During AutoZone's (NYSE:AZO) most recent conference call, CFO Bill Giles stated, "We remain committed to both our investment-grade rating and our capital allocation strategy, and share repurchases are an important element of that strategy." That sounds like a good strategy, but with $1.3 billion in buybacks over the last fiscal year ending Aug. 30 and another $869 million in authorization for more, is the auto-parts company biting off more than it can chew?
Thin on cash
The problem with AutoZone is that most of its short-term assets are inventory. Inventory is something the company has to always have on stock in order to remain in business. Inventory has to be replaced just as fast as it is sold so there is always a large amount of liquidity tied up in inventory that isn't really available to pay bills with.
For AutoZone, that leaves it with $400 million in other current assets such as cash, $4.6 billion in short-term liabilities, and another $4.5 billion in long-term liabilities. In short, the company fully depends on its admittedly very larger cash flow to keep afloat but it has almost nothing tucked away for a rainy day.
Other factors to consider
On the one hand, AutoZone's interest expense on debt is almost a pittance. For years, it's only been a very tiny fraction of pre-tax income and even then it's mostly or all tax deductible. On the other hand, the company has been buying shares back of a sinking stock price while paying more than it could have if it waited.
Last quarter, for instance, AutoZone bought back about 356,000 shares for which it spent $528 per share or $188 million. This occurred while its retail sales were softening due to the improving economy turning consumers away from the do-it-yourself repair market and instead upgrading to new cars. Even though same-store sales were up that was only thanks to average ticket while the more important traffic figure was negative.
It would seem that instead of propping up its earnings by buying back shares at what might prove to be high prices, AutoZone might want to pay down some of its debt and/or store up some cash. Instead, the company has been taking on more debt while executing the buybacks.
I'm normally a big fan of buybacks as they show confidence but I prefer an already debt-laden company to execute these without having to go further into debt. Otherwise it's not really returning capital to shareholders -- it's robbing Peter to pay Paul.
Perhaps AutoZone feels it has to "do something" since expansion isn't paying off as well as it hoped in an already declining market, but I say it's better to be safe, store up the cash, and execute a buyback during more confident near-term times from a stockpile of cash instead of AutoZone squeezing out every last dime that comes in the door.