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Case30 Autozone

Autor:   •  February 13, 2019  •  1,838 Words (8 Pages)  •  1,082 Views

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However, share repurchase is an alternative of dividend distribution to investors which generally sends a positive signal to investors due to positive management’s belief that the stock is currently undervalued.

Therefore, AutoZone may use this tactic in order to send positive signal to marketplace and drive the value of the share.

- To defer income tax of investors

Basically, dividends are taxed at the shareholder level in the year received, whereas share repurchase program as an alternative of dividend distribution could help non-selling investors to defer paying tax until they sold the share.

Therefore, AutoZone may use this tactic to attract investors who want to lower their tax liabilities which could lead to the increase in share price.

Impact of Share Repurchase

As mentioned earlier that share repurchase program would be a key driver of the increase in share price of AutoZone as share repurchase program directly impact Earning Per Share (EPS) and Return on Invested Capital (ROIC) positively.

EPS: The higher the share repurchase, the higher EPS of a company

[pic 8]

According to the EPS formula above, as number of common shares outstanding declines, EPS would increase respectively. Exhibit 2 also confirmed this statement.

[pic 9]

ROIC: The higher the share repurchase, the higher ROIC of a company

[pic 10]

According to the ROIC formula above, as average book value equity decline, ROIC would increase respectively. Exhibit 9 also confirmed this statement.

[pic 11]

In light of this, higher EPS and higher ROIC would send a positive signal that the company could give a strong return to investors; as a result, stock price of AutoZone increase aggressively as shown in Exhibit 1 below:

[pic 12]

4. Assume that AutoZone is planning to stop its share repurchase program. What would be the best alternative use of those cash flows? Why?

The share repurchase program of the company had compensated to the AZO’s shareholders of the company. Shareholders had enjoyed higher Earning Per Share due to lower amount of share outstanding. However, based on assumption that the company will stop the share repurchase program, the company had four alternatives to use their cash flow, those alternatives were;

- Paying the dividend versus share repurchase;

- Organic growth,

- Growth by acquisition and

- Debt retirement.

The best alternative for AutoZone is to choose organic growth, organic growth means that the company try to grow or expand into the domestic market as well as the foreign markets. This could be by opening new stores or by acquisition other companies. AutzoZone could expand into the new foreign market such as Brazil and the company could increase number of stores in existing foreign markets such as in Mexico and Puerto Rico. The company could also increase the number of new stores in the domestic market, this would help the company to compete with their competitors, however, the company should consider about the policy of the states as well, whereas there could be against antitrust law. The reason that organic growth should be the best alternative for the company because the company was in the growth stage by looking at the financial measurement of the company, it showed that it was constantly improving in terms of revenue growth, margin and earning per share. According to the AutoZone annual report 2011, it showed that the number of new stores opened in the domestic markets, the District of Columbia and in Puerto Rico had increased from 4,389 stored in year 2010 to 4,534 stores in year 2011, the number of new stores opened in the foreign market which was Mexico also increased from 238 stores to 279 stores which showed a positive signal of the company that the company could grow in both domestic and foreign markets. The stronger growth in the financial growth could be a good indicator whereby sales increased by 9.6% and same stall sales were growth at 6.3%, moreover, the operating profit increased to 13.3% whereas operating margin were up to 18.5% which resulted in a growing in net income to 15%. On the other hand, earning per share had increased to 30% from $14.97 per share in year 2010 to $19.47 per share in year 20111. Most importantly, the company should maintain its position as a leading retailer of auto-parts retailer in the United States.

5. What should Johnson do about his holdings of AutoZone shares?

Johnson was one of the major holding of AZO. The main concern of Johnson was that Mr. Edward Lampert wanted to liquidate his shares from AZO, and this could have an effect on the share repurchase program that the company has been doing. However, Johnson had 3 options to do with te position that he had, those options were:

- To buy or increase more of the position at AZO

- To sell and close his position at AZO

- To hold/ maintain his position at AZO

According to the information we had, the recommendation for Johnson was they should hold their shares position with the cautious, the reason was because the debt ratio of the company was not good, it was quite high and the share repurchase program of the company was quite risky due to the company used leverage to perform the program by using leverage it would lead to a higher debt ratios. Moreover, having a higher debt ratio could lead to a downgrade in credit rating which would have a negative impact on the company as well as the AZO share price. However, Johnson should hold the position at AZO because the financial performance of the company was doing better such as the number of same stall sales growth increased, the operating margin also improved including net margin performed better. The share prices should perform well and the price should appreciate because of the company future’s growth. Even though, Mr. Edward Lampert wanted to liquidate his position from the AutoZone but this action should not affect the share repurchase program of the company.

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