UV6463
\nRev. Nov. 20, 2013
\nThis case was prepared by Justin Brenner (MBA \u201912) under the supervision of Kenneth Eades, Paul Tudor Jones
\nResearch Professor of Business Administration. It was written as a basis for class discussion rather than to illustrate
\neffective or ineffective handling of an administrative situation. The character of Mark Johnson and the Johnson &
\nAssociates company are fictional. Copyright \uf0e3 2012 by the University of Virginia Darden School Foundation,
\nCharlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com.
\nNo part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in
\nany form or by any means\u2014electronic, mechanical, photocopying, recording, or otherwise\u2014without the permission
\nof the Darden School Foundation.
\nAUTOZONE, INC.
\nOn February 1, 2012, Mark Johnson, portfolio manager at Johnson & Associates, an asset
\nmanagement company, was in the process of reviewing his largest holdings, which included
\nAutoZone, an aftermarket auto-parts retailer. AutoZone shareholders had enjoyed strong price
\nappreciation since 1997, with an average annual return of 11.5% (Exhibit 1). The stock price
\nstood at $348, but Johnson was concerned about the recent news that Edward Lampert,
\nAutoZone\u2019s main shareholder, was rapidly liquidating his stake in the company.
\nSince 2004, AutoZone shareholders had received large distributions of the company\u2019s
\ncash flows in the form of share repurchases. When a company repurchased its own shares, it
\nenhanced earnings per share by reducing the shares outstanding, and it also served to reduce the
\nbook value of shareholders\u2019 equity (see AutoZone financial statements in Exhibits 2, 3, 4, and
\n5). Johnson felt that Lampert was likely a driving force behind AutoZone\u2019s repurchase strategy
\nbecause the repurchases started around the time Lampert acquired his stake and accelerated as he
\nbuilt up his position. Now that Lampert was reducing his stake, however, Johnson wondered if
\nAutoZone would continue to repurchase shares or if the company would change its strategy and
\nuse its cash flows for initiating a cash dividend or reinvesting the cash in the company to grow its
\ncore business. In addition, given its large debt burden (Exhibit 6), AutoZone could choose to
\nrepay debt to improve its credit rating and increase its financial flexibility.
\nWith AutoZone potentially changing its strategy for the use of its cash flows, Johnson
\nneeded to assess the impact of the change on the company\u2019s stock price and then decide whether
\nhe should alter his position on the stock.
\nThe Auto Parts Business
\nAftermarket auto-parts sales were split into Do-It-Yourself (DIY) and Do-It-For-Me
\n(DIFM) segments. In the DIY segment, automobile parts were sold directly to vehicle owners
\nwho wanted to fix or improve their vehicles on their own. In the DIFM segment, automobile
\nrepair shops provided the parts for vehicles left in their care for repair. DIY customers were
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\n-2- UV6463
\nserviced primarily through local retail storefronts where they could speak with a knowledgeable
\nsales associate who located the necessary part. Because of their expertise in repairing vehicles,
\nDIFM service providers generally did not require storefront access or the expertise of a sales
\nassociate. DIFM customers, however, were concerned with pricing, product availability, and
\nefficient product delivery.
\nSales in both segments were strongly related to the number of miles a vehicle had been
\ndriven. For the DIY segment, the number of late-model cars needing repair was also a strong
\npredictor of auto-parts sales. As the age of a car increased, more repairs were required, and the
\nowners of older cars were more likely to repair these senior vehicles themselves (Exhibit 7).
\nThe number of miles a car was driven was affected by several economic fundamentals,
\nthe most important of which was the cost of gasoline. The number of older cars on the road
\nincreased during those times when fewer consumers bought new cars. New car purchases were
\nsubject to the same general economic trends applicable to most durable goods. As a result, in
\nperiods of strong economic growth and low unemployment, new car sales increased. Conversely,
\nwhen the economy struggled and unemployment was high, fewer new cars were purchased, and
\nolder cars were kept on the road longer, requiring more frequent repairs.
\nOverall, when the economy was doing well, gas prices and new car sales both increased,
\ndecreasing the number of older cars on the road and also the amount of additional mileage
\naccumulated. When the economy did poorly, gas prices and new car sales were more likely to be
\ndepressed, increasing the utilization of older cars and adding to their mileage. Because of these
\ndynamics, auto-parts sales, especially in the DIY segment, were somewhat counter-cyclical.
