This massive stock buyback has been financed by issuance of debt. As of May 5, 2012, total debt was more than $3.6 billion. This transformed AZO’s book value from a positive $6.11 per share at fiscal year-end 2007 to a negative $31.27 per share by Aug. 27, 2011. It’s significantly more negative on a per-share basis today.
2011 10-K - Stock Repurchase Program:
During 1998, the company announced a program permitting the company to repurchase a portion of its outstanding shares not to exceed a dollar maximum established by the board. The program was last amended on June 14, 2011, to increase the repurchase authorization to $10.4 billion from $9.9 billion. From January 1998 to Aug. 27, 2011, the company has repurchased a total of 127.3 million shares at an aggregate cost of $10.2 billion.
In fiscal Q3 (ended May 5, 2012) the company bought back 1.1 million shares at an average cost of $380 per share. AZO’s 10-K details how more than 100% of net cash provided from operations has been dedicated to this program.
Officially, AutoZone has posted nothing but good news. With all-time highs in revenues and EPS you’d think insider trading would reflect bullishness. They aren’t drinking the Kool-Aid. By August 15, shares have dropped more than $41 (-10.33%) since topping out at $399.10 in late April.
AutoZone’s management has levered up the company while using the billions in newly issued debt to buy back shares that officers and directors were selling on the open market. A great exit strategy for them but perhaps a warning sign for others.
AZO’s enormous debt leaves little margin of error in case of another recession or even a significant industry-specific slow down. Insiders haven’t been waiting around to see how this play will end. Perhaps you shouldn’t either.