AutoZone, Inc.

AutoZone has been aggressively using the strategy of share repurchasing to

further benefit their shareholders, as well as improve their financials. They have

also been using their cash flows to further fund their share-repurchasing tactic,

which has seemed to work consistently. AutoZone has many options when assessing

where they could refinance their operating cash flow which include; issuing

dividends, promoting organic growth, growth by acquisition, and debt retirement.

As of right now, they have continued to stick with stock repurchasing, and Johnson

is left to assess his current holding on the stock.

The stock price performance has been increasing steadily with the last stock

price recorded at $348; and earnings per share have increased at a rate of 231% due

to the $5 Billion plus stock repurchases. For example, in 2007 EPS was $8.62 and in

2011 it over doubled to $19.91.

AutoZone stock prices have performed very well over the last 5 years, and

the overall performance of the company’s stock price is largely due to the

repurchasing program AutoZone has put in place. Other financial measures that are

consistent with the stock price performance are; the price to earnings (P/E ratio),

the return on equity (ROE), the earnings per share (EPS), and the return on assets

(ROA).

Instead of a steady minor growth, AutoZone was experiencing a large growth

due to the reduced number of shares outstanding, coupled with the continued

steady growth of the company. This was primarily a result of stock repurchases.
AutoZone shareholders were being bought up by the company, which resulted in

larger ownership claims and larger underlying earnings. The shares outstanding of

the company have drastically decreased over the years, for example, in 2007,

AutoZone had 65.9 million shares outstanding, and in 2011 the company only had

40.1 million shares outstanding remaining.

The stock-repurchasing program is when the firm buys back its shares

through either a tenant offer or from the market. This occurs either because the firm

believes the shares are worth more than what the market has dictated, or because

the firm wants to improve their financials. When shares are repurchased, the EPS

increases proportionately. Also, due to the purchasing of shares, the cash asset on

the balance sheet also decreases; increasing ROA. This also affects ROE, because

there is less outstanding equity, causing the return on equity to increase. Finally, the

P/E ratio is lowered due to the repurchasing of the shares, making the firm a less

risky investment. As far as its effect of ROIC, stock repurchasing will likely have no

effect due to the proportionate opposite effect on assets and debt. Assets will likely

decrease, as debt continues to increase, resulting in a stagnant ROIC.

AutoZone’s growing stock performance can be attributed to the share

repurchase program; since it has steadily improved the company’s ROIC, which was

the primary reason of the stock appreciation.

If AutoZone were to stop the repurchasing program, the best alternative use

of the cash flows would be to retire some of their outstanding debt. Since a large

portion of their repurchases is financed by debt, AutoZone has accumulated a

negative book-equity position of $1.2 billion. The company’s ability to cover its

liabilities is also diminishing.

YEAR 2008 2009 2010 2011

CASH RATIO .096 .034 .032 .028

If a unforeseen circumstance were to arise, AutoZone will face major

difficulties paying of the interest on their debt, they would lose their investment

grade credit rating, and face harder problems down the line acquiring any future

debt financing. Therefore it is important to settle some of their debt to prevent any

negative impact on the firm that could deter what they have worked hard to achieve,

their promising financials.

Johnson should hold onto his current holding of AutoZone shares seeing as

the stock-repurchasing program is still in place and is set to increase earnings per

share of his investment. Also, due to the lagging economy and the countercyclical

nature of the business, AutoZone is expected to remain profitable and the stock

price is expected to appreciate. As long as the interest coverage ratio remains the

same, AutoZone will continue to operate their stock-repurchasing program, and

seeing as the interest coverage ratio has remained steady over the past few years,

AutoZone are less likely to mess with what they have been doing well.