Autozone inc case study

Autozone, Inc. 1

Autozone, Inc. 2

Case Study 30

BNFN 4304 – Financial Policy

Instructor: Mr. Masood Aijazi

Done by:

Halah Bahanshal 1510635

Yusra Bashanfar 1410057

Yara Al-Feki 1410435

Hala Rajab 1310257

Due: 3rd of April, 2018

Image result for autozone logo

Introduction: 3 Question 1 4 Question 2 7 Question 3 11 Question 4 12 Question 5 15 Conclusion 17 References 18

Introduction:

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.

Question 1

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.

AutoZone Income Statements

(in thousands, except per share)

August 27,

2011

August 28,

2010

August 29, 2009

August 30, 2008

August 25,

2007

% change

Net sales

$8,072,973

$7,362,618

$6,816,824

$6,522,706

$6,169,804

30.85%

Cost of sales

3,953,510

3,650,874

3,400,375

3,254,645

3,105,554

27.30%

Gross profit

4,119,463

3,711,744

3,416,449

3,268,061

3,064,250

34.44%

Operating profit

1,494,803

1,319,414

1,176,062

1,124,134

1,055,266

41.65%

Net income

$848,974

$738,311

$657,049

$641,606

$595,672

42.52%

Wt. avg. shares for basic EPS

42,632

48,488

55,282

63,295

69,101

-38.30%

Effect of dilutive stock equivalents

971

816

710

580

743

30.69%

Adj. wt. avg. shares for diluted EPS

43,603

49,304

55,992

63,875

69,844

-37.57%

Basic earnings per share

$19.91

$15.23

$11.89

$10.14

$8.62

130.97%

Diluted earnings per share

$19.47

$14.97

$11.73

$10.04

$8.53

128.25%

Additionally, Autozone's management also focused on after tax return on invested capital( ROIC) as the primary way to measure value creation for the company's capital providers. In 1998, Autozone had restrained capital to its equity investors through share repurchases which is funded through strong operating cash flow and debt issuance. Thus, resulting in reduction of the shares outstanding, which enhanced earning per share. Share outstanding reduction reached 39% from 2007 to 2011, and the shareholders’ equity reached negative 1.2 billion in 2011. The net result was that Autozone’s invested capital had remained fairly constant since 2007, which combined of both increased earning and create attractive ROIC level as shown in exhibit 9 in the case. These two reasons result in the stock price increasing in the previous five years. Autozone cash flow statement in Exhibit 4 shows that net cash provided by operating activities was $1,291,538 in 2011 and the debt is $500,000, showing that the purchases of treasury stock totaling $1,466,802 in 2001 was heavily funded by the free cash flow and by debt as well.

August 27, 2011

August 28, 2010

August 29, 2009

August 30, 2008

August 25, 2007

Net cash provided by operating activities

1,291,538

1,196,252

923,808

921,100

845,194

Net cash used in investing activities

(318,994)

(307,447)

(263,722)

(243,150)

(228,715)

Cash flows from financing activities:

Proceeds from issuance of debt

500,000

-

500,000

750,000

-

Purchase of treasury stock

(1,466,802)

(1,123,655)

(1,300,002)

(849,196)

(761,887)

Question 2

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

When we talk about free cash flow in a company, the first decision they have to take is whether to retain the cash flow or distribute it to the firm’s capital providers as a return to their investment. If the firm chooses to retain cash flow, it will invest in new projects or add to the cash reserves. If the firm chooses to distribute cash flow, it can do so by repurchasing shares or paying dividends. The way a firm chooses between alternatives ways to pay out cash to shareholders is called Payout policy.

A share repurchase, also known as share buyback, is “the transaction in which the stock issuer buys back its shares from investors”. Once Shares are repurchased, these shares are generally held in the corporate treasury and become treasury shares (or treasury stock). The Accounting transaction that is done to record it is that the dollar amount of the stocks repurchased is debited to the Treasury Stock account and cash is credited. The account of Treasury Stock cannot be considered as an asset/investment, because stocks purchased are from the company’s own shares. Treasury Stock account is a contra-stockholders equity account and it is mainly found in the Balance sheet, specifically stockholders equity section, as a negative item.