What happened
Shares of home storage retailer The Container Store (TCS 29.10%) rose a quick 11.5% in early trading on Jan. 3, the first trading day of the new year. The likely reason was a news release put out before the market opened, outlining an acquisition in the closet space.
So what
If you've ever been to a Container Store you know that the company's wholly owned Elfa closet organizing system is a huge part of its business. In the fiscal second quarter of 2021 (ended Oct. 2), the company's overall sales rose 11.2% year over year. However, that was driven by a 22.1% increase in "custom closets," which is basically Elfa, and just 3.1% in "other" product categories. Closets are obviously an important growth driver for the retailer.
Image source: Getty Images.
That's likely why The Container Store's announcement today that it had agreed to buy Closet Works for $21.5 million was so well received. Elfa is largely a metal-based system. Closet Works' products are wood-based, essentially expanding The Container Store's products more aggressively into a new and highly complementary space. A key piece of the transaction is adding Closet Works' manufacturing facilities, which will allow The Container Store to have control over the entire sales process from manufacturing to installation. Additional important goals of the acquisition are to increase sales in the garage space and of higher-priced closet upgrades, specifically those costing in excess of $2,000.
Now what
The Container Store is looking to "double our sales over time," according to the press release, which is a lofty goal. That said, complementary acquisitions like the one announced today could go a long way toward achieving that end. Investors are probably right to like the company's first big move of 2022.