\nThe auto-parts business consisted of a large number of small, local operations as well as a
\nfew large, national retailers, such as AutoZone, O\u2019Reilly Auto Parts, Advance Auto Parts, and
\nPep Boys. The national chains had sophisticated supply-chain operations to ensure that an
\nappropriate level of inventory was maintained at each store while managing the tradeoff between
\nminimizing inventory stock outs and maximizing the number of stock-keeping units (SKUs).
\nThis gave the large, national retailers an advantage because customers were more likely to find
\nthe parts they wanted at one of these stores. Counterbalancing the inventory advantage, however,
\nwas the expertise of sales associates, which allowed the smaller, local stores to enhance the
\ncustomer service experience in DIY sales.
\nRecent Trends
\nIn 2008, the U.S. economy had gone through the worst recession since the Great
\nDepression, and the recovery that followed had been unusually slow. As a result, the auto-parts
\nretail business enjoyed strong top-line growth. The future path of the U.S. economy was still
\nhighly uncertain as was the potential for a disconnect between GDP growth and gas price
\nincreases and between gas prices and miles driven. Furthermore, as auto-parts retailers operated
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\nwith high-gross margins and significant fixed costs, profits varied widely with the level of sales,
\nmaking the near-term earnings in the auto-parts retail segment particularly difficult to predict.
\nThe auto-parts retail business experienced more competition as national retailers
\ncontinued to expand their operations. Most of their expansion was at the expense of local
\nretailers, but competition between major national retailers was heating up. If the economy
\nstrengthened and the auto-parts retail business was negatively affected by the replacement of
\nolder cars with new ones, competition between large, national retailers could make a bad
\nsituation worse.
\nLinked to high levels of industry competition and the expansion of the major retailers was
\nthe possibility that growth would eventually hit a wall if the market became oversaturated with
\nauto-parts stores. Despite this concern, by 2012, AutoZone1
\nmanagement had stated that it was
\nnot seeing any signs of oversaturation, implying that expansion opportunities still remained.
\nThe industry was also seeing an increase in sales via online channels as consumers
\nenjoyed the flexibility of purchasing online and either picking up an order at the most convenient
\nlocation or having it delivered to their doorstep. Given the high operating leverage provided by
\nselling through online channels, especially given the preexisting supply chains that already were
\nbuilt for storefront operations, as well as the growth in this channel, the national retail chains
\ncontinued to invest in their online solutions and looked at that channel for future earnings
\ngrowth.
\nFinally, another trend was the expansion of the large, U.S. auto-parts retailers into
\nadjacent foreign markets, such as Mexico, Canada, and Puerto Rico. Thus far, the national retail
\ncompanies were successful using this strategy, but their ability to continue to succeed and
\nprosper in these markets, as well as in new, attractive locations such as Brazil, was not yet a
\nreality.
\nAutoZone
\nAutoZone\u2019s first store opened in 1979, under the name of Auto Shack in Forrest City,
\nArizona. In 1987, the name was changed to AutoZone, and the company implemented the first
\nelectronic auto-parts catalog for the retail industry. Then` in 1991, after four years of steady
\ngrowth, AutoZone went public and was listed on the New York Stock Exchange under the ticker
\nsymbol AZO.
\nBy 2012, AutoZone had become the leading retailer of automotive replacement parts and
\naccessories in the United States, with more than 65,000 employees and 4,813 stores located in
\n1
\nAutoZone Q1 2012 Earnings Call\u2014\u201cI haven\u2019t seen a market yet that was so saturated that we were challenged
\neconomically,\u201d Bill Rhodes, AutoZone chairman, president, and CEO.
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\n-4- UV6463
\nevery state in the contiguous United States, Puerto Rico, and Mexico. AutoZone also distributed
\nparts to commercial repair shops. In addition, a small but growing portion of AutoZone sales
\ncame through its online channel.
\nFrom the beginning, AutoZone had invested heavily in expanding its retail footprint via
\nboth organic and inorganic growth. It had also developed a sophisticated hub-and-feeder
\ninventory system that kept the inventories of individual stores low as well as reduced the
\nlikelihood of stock outs. The expansion of its retail footprint had driven top-line revenue growth.
\nAutoZone\u2019s success in developing category-leading distribution capabilities had resulted in both
\nthe highest operating margin for its industry and strong customer service backed by the ability of
\nits distribution network to supply stores with nearly all of the AutoZone products on a same-day
\nbasis (Exhibit 8).
\nAutoZone\u2019s management focused on after-tax return on invested capital (ROIC) as the
\nprimary way to measure value creation for the company\u2019s capital providers. As a result, while
\nAutoZone management invested in opportunities that led to top-line revenue growth and
\nincreased margins, it also focused on capital stewardship. What resulted was an aggressively
\nmanaged working capital at the store level through the efficient use of inventory as well as
\nattractive terms from suppliers.
