American Eagle Spent Big on Logistics. How Supply-Chain Woes—and Amazon—Are Changing Retail.

Text size

Investors got a jolt Wednesday when

American Eagle Outfitters announced the acquisition of Quiet Logistics, an operator of automated distribution centers near city centers, for $350 million. It wasn’t a small deal. The mall-based apparel retailer spent about 8% of its market cap on a distribution business. Quiet Logistics wasn’t even American Eagle’s first logistics buy: The retailer bought AirTerra, which focuses on middle-mile logistics, earlier in 2021. (“Middle mile” refers to delivery of products from a warehouse to a retail store.)

It’s either madness or genius. Either way, it illustrates how companies view the shipping business after two years of pandemic and a year of supply-chain disruptions.

Quiet’s business enables American Eagle (ticker: AEO) and Quiet’s other customers to better manage store inventory and e-commerce fulfillment, both critical to retail success. “People who don’t have sophisticated and efficient capabilities for shipping…can’t compete,” says Michael Rempell, American Eagle’s chief operating officer.

American Eagle’s moves look necessary as shopping gets more complex postpandemic, especially for small retailers trying to compete with giants like

Amazon.com (AMZN). Shoppers want to buy online, in store, and online for pickup at the store, and they want to return purchases in multiple ways too. If a store doesn’t have the desired brand or style, shoppers will just shop elsewhere or go online. As a result, customers, not retailers, are in charge of the supply chain, something that has forced a rethink of logistics operations. “What it’s doing is turning the supply chain from a pure costs center…to a revenue driver,” says Mark Okerstrom, president of digital truck broker Convoy.

Whether Eagle stock, which has gained 32% in 2021, is a buy is a tough question. The shipping strategy looks smart, but Eagle investors still need to focus on fashion trends of 20-year-olds.

C.H. Robinson Worldwide (CHRW) and

XPO Logistics (XPO)—large truck brokers with smart technology—might be better bets for some investors. That pair trades for 16 times and 17 times estimated 2022 earnings, respectively, cheaper than the S&P 500’s 20 times. It’s a sign investors aren’t expecting much growth from these companies for now.

Shipping giants

United Parcel Service (UPS) and

FedEx (FDX) can also benefit from smaller retailers’ focus on logistics. UPS, for one, grew its shipping volumes with small- and medium-size businesses by almost 11% year over year in the third quarter, a sign the company is more intent on providing outsourced solutions for smaller shippers needing to compete with larger rivals.

FedEx, meanwhile, completed its acquisition of ShopRunner, which connects brands and merchants with online shoppers, in December 2020. As part of FedEx, ShopRunner can improve customer inventory management, cut delivery times, and ease returns.

The valuations of the shipping giants don’t reflect the investments they’ve made in the logistics technology needed to grow. UPS stock, which has gained 25% in 2021, trades at about 17 times earnings, even as Wall Street projects a 7% average annual earnings growth over the next three years. FedEx, after dropping 5.6% this year, is even cheaper. FedEx stock trades at 11 times estimated 2022 earnings, despite Wall Street projecting 11% average annual earnings growth for the next three years.

The below-market valuation multiples of the shipping franchises would seem to indicate a lack of faith in their ability to grow. American Eagle’s acquisition of Quiet Logistics suggests otherwise.

Write to Al Root at [email protected]