What happened
Shares of teen fashion retailer American Eagle Outfitters (AEO -1.57%) hit a high-water mark just shy of 13% this week according to data from S&P Global Market Intelligence. At the start of trading on Friday Nov. 5, meanwhile, the stock was still higher by roughly 11.5%. Although it's earnings season, the company doesn't report until Nov. 23, so the move didn't have anything to do with the retailer's earnings at all. It was likely attributable to an acquisition.
So what
There's a couple of unique things here. First, very often, when a company announces it is buying another company the acquirer's shares go down. That makes logical sense, given that the buyer has to come up with the cash to pay for the purchase and there's usually a premium involved. But instead, the stock went up. Second, American Eagle isn't buying another retail brand, which is what you might expect. It's buying a logistics company.
Image source: Getty Images.
American Eagle announced on Nov. 2 that it was buying Quiet Logistics for $350 million in cash. According to the retailer, "Quiet Logistics is a supply chain partner that utilizes state-of-the-art technology and robotics and has provided cost-effective in-market fulfillment services for AEO, as well as for numerous other leading consumer brands." In other words, American Eagle is buying a current supplier that will help it internalize its supply chain processes, including adding physical distribution hubs near major cities like Boston, Chicago, Los Angeles, Dallas, St. Louis, and Jacksonville. Being close to demand centers helps to speed up delivery times.
American Eagle expects the purchase to be accretive in the first year. Although the acquisition solidifies the retailer's distribution capabilities, Quiet Logistics will be run as an independent entity. In fact, Quiet Logistics will continue to offer its services to other companies, adding a new income stream to American Eagle's business. This is an unusual set up, since it means American Eagle could be supporting the business efforts of direct and indirect competitors. From a long-term perspective it could also make it more difficult to assign American Eagle a valuation, given that it is both a retailer and a service provider to the retail industry.
Now what
It appears that investors like American Eagle's moves to ensure it has timely distribution, which is increasingly important in today's digital world. While it is too soon to really decide if the unique plan, to effectively build a vertically integrated teen retailer, will be a winning move, it is certainly an interesting decision on the part of management. Long-term investors should probably take a little bit of time to contemplate the implications, both good and bad, of this business direction before jumping aboard.