\nStarting in 1998, AutoZone had returned capital to its equity investors through share
\nrepurchases. Although share-repurchase programs were common among U.S. companies, the
\ntypical result was a modest impact on shares outstanding. AutoZone\u2019s consistent use of share
\nrepurchases, however, had resulted in a significant reduction of both the shares outstanding and
\nthe equity capital. In particular, shares outstanding had dropped 39% from 2007 to 2011, and
\nshareholders\u2019 equity had been reduced to a negative $1.2 billion in 2011. The repurchases had
\nbeen funded by strong operating cash flows and by debt issuance. The net result was that
\nAutoZone\u2019s invested capital had remained fairly constant since 2007, which, combined with
\nincreased earnings, created attractive ROIC levels (Exhibit 9).
\nOperating Cash Flow Options
\nWhile AutoZone had historically repurchased shares with operating cash flow, Mark
\nJohnson felt that Edward Lampert\u2019s reduced stake in the company could prompt management to
\nabandon repurchases and use the cash flows for other purposes. For example, AutoZone could
\ndistribute cash flows through cash dividends, reinvest the cash flows back into the core business,
\nor use the funds to acquire stores. The company could also invest further in its operational
\ncapabilities to stay on the leading edge of the retail auto-parts industry. Finally, given a negative
\nbook-equity position and a continually growing debt load, AutoZone might consider using its
\ncash flows to pay down debt to increase its future financial flexibility.
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\nDividends versus share repurchases
\nAssuming that AutoZone decided to distribute some of its operating cash flows to
\nshareholders, the company had the choice of distributing the cash through dividends, share
\nrepurchases, or some combination of the two. Dividends were seen as a way to provide cash to
\nexisting shareholders, whereas only those shareholders who happened to be selling their shares
\nwould receive cash from a share-repurchase program. On the other hand, dividends were taxed at
\nthe shareholder level in the year received, whereas if a share-repurchase program succeeded in
\nincreasing the share price, the nonselling shareholders could defer paying taxes until they sold
\nthe stock.2
\nDividends were also generally considered to be \u201csticky,\u201d meaning that the market
\nexpected a company to either keep its dividend steady or raise it each year. Because of this
\nmindset, the implementation of a dividend or an increase of the dividend was usually interpreted
\nby the market as a positive signal of the firm\u2019s ability to earn enough to continue paying the
\ndividend far into the future. Conversely, any decrease in the dividend was normally viewed by
\nthe market as a very negative signal. Therefore, the stock price tended to change according to the
\ndividend news released by the firm, which would be favorable for AutoZone shareholders so
\nlong as management was able to continue or increase the dividend each year.
\nShare repurchases were not viewed as sticky by the market because the amount of the
\nrepurchase often varied each year. The variance in the shares purchased might be caused by
\neconomic headwinds or tailwinds or differences in the quantity and size of investment
\nopportunities that management believed would create shareholder value. Also, share repurchases
\nwere seen by some as a way to signal management\u2019s belief that the stock was undervalued and
\nthus represented a good investment for the company.
\nSome companies chose to return shareholder capital through both dividends and share
\nrepurchases. In most of these cases, the company provided a stable but relatively small cash
\ndividend and then repurchased shares at varying levels according to the circumstances each year.
\nThe benefit of this approach was to give shareholders the benefit of a sticky dividend while also
\nreceiving the price support of share repurchases.
\nOrganic growth
\nAutoZone could consider using its operating cash flow to increase the number of new
\nstores it opened each year. Although the retail auto-parts industry was competitive and relatively
\nmature, AutoZone\u2019s CEO had recently indicated that he did not see oversaturation of retail autoparts stores in any of the company\u2019s markets.3
\nTherefore, AutoZone could seize the opportunity
\n2
\nCurrent tax laws did allow for most dividends to be taxed at the same long-term capital gains rates, although
\nthis was not always the case, and the tax law regarding dividends was not certain going forward. 3
\nSee footnote 1.
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\n-6- UV6463
\nto expand more rapidly and perhaps preempt competition from gaining a foothold in those
\nmarkets.
\nRapid expansion came with a number of risks. First, Johnson was not sure that AutoZone
\nhad the managerial capacity to expand that swiftly. The company\u2019s growth in recent years had
\nbeen substantial as were the returns on investment, but it was not apparent if further growth
\nwould necessarily continue to create value. In addition, Johnson reasoned that the best retail
\nlocations were already covered and that remaining areas would have lower profitability. This
\ncould be exacerbated if AutoZone expanded into areas that were less well served by its
\ndistribution network.
