What happened
Shares of The Container Store (TCS +0.00%), a retailer of home goods tied largely to storage, rose sharply on the first trading day of 2021 and were higher by as much as 16% at one point during the week according to data from S&P Global Market Intelligence. That said, it gave back some of the advance to start Friday, Jan. 7, up a still impressive 13.5% or so. The big news was an acquisition.
So what
Normally when a company announces that it is buying another company the acquirer's shares fall, as it has to come up with the funds to seal the deal. That obviously wasn't the case here, with The Container Store's shares advancing after the premarket announcement on Jan. 3, the first trading day of the new year, that it was spending $21.5 million to buy Closet Works. That company makes wood-based closet organization systems.
Image source: Getty Images.
That's a complementary product line for The Container Store's Elfa line of metal-based closet organization systems. This is a very important business for the retailer, noting that closet systems accounted for 16.9 percentage points of the company's 30.3% sales advance in the first six months of fiscal 2021, ended Oct. 2, 2021. In other words, Elfa basically drove more than half of the company's growth in the first six months of fiscal 2021. Investors clearly believe that augmenting that business with wood-based products is a good idea. Notably, the Closet Works purchase will include production assets, allowing The Container Store complete control over the sales process from production to installation. And, having those assets may also provide the ability to more easily integrate wood components into the Elfa line. So there are multiple benefits here that could help the company reach its goal of doubling sales over time. No wonder investors were so upbeat about the news.
Now what
It certainly looks as if The Container Store has made a strategically sound move by agreeing to buy Closet Works. If you are a shareholder or are thinking about investing in The Container Store, you should probably be pleased. And while it's fairly unusual for a company's stock to rise after it announces an acquisition, investors appear to be taking a long-term view here, and have rewarded The Container Store for its strategic investment in this bolt-on deal. Indeed, it looks like The Container Store found a very good way to ring in calendar year 2022.
