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 email@example.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.
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.