\nJohnson thought that there were some very attractive overseas investment opportunities
\nas evidenced by successful store openings in Mexico and Puerto Rico. AutoZone\u2019s 2011 annual
\nreport indicated work was underway to expand into Brazil over the next several years.4
\nThe
\ncompany could increase its global presence by aggressively opening multiple stores in Brazil and
\nother international locations. Hasty expansion into foreign markets, however, brought with it not
\nonly the risks of rapid store expansion but also the difficulties inherent in transferring and
\ntranslating the domestically successful supply model.
\nGrowth by acquisition
\nJohnson noted that in 1998 AutoZone had acquired over 800 stores from competitors and
\nreasoned that another way to swiftly increase revenues would be for AutoZone to acquire other
\nauto-parts retail stores. While this strategy would require some postmerger integration
\ninvestment, such stores would be productive much more quickly than greenfield stores and
\nshorten the return time on AutoZone\u2019s investment. This was an interesting strategy, but Johnson
\nalso knew that industry consolidation (Exhibit 10) had removed most of the viable takeover
\ntargets from the market; therefore it was unclear whether a merger of two of the large players
\nwould be allowed by the U.S. Department of Justice.
\nDebt retirement
\nA final consideration was whether AutoZone might use part or all of its operating cash
\nflows to retire some of the debt that the company had accumulated over the years. Much of the
\ndebt had been used to fund the share repurchases, but with a negative book-equity position and
\nsuch a large debt position, Johnson wondered whether it was prudent to continue adding debt to
\nthe balance sheet. If AutoZone ran into trouble, it could struggle under the strain of making the
\ninterest payments and rolling over maturing debt. At some point, it was conceivable that
\n4
\nAutoZone annual report, 2011.
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\n-7- UV6463
\nAutoZone could lose its investment-grade credit rating,5
\nwhich would only make future debt
\nfinancing more difficult to secure and more expensive.
\nThe Decision
\nJohnson had to decide what to do with his AutoZone investment. He was impressed with
\nthe company\u2019s history of strong shareholder returns and its leading position in the industry. Still
\nhe wondered if Lampert\u2019s reduced influence and the potential for less favorable economic trends
\nfor auto-parts retailers were enough uncertainty for him to consider selling some or all of his
\nposition in the stock. As an analyst, Johnson\u2019s first consideration regarding the value of a
\ncompany was to determine how well management was using the operating cash flow to
\nmaximize value for shareholders. Based on the ROIC (Exhibit 9), AutoZone was earning high
\nreturns on the capital invested in the company, which was undoubtedly the primary driver of
\nstock returns. The extent to which share repurchases had contributed to the stock\u2019s performance,
\nhowever, was less clear.
\nHow would the market react to the news that AutoZone was reducing or eliminating its
\nshare repurchases after years of consistently following that strategy? Did the market view
\nAutoZone\u2019s share repurchases as a cash dividend or was it indifferent about whether cash flows
\nwere distributed by repurchasing shares or paying a cash dividend? In any case, Johnson
\nwondered if any move away from repurchasing shares after so many years might cause the stock
\nprice to fall, regardless of how the cash flows were ultimately spent. Or would AutoZone\u2019s stock
\nprice continue to appreciate as it had in the past so long as it continued to produce strong cash
\nflows?<\/p>\n
5
\nMoody\u2019s and S&P had consistently assigned investment-grade ratings of Baa and BBB, respectively, for
\nAutoZone\u2019s senior unsecured debt.
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\n-8- UV6463
\nExhibit 1
\nAUTOZONE, INC.
\nEdward Lampert\u2019s Position in AutoZone
\nAutoZone\u2019s Stock Price Performance
\nData source: Bloomberg.
\n0
\n5
\n10
\n15
\n20
\n25
\n30
\nMar-02
\nAug-02
\nJan-03
\nJun-03
\nNov-03
\nApr-04
\nSep-04
\nFeb-05
\nJul-05
\nDec-05
\nMay-06
\nOct-06
\nMar-07
\nAug-07
\nJan-08
\nJun-08
\nNov-08
\nApr-09
\nSep-09
\nFeb-10
\nJul-10
\nDec-10
\nMay-11
\nOct-11
\nShares Held (millions)
\nShares
\n0%
\n200%
\n400%
\n600%
\n800%
\n1000%
\n1200%
\n1400%
\nDec-96
\nJul-97
\nFeb-98
\nSep-98
\nApr-99
\nNov-99
\nJun-00
\nJan-01
\nAug-01
\nMar-02
\nOct-02
\nMay-03
\nDec-03
\nJul-04
\nFeb-05
\nSep-05
\nApr-06
\nNov-06
\nJun-07
\nJan-08
\nAug-08
\nMar-09
\nOct-09
\nMay-10
\nDec-10
\nJul-11
\nRelative Cumulative Return
\nAutoZone S&P 500
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\nExhibit 2
\nAUTOZONE, INC.
