equal a 27.430% increase. The increase in cost of sales is lower than the increase in net sales which results in an increase in gross profit from $3,064,250 till $4,119,463 in the previous five years which is equal to 34.4%. Furthermore, Autozone’s operating profit increased by 41.65% ,where it was $1,055,266 in 2007 reaching to $1,494,803 in 2011 indicating the efficiency and the profitability of the company. EPS is strongly related and is a key driver of the stock price for Autozone company. Where basic EPS increase by 130.97% from 2007 till 2011, and the diluted EPS increase by 128.25% through the same period.