Imagine this potential scenario for a moment. William Giles, CFO of AutoZone (NYSE:AZO) walks into the office of Timothy Briggs, Senior VP of Human Resources. Giles says, "Tim, I think we need to do a better job repurchasing our shares. Here's what I'd like to do. For every $1 per share we pay above the average trading price of our stock in any given year, we will grant a million dollars in stock to our employees. It's not a lot but maybe it'll teach us to buy back our stock only when it's truly on sale."

Shareholders can relax. This would never happen. Do you know why? It's because most companies have no idea whether their stock is cheap or not. All the C-Suite wants to do is keep the earnings-per-share-train rolling. For them, it's the difference between a good paycheck and a great one.

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A Million Here A Million There
AutoZone in the last three years bought back 22.1 million shares at an average price of $131.72. The average trading price of its shares over this period was $122.25, a difference of $9.47 a share. Thus, it paid $209 million more than necessary. Applying the scenario above, AutoZone would have to issue $10 million in stock to its employees. This is peanuts when you consider it willingly overpaid for its shares. I continue to wonder if CEOs and the boards they report to will ever learn. This is a classic case of human resources needing to stand up to investor relations and those at the top. Employees deserve better.

In Its Defense
Supporters of AutoZone will quite rightly point to its stock appreciation over the last five years. It's taken $100 and turned it into $197 while its peers took that same $100 and were only able to turn it into $141. However, this fails to take into account what might have happened if it didn't spend any money on share repurchases and instead invested those funds ($2.9 billion) in the business or better still; repaid debt. I fail to see how either of these moves wouldn't elicit a similar reaction from investors. Perhaps a look at AutoZone's peer group can answer this question more definitively.

Table 1: AutoZone & Peer Group Share Repurchases Over the Past Three Years




Company


Average Price Paid


Average Trading Price


Difference
+/-


3-Year Annual Total Return


AutoZone (NYSE:AZO)


$131.72


$122.25


-9.47


10.4%


Advance Auto Parts (NYSE:AAP)


$35.53


$36.05


0.52


2.8%


Genuine Parts (NYSE:GPC)


$39.85


$37.92


-$1.93


-1.3%


O\'Reilly Automotive (Nasdaq:ORLY)


No Repurchases


N/A


N/A


7.8%


Pep Boys (NYSE:PBY)


$18.19


$14.99


-$3.20


-15.8%


Divergent Results
The results are all over the map. At first glance, it appears there is nothing to discern from them. Upon closer inspection, I see an obvious conclusion. Despite AutoZone repurchasing $2.9 billion in stock, its shares outperformed O'Reilly Automotive's (no repurchases) by just 260 basis points annually. That's a huge amount of money wasted in my opinion. AutoZone could have done so much more with these funds including improving employee benefits and pay, initiating regular and/or special dividends as well as the suggestions made previously. While 10.4% annual returns are nothing to sneeze at, a more appropriate allocation of capital likely would have generated even greater returns.

Bottom Line
AutoZone operates a sound and profitable business. However, when it comes to share repurchases, like so many companies, it really needs to rethink what it's doing. This isn't monopoly money. The average American works damn hard for his paycheck. If I was a front-line employee of the company, I'd have a hard time understanding why I can't get a $1 an hour raise when the CEO made $3.2 million in 2009. Especially when you consider it had almost $3 billion reasons to approve it. (For further reading, see A Breakdown Of Stock Buybacks and 6 Bad Stock Buyback Scenarios.)

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Tickers in this Article: AZO, AAP, GPC, ORLY, PBY

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