UV6463
Rev. Nov. 20, 2013
This case was prepared by Justin Brenner (MBA ’12) under the supervision of Kenneth Eades, Paul Tudor Jones
Research Professor of Business Administration. It was written as a basis for class discussion rather than to illustrate
effective or ineffective handling of an administrative situation. The character of Mark Johnson and the Johnson &
Associates company are fictional. Copyright 2012 by the University of Virginia Darden School Foundation,
Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com.
No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in
any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission
of the Darden School Foundation.
AUTOZONE, INC.
On February 1, 2012, Mark Johnson, portfolio manager at Johnson & Associates, an asset
management company, was in the process of reviewing his largest holdings, which included
AutoZone, an aftermarket auto-parts retailer. AutoZone shareholders had enjoyed strong price
appreciation since 1997, with an average annual return of 11.5% (Exhibit 1). The stock price
stood at $348, but Johnson was concerned about the recent news that Edward Lampert,
AutoZone’s main shareholder, was rapidly liquidating his stake in the company.
Since 2004, AutoZone shareholders had received large distributions of the company’s
cash flows in the form of share repurchases. When a company repurchased its own shares, it
enhanced earnings per share by reducing the shares outstanding, and it also served to reduce the
book value of shareholders’ equity (see AutoZone financial statements in Exhibits 2, 3, 4, and
5). Johnson felt that Lampert was likely a driving force behind AutoZone’s repurchase strategy
because the repurchases started around the time Lampert acquired his stake and accelerated as he
built up his position. Now that Lampert was reducing his stake, however, Johnson wondered if
AutoZone would continue to repurchase shares or if the company would change its strategy and
use its cash flows for initiating a cash dividend or reinvesting the cash in the company to grow its
core business. In addition, given its large debt burden (Exhibit 6), AutoZone could choose to
repay debt to improve its credit rating and increase its financial flexibility.
With AutoZone potentially changing its strategy for the use of its cash flows, Johnson
needed to assess the impact of the change on the company’s stock price and then decide whether
he should alter his position on the stock.
The Auto Parts Business
Aftermarket auto-parts sales were split into Do-It-Yourself (DIY) and Do-It-For-Me
(DIFM) segments. In the DIY segment, automobile parts were sold directly to vehicle owners
who wanted to fix or improve their vehicles on their own. In the DIFM segment, automobile
repair shops provided the parts for vehicles left in their care for repair. DIY customers were
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serviced primarily through local retail storefronts where they could speak with a knowledgeable
sales associate who located the necessary part. Because of their expertise in repairing vehicles,
DIFM service providers generally did not require storefront access or the expertise of a sales
associate. DIFM customers, however, were concerned with pricing, product availability, and
efficient product delivery.
Sales in both segments were strongly related to the number of miles a vehicle had been
driven. For the DIY segment, the number of late-model cars needing repair was also a strong
predictor of auto-parts sales. As the age of a car increased, more repairs were required, and the
owners of older cars were more likely to repair these senior vehicles themselves (Exhibit 7).
The number of miles a car was driven was affected by several economic fundamentals,
the most important of which was the cost of gasoline. The number of older cars on the road
increased during those times when fewer consumers bought new cars. New car purchases were
subject to the same general economic trends applicable to most durable goods. As a result, in
periods of strong economic growth and low unemployment, new car sales increased. Conversely,
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.
Overall, when the economy was doing well, gas prices and new car sales both increased,
decreasing the number of older cars on the road and also the amount of additional mileage
accumulated. When the economy did poorly, gas prices and new car sales were more likely to be
depressed, increasing the utilization of older cars and adding to their mileage. Because of these
dynamics, auto-parts sales, especially in the DIY segment, were somewhat counter-cyclical.
The auto-parts business consisted of a large number of small, local operations as well as a
few large, national retailers, such as AutoZone, O’Reilly Auto Parts, Advance Auto Parts, and
Pep Boys. The national chains had sophisticated supply-chain operations to ensure that an
appropriate level of inventory was maintained at each store while managing the tradeoff between
minimizing inventory stock outs and maximizing the number of stock-keeping units (SKUs).