\nAutoZone Income Statement
\n(August FY, in thousands of dollars, except ratios and per-share data)
\nData source: AutoZone annual reports.<\/p>\n
August 27, August 28, August 29, August 30, August 25,
\n2011 2010 2009 2008 2007
\nNet sales $8,072,973 $7,362,618 $6,816,824 $6,522,706 $6,169,804
\nCost of sales 3,953,510 3,650,874 3,400,375 3,254,645 3,105,554
\nGross profit 4,119,463 3,711,744 3,416,449 3,268,061 3,064,250
\nSG&A 2,624,660 2,392,330 2,240,387 2,143,927 2,008,984
\nOperating profit 1,494,803 1,319,414 1,176,062 1,124,134 1,055,266
\nInterest expense, net 170,557 158,909 142,316 116,745 119,116
\nIncome before income taxes 1,324,246 1,160,505 1,033,746 1,007,389 936,150
\nIncome tax expense 475,272 422,194 376,697 365,783 340,478
\nNet income $848,974 $738,311 $657,049 $641,606 $595,672
\nWt. avg. shares for basic EPS 42,632 48,488 55,282 63,295 69,101
\nEffect of dilutive stock equivalents 971 816 710 580 743
\nAdj. wt. avg. shares for diluted EPS 43,603 49,304 55,992 63,875 69,844
\nBasic earnings per share $19.91 $15.23 $11.89 $10.14 $8.62
\nDiluted earnings per share $19.47 $14.97 $11.73 $10.04 $8.53
\nOther information:
\nEBIT $1,494,803 $1,319,414 $1,176,062 $1,124,134 $1,055,266
\nDepr. & Amort. 196,209 192,084 180,433 169,509 159,411
\nEBITDA $1,691,012 $1,511,498 $1,356,495 $1,293,643 $1,214,677
\nEBITDA\/Interest 9.9x 9.5x 9.5x 11.1x 10.2x
\nYear ended
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\nExhibit 3
\nAUTOZONE, INC.
\nAutoZone Balance Sheet (August FY, in thousands of dollars)
\nData source: AutoZone annual reports.
\nAugust 27, August 28, August 29, August 30, August 25,
\n2011 2010 2009 2008 2007
\nAssets
\nCurrent assets:
\nCash and cash equivalents $97,606 $98,280 $92,706 $242,461 $86,654
\nAccounts receivable 140,690 125,802 126,514 71,241 59,876
\nMerchandise inventories 2,466,107 2,304,579 2,207,497 2,150,109 2,007,430
\nOther current assets 88,022 83,160 135,013 122,490 116,495
\nDeferred income taxes – – – – –
\nTotal current assets 2,792,425 2,611,821 2,561,730 2,586,301 2,270,455
\nProperty and equipment:
\nLand 740,276 690,098 656,516 643,699 625,992
\nBuildings and improvements 2,177,476 2,013,301 1,900,610 1,814,668 1,720,172
\nEquipment 994,369 923,595 887,521 850,679 780,199
\nLeasehold improvements 275,299 247,748 219,606 202,098 183,601
\nConstruction in progress 184,452 192,519 145,161 128,133 85,581
\nGross property and equipment 4,371,872 4,067,261 3,809,414 3,639,277 3,395,545
\nLess: Accumulated depreciation and amortization 1,702,997 1,547,315 1,455,057 1,349,621 1,217,703
\nNet property and equipment 2,668,875 2,519,946 2,354,357 2,289,656 2,177,842
\nGoodwill 302,645 302,645 302,645 302,645 302,645
\nDeferred income taxes 10,661 46,223 59,067 38,283 21,331
\nOther long-term assets 94,996 90,959 40,606 40,227 32,436
\nTotal assets $5,869,602 $5,571,594 $5,318,405 $5,257,112 $4,804,709
\nLiabilities and Stockholders\u2019 Deficit
\nCurrent liabilities:
\nAccounts payable $2,755,853 $2,433,050 $2,118,746 $2,043,271 $1,870,668
\nAccrued expenses and other 449,327 432,368 381,271 327,664 307,633
\nIncome taxes payable 25,185 25,385 35,145 11,582 25,442
\nDeferred income taxes 166,449 146,971 171,590 136,803 82,152
\nShort-term borrowings 34,082 26,186 – – –
\nTotal current liabilities 3,430,896 3,063,960 2,706,752 2,519,320 2,285,895
\nLong-term debt 3,317,600 2,882,300 2,726,900 2,250,000 1,935,618
\nOther long-term liabilities 375,338 364,099 317,827 258,105 179,996
\nStockholders\u2019 deficit:
\nCommon stock, par: $0.01\/share 441 501 579 636 713
\nAdditional paid-in capital 591,384 557,955 549,326 537,005 545,404
\nRetained earnings (643,998) (245,344) 136,935 206,099 546,049
\nAccumulated other comprehensive loss (119,691) (106,468) (92,035) (4,135) (9,550)
\nTreasury stock, at cost (1,082,368) (945,409) (1,027,879) (509,918) (679,416)
\nTotal stockholders\u2019 equity (1,254,232) (738,765) (433,074) 229,687 403,200
\nTotal liabilities and stockholders\u2019 equity $5,869,602 $5,571,594 $5,318,405 $5,257,112 $4,804,709
\nShares issued 44,084 50,061 57,881 63,600 71,250
\nShares outstanding 40,109 45,107 50,801 59,608 65,960
\nOther information:
\nCapital lease obligations 86,656 88,280 54,764 64,061 55,088
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\nExhibit 4
\nAUTOZONE, INC.
