General Background of Organization

Autozone Inc.

Baker Adhesives

Jacqueline Lau

Stetson Strifler

Tarleton State University

FIN-403/505, Spring Semester, Sect. 010

Dr. Omar A. Esqueda

April 8, 2013

Table of Contents

Executive Summary.........................................................................................................................3

General Background of Organization..............................................................................................3

Overview of Financial Analysis Tools............................................................................................4

Stock Repurchases and the Benefits They Offer.............................................................................5

Alternative Operating Cash Flow Options.......................................................................................6

Issuing a Dividend...........................................................................................................................6

Organic Growth ..............................................................................................................................7

Growth by Acquisition.....................................................................................................................8

Debt Retirement...............................................................................................................................8

Recommendation for Autozone.......................................................................................................9

Recommendation for Mark Johnson .............................................................................................10

References......................................................................................................................................12

Executive Summary

Throughout this report, a case analysis will be conducted over the primary topic of share repurchases and dividends, namely concerning Autozone, Inc. (Autozone) and the strategy for the future use of its cash flows. Within this case analysis, we will examine Autozone's stock repurchasing program, as well as the mechanics behind it and the benefits it provides to the firm. Additionally, this report will analyze the alternative operating cash flow options Autozone should consider, detailing the benefits and costs of each option. A comprehensive examination of these operating cash flow alternatives will be presented, allowing for the determination of the most viable alternative for the use of Autozone's operating cash flows.

General Background of Organization

Founded in 1979 under the name AutoShack, Autozone has grown to become the leading retailer of automotive replacement parts and accessories in the United States, employing nearly 65,000 employees with over 4,800 locations in North America. After changing their name to Autozone in 1987, the company was able to implement the first electronic auto-parts catalogue in the retail industry, helping to establish their dominant position in the market. Because the firm was able to record steady growth for years, it was taken public in 1991, allowing it to be listed on the New York Stock Exchange (NYSE) under the ticker symbol AZO. Along with heavy investments in their retail footprint, Autozone had also developed a refined hub-and-feeder inventory system, keeping in-store inventory levels low while reducing the chance of stock outages. Because of their revolutionary electronic catalogue and their sophisticated inventory system, Autozone was able to develop category leading distribution capabilities, giving them the highest operating margin in the industry. Focusing on return on invested capital (ROIC) as the primary way to measure the firm's valuation, Autozone consistently invests in opportunities that lead to top-line revenue growth, ultimately leading to increased margins. As a way to return capital to their equity investors, Autozone has opted to use a share repurchasing program since 1998. Because of their consistent use of the share repurchasing program since its inception in 1998, there has been a 39% reduction in shares outstanding, reducing shareholder's equity to negative $1.2 billion by 2011. Funded by strong operating cash flows and the issuance of debt, Autozone's share repurchasing program has allowed their invested capital to remain relatively stable, creating an attractive ROIC for the firm (Brenner & Eades, 2012).

Overview of Financial Analysis Tools

In order to fully understand the value that is generated through a stock repurchasing program, it is important to comprehend the financial ratios that will be discussed in this case analysis. (See Table 1.1)

Table 1.1

Financial Ratio | Formula | Use |

Return on Total Assets | Net Income available to CS ÷ Total Assets | Measure of how well management is using its assets to generate earnings |

Return on Common Equity | Net Income available to CS ÷ Common Equity | Stockholders invest in order to garner a return, this tells how well they are doing in an accounting sense |

Price/Earnings Ration | Price Per Share ÷ Earnings Per Share | How much investors are willing to pay per dollar of reported profits |

Earnings Per Share | (Net Income - Preferred Dividends) ÷ Total Shares Outstanding | Portion of a firm's profits allocated to each outstanding share of common stock, a measure of profitability |

Return on Invested Capital | (Net Income - Dividends) ÷ Total Capital | Assesses a company's efficiency at allocating the capital under its control to profitable investments |

Stock Repurchases and the Benefits They