This gave the large, national retailers an advantage because customers were more likely to find
the parts they wanted at one of these stores. Counterbalancing the inventory advantage, however,
was the expertise of sales associates, which allowed the smaller, local stores to enhance the
customer service experience in DIY sales.
Recent Trends
In 2008, the U.S. economy had gone through the worst recession since the Great
Depression, and the recovery that followed had been unusually slow. As a result, the auto-parts
retail business enjoyed strong top-line growth. The future path of the U.S. economy was still
highly uncertain as was the potential for a disconnect between GDP growth and gas price
increases and between gas prices and miles driven. Furthermore, as auto-parts retailers operated
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with high-gross margins and significant fixed costs, profits varied widely with the level of sales,
making the near-term earnings in the auto-parts retail segment particularly difficult to predict.
The auto-parts retail business experienced more competition as national retailers
continued to expand their operations. Most of their expansion was at the expense of local
retailers, but competition between major national retailers was heating up. If the economy
strengthened and the auto-parts retail business was negatively affected by the replacement of
older cars with new ones, competition between large, national retailers could make a bad
situation worse.
Linked to high levels of industry competition and the expansion of the major retailers was
the possibility that growth would eventually hit a wall if the market became oversaturated with
auto-parts stores. Despite this concern, by 2012, AutoZone1
management had stated that it was
not seeing any signs of oversaturation, implying that expansion opportunities still remained.
The industry was also seeing an increase in sales via online channels as consumers
enjoyed the flexibility of purchasing online and either picking up an order at the most convenient
location or having it delivered to their doorstep. Given the high operating leverage provided by
selling through online channels, especially given the preexisting supply chains that already were
built for storefront operations, as well as the growth in this channel, the national retail chains
continued to invest in their online solutions and looked at that channel for future earnings
growth.
Finally, another trend was the expansion of the large, U.S. auto-parts retailers into
adjacent foreign markets, such as Mexico, Canada, and Puerto Rico. Thus far, the national retail
companies were successful using this strategy, but their ability to continue to succeed and
prosper in these markets, as well as in new, attractive locations such as Brazil, was not yet a
reality.
AutoZone
AutoZone’s first store opened in 1979, under the name of Auto Shack in Forrest City,
Arizona. In 1987, the name was changed to AutoZone, and the company implemented the first
electronic auto-parts catalog for the retail industry. Then` in 1991, after four years of steady
growth, AutoZone went public and was listed on the New York Stock Exchange under the ticker
symbol AZO.
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 located in
1
AutoZone Q1 2012 Earnings Call—“I haven’t seen a market yet that was so saturated that we were challenged
economically,” Bill Rhodes, AutoZone chairman, president, and CEO.
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every state in the contiguous United States, Puerto Rico, and Mexico. AutoZone also distributed
parts to commercial repair shops. In addition, a small but growing portion of AutoZone sales
came through its online channel.
From the beginning, AutoZone had invested heavily in expanding its retail footprint via
both organic and inorganic growth. It had also developed a sophisticated hub-and-feeder
inventory system that kept the inventories of individual stores low as well as reduced the
likelihood of stock outs. The expansion of its retail footprint had driven top-line revenue growth.
AutoZone’s success in developing category-leading distribution capabilities had resulted in both
the highest operating margin for its industry and strong customer service backed by the ability of
its distribution network to supply stores with nearly all of the AutoZone products on a same-day
basis (Exhibit 8).
AutoZone’s management focused on after-tax return on invested capital (ROIC) as the
primary way to measure value creation for the company’s capital providers. As a result, while
AutoZone management invested in opportunities that led to top-line revenue growth and
increased margins, it also focused on capital stewardship. What resulted was an aggressively
managed working capital at the store level through the efficient use of inventory as well as
attractive terms from suppliers.
Starting in 1998, AutoZone had returned capital to its equity investors through share
repurchases. Although share-repurchase programs were common among U.S. companies, the
typical result was a modest impact on shares outstanding. AutoZone’s consistent use of share
repurchases, however, had resulted in a significant reduction of both the shares outstanding and
the equity capital. In particular, shares outstanding had dropped 39% from 2007 to 2011, and
shareholders’ equity had been reduced to a negative $1.2 billion in 2011. The repurchases had
been funded by strong operating cash flows and by debt issuance. The net result was that
AutoZone’s invested capital had remained fairly constant since 2007, which, combined with
increased earnings, created attractive ROIC levels (Exhibit 9).