\nAutoZone Statement of Cash Flows (August FY, in thousands of dollars)
\nData source: AutoZone annual reports.
\nAugust 27, August 28, August 29, August 30, August 25,
\n2011 2010 2009 2008 2007
\nCash flows from operating activities:
\nNet income $848,974 $738,311 $657,049 $641,606 $595,672
\nAdjustments to reconcile net income to
\nnet cash provided by operating activities:
\nDepreciation and amortization of property and equipment 196,209 192,084 180,433 169,509 159,411
\nAmortization of debt origination fees 8,962 6,495 3,644 1,837 1,719
\nIncome tax benefit from exercise of stock options (34,945) (22,251) (8,407) (10,142) (16,523)
\nDeferred income taxes 44,667 (9,023) 46,318 67,474 24,844
\nShare-based compensation expense 26,625 19,120 19,135 18,388 18,462
\nOther – – – – –
\nChanges in operating assets and liabilities:
\nAccounts receivable (14,605) 782 (56,823) (11,145) 20,487
\nMerchandise inventories (155,421) (96,077) (76,337) (137,841) (160,780)
\nAccounts payable and accrued expenses 342,826 349,122 137,158 175,733 186,228
\nIncome taxes payable 34,319 12,474 32,264 (3,861) 17,587
\nOther, net (6,073) 5,215 (10,626) 9,542 (1,913)
\nNet cash provided by operating activities 1,291,538 1,196,252 923,808 921,100 845,194
\nCash flows from investing activities:
\nCapital expenditures (321,604) (315,400) (272,247) (243,594) (224,474)
\nPurchase of marketable securities (43,772) (56,156) (48,444) (54,282) (94,615)
\nProceeds from sale of marketable securities 43,081 52,620 46,306 50,712 86,921
\nAcquisitions – – – – –
\nDisposal of capital assets 3,301 11,489 10,663 4,014 3,453
\nNet cash used in investing activities (318,994) (307,447) (263,722) (243,150) (228,715)
\nCash flows from financing activities:
\nNet proceeds from commercial paper 134,600 155,400 277,600 (206,700) 84,300
\nNet proceeds from short-term borrowings 6,901 26,186 – – –
\nProceeds from issuance of debt 500,000 – 500,000 750,000 –
\nRepayment of debt (199,300) – (300,700) (229,827) (5,839)
\nNet proceeds from sale of common stock 55,846 52,922 39,855 27,065 58,952
\nPurchase of treasury stock (1,466,802) (1,123,655) (1,300,002) (849,196) (761,887)
\nIncome tax benefit from exercise of stock options 34,945 22,251 8,407 10,142 16,523
\nPayments of capital lease obligations (22,781) (16,597) (17,040) (15,880) (11,360)
\nOther (17,180) – (15,016) (8,286) (2,072)
\nNet cash used in financing activities (973,771) (883,493) (806,896) (522,682) (621,383)
\nEffect of exchange rate changes on cash 553 262 (2,945) 539 –
\nNet (decrease) increase in cash and cash equivalents (674) 5,574 (149,755) 155,807 (4,904)
\nCash and cash equivalents at beginning of year 98,280 92,706 242,461 86,654 91,558
\nCash and cash equivalents at end of year $97,606 $98,280 $92,706 $242,461 $86,654
\nSupplemental cash flow information:
\nInterest paid, net of interest cost capitalized $155,531 $150,745 $132,905 $107,477 $116,580
\nIncome taxes paid $405,654 $420,575 $299,021 $313,875 $299,566
\nAssets acquired through capital lease $32,301 $75,881 $16,880 $61,572 $69,325
\nYear ended
\nThis document is authorized for use only by Pablo Mercado (pmercado@bu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or
\n800-988-0886 for additional copies.