Operating Cash Flow Options
While AutoZone had historically repurchased shares with operating cash flow, Mark
Johnson felt that Edward Lampert’s reduced stake in the company could prompt management to
abandon repurchases and use the cash flows for other purposes. For example, AutoZone could
distribute cash flows through cash dividends, reinvest the cash flows back into the core business,
or use the funds to acquire stores. The company could also invest further in its operational
capabilities to stay on the leading edge of the retail auto-parts industry. Finally, given a negative
book-equity position and a continually growing debt load, AutoZone might consider using its
cash flows to pay down debt to increase its future financial flexibility.
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Dividends versus share repurchases
Assuming that AutoZone decided to distribute some of its operating cash flows to
shareholders, the company had the choice of distributing the cash through dividends, share
repurchases, or some combination of the two. Dividends were seen as a way to provide cash to
existing shareholders, whereas only those shareholders who happened to be selling their shares
would receive cash from a share-repurchase program. On the other hand, dividends were taxed at
the shareholder level in the year received, whereas if a share-repurchase program succeeded in
increasing the share price, the nonselling shareholders could defer paying taxes until they sold
the stock.2
Dividends were also generally considered to be “sticky,” meaning that the market
expected a company to either keep its dividend steady or raise it each year. Because of this
mindset, the implementation of a dividend or an increase of the dividend was usually interpreted
by the market as a positive signal of the firm’s ability to earn enough to continue paying the
dividend far into the future. Conversely, any decrease in the dividend was normally viewed by
the market as a very negative signal. Therefore, the stock price tended to change according to the
dividend news released by the firm, which would be favorable for AutoZone shareholders so
long as management was able to continue or increase the dividend each year.
Share repurchases were not viewed as sticky by the market because the amount of the
repurchase often varied each year. The variance in the shares purchased might be caused by
economic headwinds or tailwinds or differences in the quantity and size of investment
opportunities that management believed would create shareholder value. Also, share repurchases
were seen by some as a way to signal management’s belief that the stock was undervalued and
thus represented a good investment for the company.
Some companies chose to return shareholder capital through both dividends and share
repurchases. In most of these cases, the company provided a stable but relatively small cash
dividend and then repurchased shares at varying levels according to the circumstances each year.
The benefit of this approach was to give shareholders the benefit of a sticky dividend while also
receiving the price support of share repurchases.
Organic growth
AutoZone could consider using its operating cash flow to increase the number of new
stores it opened each year. Although the retail auto-parts industry was competitive and relatively
mature, AutoZone’s CEO had recently indicated that he did not see oversaturation of retail autoparts stores in any of the company’s markets.3
Therefore, AutoZone could seize the opportunity
2
Current tax laws did allow for most dividends to be taxed at the same long-term capital gains rates, although
this was not always the case, and the tax law regarding dividends was not certain going forward. 3
See footnote 1.
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to expand more rapidly and perhaps preempt competition from gaining a foothold in those
markets.
Rapid expansion came with a number of risks. First, Johnson was not sure that AutoZone
had the managerial capacity to expand that swiftly. The company’s growth in recent years had
been substantial as were the returns on investment, but it was not apparent if further growth
would necessarily continue to create value. In addition, Johnson reasoned that the best retail
locations were already covered and that remaining areas would have lower profitability. This
could be exacerbated if AutoZone expanded into areas that were less well served by its
distribution network.
Johnson thought that there were some very attractive overseas investment opportunities
as evidenced by successful store openings in Mexico and Puerto Rico. AutoZone’s 2011 annual
report indicated work was underway to expand into Brazil over the next several years.4
The
company could increase its global presence by aggressively opening multiple stores in Brazil and
other international locations. Hasty expansion into foreign markets, however, brought with it not
only the risks of rapid store expansion but also the difficulties inherent in transferring and
translating the domestically successful supply model.