\n-12- UV6463
\nExhibit 5
\nAUTOZONE, INC.
\nAutoZone 2011 Statement of Stockholders\u2019 Equity
\n(dollars in thousands)
\nData source: AutoZone annual reports.
\nAccumulated
\nCommon Additional Retained Other
\nShares Common Paid-in (Deficit) Comprehensive Treasury
\n(in thousands) Issued Stock Capital Earnings Loss Stock Total
\nBalance at August 28, 2010 50,061 501 $557,955 ($245,344) ($106,468) ($945,409) ($738,765)
\nNet income 848,974 848,974
\nPension liability adjustments, net of taxes of ($3,998) (17,346) (17,346)
\nForeign currency translation adjustment 8,347 8,347
\nUnrealized loss adjustment on marketable securities, net of taxes of ($91) (171) (171)
\nNet losses on terminated derivatives (5,453) (5,453)
\nReclassification of net losses on derivatives into earnings 1,400 1,400
\nComprehensive income 835,751
\nPurchase of 5,598 shares of treasury stock (1,466,802) (1,466,802)
\nRetirement of treasury shares (6,577) (66) (82,150) (1,247,627) 1,329,843 \u2014
\nSale of common stock under stock options and stock purchase plan 600 6 55,840 55,846
\nShare-based compensation expense 24,794 24,794
\nIncome tax benefit from exercise of stock options 34,945 34,945
\nOther (1) (1)
\nBalance at August 27, 2011 44,084 441 $591,384 ($643,998) ($119,691) ($1,082,368) ($1,254,232)
\nThis document is authorized for use only by Pablo Mercado (pmercado@bu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or
\n800-988-0886 for additional copies.
\n-13- UV6463
\nExhibit 6
\nAUTOZONE, INC.
\nAutoZone Capital Structure and Coverage Ratio
\nNote: Coverage ratio is defined as EBITDA divided by interest expense.
\nData source: AutoZone annual reports.<\/p>\n
-8.0x
\n-6.0x
\n-4.0x
\n-2.0x
\n0.0x
\n2.0x
\n4.0x
\n6.0x
\n8.0x
\n10.0x
\n12.0x
\n14.0x
\n16.0x
\n-$2.0
\n-$1.0
\n$0.0
\n$1.0
\n$2.0
\n$3.0
\n$4.0
\n1996
\n1997
\n1998
\n1999
\n2000
\n2001
\n2002
\n2003
\n2004
\n2005
\n2006
\n2007
\n2008
\n2009
\n2010
\n2011
\nCoverage Ratio
\nBook Values ($ billions)
\nDebt ($B) Equity ($B) Coverage Ratio
\nThis document is authorized for use only by Pablo Mercado (pmercado@bu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or
\n800-988-0886 for additional copies.
\n-14- UV6463
\nExhibit 7
\nAUTOZONE, INC.
\nMiles Driven and Average Vehicle Age
\nData sources: U.S. Department of Transportation (miles driven) and Polk Research (vehicle age).<\/p>\n
0.0
\n2.0
\n4.0
\n6.0
\n8.0
\n10.0
\n12.0
\n0.0
\n0.5
\n1.0
\n1.5
\n2.0
\n2.5
\n3.0
\n3.5
\n1995
\n1996
\n1997
\n1998
\n1999
\n2000
\n2001
\n2002
\n2003
\n2004
\n2005
\n2006
\n2007
\n2008
\n2009
\n2010
\n2011
\nAverage Vehicle Age (years)
\nDistance traveled (trillion miles)
\nDistance traveled Average age
\nThis document is authorized for use only by Pablo Mercado (pmercado@bu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or
\n800-988-0886 for additional copies.
\n-15- UV6463
\nExhibit 8
\nAUTOZONE, INC.
\nMerchandise Listing (as of October 17, 2011)
\nData source: AutoZone annual report.