Growth by acquisition
Johnson noted that in 1998 AutoZone had acquired over 800 stores from competitors and
reasoned that another way to swiftly increase revenues would be for AutoZone to acquire other
auto-parts retail stores. While this strategy would require some postmerger integration
investment, such stores would be productive much more quickly than greenfield stores and
shorten the return time on AutoZone’s investment. This was an interesting strategy, but Johnson
also knew that industry consolidation (Exhibit 10) had removed most of the viable takeover
targets from the market; therefore it was unclear whether a merger of two of the large players
would be allowed by the U.S. Department of Justice.
Debt retirement
A final consideration was whether AutoZone might use part or all of its operating cash
flows to retire some of the debt that the company had accumulated over the years. Much of the
debt had been used to fund the share repurchases, but with a negative book-equity position and
such a large debt position, Johnson wondered whether it was prudent to continue adding debt to
the balance sheet. If AutoZone ran into trouble, it could struggle under the strain of making the
interest payments and rolling over maturing debt. At some point, it was conceivable that
4
AutoZone annual report, 2011.
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AutoZone could lose its investment-grade credit rating,5
which would only make future debt
financing more difficult to secure and more expensive.
The Decision
Johnson had to decide what to do with his AutoZone investment. He was impressed with
the company’s history of strong shareholder returns and its leading position in the industry. Still
he wondered if Lampert’s reduced influence and the potential for less favorable economic trends
for auto-parts retailers were enough uncertainty for him to consider selling some or all of his
position in the stock. As an analyst, Johnson’s first consideration regarding the value of a
company was to determine how well management was using the operating cash flow to
maximize value for shareholders. Based on the ROIC (Exhibit 9), AutoZone was earning high
returns on the capital invested in the company, which was undoubtedly the primary driver of
stock returns. The extent to which share repurchases had contributed to the stock’s performance,
however, was less clear.
How would the market react to the news that AutoZone was reducing or eliminating its
share repurchases after years of consistently following that strategy? Did the market view
AutoZone’s share repurchases as a cash dividend or was it indifferent about whether cash flows
were distributed by repurchasing shares or paying a cash dividend? In any case, Johnson
wondered if any move away from repurchasing shares after so many years might cause the stock
price to fall, regardless of how the cash flows were ultimately spent. Or would AutoZone’s stock
price continue to appreciate as it had in the past so long as it continued to produce strong cash
flows?
5
Moody’s and S&P had consistently assigned investment-grade ratings of Baa and BBB, respectively, for
AutoZone’s senior unsecured debt.
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Exhibit 1
AUTOZONE, INC.
Edward Lampert’s Position in AutoZone
AutoZone’s Stock Price Performance
Data source: Bloomberg.
0
5
10
15
20
25
30
Mar-02
Aug-02
Jan-03
Jun-03
Nov-03
Apr-04
Sep-04
Feb-05
Jul-05
Dec-05
May-06
Oct-06
Mar-07
Aug-07
Jan-08
Jun-08
Nov-08
Apr-09
Sep-09
Feb-10
Jul-10
Dec-10
May-11
Oct-11
Shares Held (millions)
Shares
0%
200%
400%
600%
800%
1000%
1200%
1400%
Dec-96
Jul-97
Feb-98
Sep-98
Apr-99
Nov-99
Jun-00
Jan-01
Aug-01
Mar-02
Oct-02
May-03
Dec-03
Jul-04
Feb-05
Sep-05
Apr-06
Nov-06
Jun-07
Jan-08
Aug-08
Mar-09
Oct-09
May-10
Dec-10
Jul-11
Relative Cumulative Return
AutoZone S&P 500
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Exhibit 2
AUTOZONE, INC.
AutoZone Income Statement
(August FY, in thousands of dollars, except ratios and per-share data)
Data source: AutoZone annual reports.
August 27, August 28, August 29, August 30, August 25,
2011 2010 2009 2008 2007
Net sales $8,072,973 $7,362,618 $6,816,824 $6,522,706 $6,169,804
Cost of sales 3,953,510 3,650,874 3,400,375 3,254,645 3,105,554
Gross profit 4,119,463 3,711,744 3,416,449 3,268,061 3,064,250
SG&A 2,624,660 2,392,330 2,240,387 2,143,927 2,008,984
Operating profit 1,494,803 1,319,414 1,176,062 1,124,134 1,055,266
Interest expense, net 170,557 158,909 142,316 116,745 119,116
Income before income taxes 1,324,246 1,160,505 1,033,746 1,007,389 936,150
Income tax expense 475,272 422,194 376,697 365,783 340,478
Net income $848,974 $738,311 $657,049 $641,606 $595,672
Wt. avg. shares for basic EPS 42,632 48,488 55,282 63,295 69,101
Effect of dilutive stock equivalents 971 816 710 580 743
Adj. wt. avg. shares for diluted EPS 43,603 49,304 55,992 63,875 69,844
Basic earnings per share $19.91 $15.23 $11.89 $10.14 $8.62
Diluted earnings per share $19.47 $14.97 $11.73 $10.04 $8.53
Other information:
EBIT $1,494,803 $1,319,414 $1,176,062 $1,124,134 $1,055,266
Depr. & Amort. 196,209 192,084 180,433 169,509 159,411
EBITDA $1,691,012 $1,511,498 $1,356,495 $1,293,643 $1,214,677
EBITDA/Interest 9.9x 9.5x 9.5x 11.1x 10.2x
Year ended
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Exhibit 3
AUTOZONE, INC.
AutoZone Balance Sheet (August FY, in thousands of dollars)
Data source: AutoZone annual reports.
August 27, August 28, August 29, August 30, August 25,
2011 2010 2009 2008 2007
Assets
Current assets:
Cash and cash equivalents $97,606 $98,280 $92,706 $242,461 $86,654
Accounts receivable 140,690 125,802 126,514 71,241 59,876
Merchandise inventories 2,466,107 2,304,579 2,207,497 2,150,109 2,007,430
Other current assets 88,022 83,160 135,013 122,490 116,495
Deferred income taxes – – – – –
Total current assets 2,792,425 2,611,821 2,561,730 2,586,301 2,270,455
Property and equipment:
Land 740,276 690,098 656,516 643,699 625,992
Buildings and improvements 2,177,476 2,013,301 1,900,610 1,814,668 1,720,172
Equipment 994,369 923,595 887,521 850,679 780,199
Leasehold improvements 275,299 247,748 219,606 202,098 183,601
Construction in progress 184,452 192,519 145,161 128,133 85,581
Gross property and equipment 4,371,872 4,067,261 3,809,414 3,639,277 3,395,545
Less: Accumulated depreciation and amortization 1,702,997 1,547,315 1,455,057 1,349,621 1,217,703
Net property and equipment 2,668,875 2,519,946 2,354,357 2,289,656 2,177,842
Goodwill 302,645 302,645 302,645 302,645 302,645
Deferred income taxes 10,661 46,223 59,067 38,283 21,331
Other long-term assets 94,996 90,959 40,606 40,227 32,436
Total assets $5,869,602 $5,571,594 $5,318,405 $5,257,112 $4,804,709
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable $2,755,853 $2,433,050 $2,118,746 $2,043,271 $1,870,668
Accrued expenses and other 449,327 432,368 381,271 327,664 307,633
Income taxes payable 25,185 25,385 35,145 11,582 25,442
Deferred income taxes 166,449 146,971 171,590 136,803 82,152
Short-term borrowings 34,082 26,186 – – –
Total current liabilities 3,430,896 3,063,960 2,706,752 2,519,320 2,285,895
Long-term debt 3,317,600 2,882,300 2,726,900 2,250,000 1,935,618
Other long-term liabilities 375,338 364,099 317,827 258,105 179,996
Stockholders’ deficit:
Common stock, par: $0.01/share 441 501 579 636 713
Additional paid-in capital 591,384 557,955 549,326 537,005 545,404
Retained earnings (643,998) (245,344) 136,935 206,099 546,049
Accumulated other comprehensive loss (119,691) (106,468) (92,035) (4,135) (9,550)
Treasury stock, at cost (1,082,368) (945,409) (1,027,879) (509,918) (679,416)
Total stockholders’ equity (1,254,232) (738,765) (433,074) 229,687 403,200
Total liabilities and stockholders’ equity $5,869,602 $5,571,594 $5,318,405 $5,257,112 $4,804,709
Shares issued 44,084 50,061 57,881 63,600 71,250
Shares outstanding 40,109 45,107 50,801 59,608 65,960
Other information:
Capital lease obligations 86,656 88,280 54,764 64,061 55,088
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Exhibit 4
AUTOZONE, INC.