\nFailure Maintenance Discretionary
\nA\/C Compressors Antifreeze & Windshield Washer Fluid Air Fresheners
\nBatteries & Accessories Brake Drums, Rotors, Shoes & Pads Cell Phone Accessories
\nBelts & Hoses Chemicals, including Brake & Power Drinks & Snacks
\nCarburetors Steering Fluid, Oil & Fuel Additives Floor Mats & Seat Covers
\nChassis Oil & Transmission Fluid Mirrors
\nClutches Oil, Air, Fuel & Transmission Filters Performance Products
\nCV Axles Oxygen Sensors Protectants & Cleaners
\nEngines Paint & Accessories Seat Covers
\nFuel Pumps Refrigerant & Accessories Sealants & Adhesives
\nFuses Shock Absorbers & Struts Steering Wheel Covers
\nIgnition Spark Plugs & Wires Stereos & Radios
\nLighting Windshield Wipers Tools
\nMufflers Wash & Wax
\nStarters & Alternators
\nWater Pumps
\nRadiators
\nThermostats
\nThis document is authorized for use only by Pablo Mercado (pmercado@bu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or
\n800-988-0886 for additional copies.
\n-16- UV6463
\nExhibit 9
\nAUTOZONE, INC.
\nShare Repurchases and ROIC 1996\u20132011
\nNote: ROIC is calculated as the sum of net income and tax-adjusted interest and rent expenses
\ndivided by the sum of average debt, average equity, six times rent expense (to approximate
\ncapitalizing rent), and average capital lease obligations.
\nData source: AutoZone annual reports.<\/p>\n
0%
\n5%
\n10%
\n15%
\n20%
\n25%
\n30%
\n35%
\n$0
\n$200
\n$400
\n$600
\n$800
\n$1,000
\n$1,200
\n$1,400
\n$1,600
\n1996
\n1997
\n1998
\n1999
\n2000
\n2001
\n2002
\n2003
\n2004
\n2005
\n2006
\n2007
\n2008
\n2009
\n2010
\n2011
\nReturns
\nShare Repurchase Amount ($ millions)
\nShare repurchases ROIC
\nThis document is authorized for use only by Pablo Mercado (pmercado@bu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or
\n800-988-0886 for additional copies.
\n-17- UV6463
\nExhibit 10
\nAUTOZONE, INC.
\nAftermarket Auto Parts Industry Structure
\nNote: The top 10 companies (stores) as of August 2010: AutoZone (4,728),
\nO\u2019Reilly Auto Parts (3,657), Advance Auto Parts (3,627), General
\nParts\/CARQUEST (1,500), Genuine Parts\/NAPA (1,035), Pep Boys (630),
\nFisher Auto Parts (406), Uni-Select (273), Replacement Parts (155), and AutoWares Group (128).
\nData sources: AAIA Factbook and SEC filings.
\n0%
\n5%
\n10%
\n15%
\n20%
\n25%
\n30%
\n35%
\n40%
\n45%
\n50%
\n0
\n5,000
\n10,000
\n15,000
\n20,000
\n25,000
\n30,000
\n35,000
\n40,000
\n2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
\nConcentration of Top 10 Retailers
\nTotal Stores for Inudstry
\nIndustry Top 10 Auto Parts Stores
\nThis document is authorized for use only by Pablo Mercado (pmercado@bu.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or
\n800-988-0886 for additional copies.<\/p>\n","protected":false},"excerpt":{"rendered":"
UV6463 Rev. Nov. 20, 2013 This case was prepared by Justin Brenner (MBA \u201912) under the supervision of Kenneth Eades, Paul Tudor Jones Research Professor\u2026<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7643,7642,7645,7644],"tags":[7678,8989,8988,7387,633,8991,630,8987,8994,8467,15,8990,7656,7571,8993,66,8992],"class_list":["post-105091","post","type-post","status-publish","format-standard","hentry","category-custom-same-day-essays","category-custom-writings-writers","category-do-my-essay-mla-format","category-write-my-paper-hub-writers","tag-best-custom-paper-writing-service","tag-best-online-paper-writing-service","tag-best-paper-writing-service","tag-best-research-paper-writing-services","tag-cheap-research-paper-writing-service","tag-cheapest-paper-writing-service","tag-college-paper-writing-service","tag-free-paper-writing-service","tag-free-term-paper-writing-service","tag-paper-writing-service","tag-paper-writing-service-reddit","tag-professional-paper-writing-service","tag-someone-to-write-my-paper","tag-websites-that-write-papers-for-you","tag-what-is-the-best-paper-writing-service","tag-write-my-paper","tag-write-my-paper-for-me-free"],"_links":{"self":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/posts\/105091","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/comments?post=105091"}],"version-history":[{"count":0,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/posts\/105091\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/media?parent=105091"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/categories?post=105091"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/tags?post=105091"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}