AutoZone Statement of Cash Flows (August FY, in thousands of dollars)
Data source: AutoZone annual reports.
August 27, August 28, August 29, August 30, August 25,
2011 2010 2009 2008 2007
Cash flows from operating activities:
Net income $848,974 $738,311 $657,049 $641,606 $595,672
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of property and equipment 196,209 192,084 180,433 169,509 159,411
Amortization of debt origination fees 8,962 6,495 3,644 1,837 1,719
Income tax benefit from exercise of stock options (34,945) (22,251) (8,407) (10,142) (16,523)
Deferred income taxes 44,667 (9,023) 46,318 67,474 24,844
Share-based compensation expense 26,625 19,120 19,135 18,388 18,462
Other – – – – –
Changes in operating assets and liabilities:
Accounts receivable (14,605) 782 (56,823) (11,145) 20,487
Merchandise inventories (155,421) (96,077) (76,337) (137,841) (160,780)
Accounts payable and accrued expenses 342,826 349,122 137,158 175,733 186,228
Income taxes payable 34,319 12,474 32,264 (3,861) 17,587
Other, net (6,073) 5,215 (10,626) 9,542 (1,913)
Net cash provided by operating activities 1,291,538 1,196,252 923,808 921,100 845,194
Cash flows from investing activities:
Capital expenditures (321,604) (315,400) (272,247) (243,594) (224,474)
Purchase of marketable securities (43,772) (56,156) (48,444) (54,282) (94,615)
Proceeds from sale of marketable securities 43,081 52,620 46,306 50,712 86,921
Acquisitions – – – – –
Disposal of capital assets 3,301 11,489 10,663 4,014 3,453
Net cash used in investing activities (318,994) (307,447) (263,722) (243,150) (228,715)
Cash flows from financing activities:
Net proceeds from commercial paper 134,600 155,400 277,600 (206,700) 84,300
Net proceeds from short-term borrowings 6,901 26,186 – – –
Proceeds from issuance of debt 500,000 – 500,000 750,000 –
Repayment of debt (199,300) – (300,700) (229,827) (5,839)
Net proceeds from sale of common stock 55,846 52,922 39,855 27,065 58,952
Purchase of treasury stock (1,466,802) (1,123,655) (1,300,002) (849,196) (761,887)
Income tax benefit from exercise of stock options 34,945 22,251 8,407 10,142 16,523
Payments of capital lease obligations (22,781) (16,597) (17,040) (15,880) (11,360)
Other (17,180) – (15,016) (8,286) (2,072)
Net cash used in financing activities (973,771) (883,493) (806,896) (522,682) (621,383)
Effect of exchange rate changes on cash 553 262 (2,945) 539 –
Net (decrease) increase in cash and cash equivalents (674) 5,574 (149,755) 155,807 (4,904)
Cash and cash equivalents at beginning of year 98,280 92,706 242,461 86,654 91,558
Cash and cash equivalents at end of year $97,606 $98,280 $92,706 $242,461 $86,654
Supplemental cash flow information:
Interest paid, net of interest cost capitalized $155,531 $150,745 $132,905 $107,477 $116,580
Income taxes paid $405,654 $420,575 $299,021 $313,875 $299,566
Assets acquired through capital lease $32,301 $75,881 $16,880 $61,572 $69,325
Year ended
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Exhibit 5
AUTOZONE, INC.
AutoZone 2011 Statement of Stockholders’ Equity
(dollars in thousands)
Data source: AutoZone annual reports.
Accumulated
Common Additional Retained Other
Shares Common Paid-in (Deficit) Comprehensive Treasury
(in thousands) Issued Stock Capital Earnings Loss Stock Total
Balance at August 28, 2010 50,061 501 $557,955 ($245,344) ($106,468) ($945,409) ($738,765)
Net income 848,974 848,974
Pension liability adjustments, net of taxes of ($3,998) (17,346) (17,346)
Foreign currency translation adjustment 8,347 8,347
Unrealized loss adjustment on marketable securities, net of taxes of ($91) (171) (171)
Net losses on terminated derivatives (5,453) (5,453)
Reclassification of net losses on derivatives into earnings 1,400 1,400
Comprehensive income 835,751
Purchase of 5,598 shares of treasury stock (1,466,802) (1,466,802)
Retirement of treasury shares (6,577) (66) (82,150) (1,247,627) 1,329,843 —
Sale of common stock under stock options and stock purchase plan 600 6 55,840 55,846
Share-based compensation expense 24,794 24,794
Income tax benefit from exercise of stock options 34,945 34,945
Other (1) (1)
Balance at August 27, 2011 44,084 441 $591,384 ($643,998) ($119,691) ($1,082,368) ($1,254,232)
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Exhibit 6
AUTOZONE, INC.
AutoZone Capital Structure and Coverage Ratio
Note: Coverage ratio is defined as EBITDA divided by interest expense.
Data source: AutoZone annual reports.
-8.0x
-6.0x
-4.0x
-2.0x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
-$2.0
-$1.0
$0.0
$1.0
$2.0
$3.0
$4.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Coverage Ratio
Book Values ($ billions)
Debt ($B) Equity ($B) Coverage Ratio
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Exhibit 7
AUTOZONE, INC.
Miles Driven and Average Vehicle Age
Data sources: U.S. Department of Transportation (miles driven) and Polk Research (vehicle age).
0.0
2.0
4.0
6.0
8.0
10.0
12.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Average Vehicle Age (years)
Distance traveled (trillion miles)
Distance traveled Average age
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Exhibit 8
AUTOZONE, INC.
Merchandise Listing (as of October 17, 2011)
Data source: AutoZone annual report.
Failure Maintenance Discretionary
A/C Compressors Antifreeze & Windshield Washer Fluid Air Fresheners
Batteries & Accessories Brake Drums, Rotors, Shoes & Pads Cell Phone Accessories
Belts & Hoses Chemicals, including Brake & Power Drinks & Snacks
Carburetors Steering Fluid, Oil & Fuel Additives Floor Mats & Seat Covers
Chassis Oil & Transmission Fluid Mirrors
Clutches Oil, Air, Fuel & Transmission Filters Performance Products
CV Axles Oxygen Sensors Protectants & Cleaners
Engines Paint & Accessories Seat Covers
Fuel Pumps Refrigerant & Accessories Sealants & Adhesives
Fuses Shock Absorbers & Struts Steering Wheel Covers
Ignition Spark Plugs & Wires Stereos & Radios
Lighting Windshield Wipers Tools
Mufflers Wash & Wax
Starters & Alternators
Water Pumps
Radiators
Thermostats
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Exhibit 9
AUTOZONE, INC.
Share Repurchases and ROIC 1996–2011
Note: ROIC is calculated as the sum of net income and tax-adjusted interest and rent expenses
divided by the sum of average debt, average equity, six times rent expense (to approximate
capitalizing rent), and average capital lease obligations.
Data source: AutoZone annual reports.
0%
5%
10%
15%
20%
25%
30%
35%
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Returns
Share Repurchase Amount ($ millions)
Share repurchases ROIC
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Exhibit 10
AUTOZONE, INC.
Aftermarket Auto Parts Industry Structure
Note: The top 10 companies (stores) as of August 2010: AutoZone (4,728),
O’Reilly Auto Parts (3,657), Advance Auto Parts (3,627), General
Parts/CARQUEST (1,500), Genuine Parts/NAPA (1,035), Pep Boys (630),
Fisher Auto Parts (406), Uni-Select (273), Replacement Parts (155), and AutoWares Group (128).
Data sources: AAIA Factbook and SEC filings.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Concentration of Top 10 Retailers
Total Stores for Inudstry
Industry Top 10 Auto Parts Stores
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