Remember how, on Tuesday, we noted that Amazon delivered yet another gut punch to retail with the introduction of “Prime Wardrobe”?
Here’s what we said:
Jeff Bezos is going to drive every retailer on the planet not called “Amazon” out of business if it’s the last thing he does, goddammit. And if you do manage to stay in business, he’ll just buy you.
Fresh off snapping up Whole Foods — throwing the future of brick and mortar grocers into question in the process — Amazon is apparently rolling out something called “Prime Wardrobe”.
Yeah, well that news catalyzed a sharp decline in apparel stocks. The pressure was readily apparent in the S&P Supercomposite Apparel Retail index which fell 2.5% by lunchtime:
(BBG)
Fast forward to Wednesday and at least one analyst thinks “Prime Wardrobe” is “another nail in the coffin” for department stores and sends the entire retail space “into a tailspin.”
Those quotes are from Wells Fargo’s Ike Boruchow, whose expanded commentary can be found below…
Via Wells Fargo
Our Call. As they seek to further disrupt the retail space (following their WFM acquisition just last week), Amazon announced Prime Wardrobe yesterday (6/20) — their latest venture into apparel that sent our universe into a tailspin. At a high level, the service lets Prime members try on clothes before they purchase (with no pressure to buy) with free delivery/returns. Interestingly, Amazon currently lists several well-known brands (like Calvin Klein, Levi’s and Adidas) that will be available via Wardrobe — indicating they have commitment from many global brands. All in, we view this as another potential nail in the coffin for the department store sector (Prime members gain access to a broad assortment of real brands – presumably, broader than any single department store given the current and likely future breadth of AMZN’s assortment – in one place, at an already familiar point of sale, with minimal friction and free delivery/returns), while we see this as a new channel for brand/vendor growth (over time healthy brands gain a new avenue of sell-in to replace the brick and mortar declines) and view offprice to be fairly insulated at this point in time (different customer and price points).
AMZN Encroaching On Niche Service? The “try before you buy” online strategy is not a new model this business has been a darling of fashion start-ups and venture funds over the past several years. However, the players in that niche space, like Stitch Fix and Trunk Club (acquired by JWN in 2014, and has so far generated uneven results according to their most recent earnings release), along with smaller players (such as Five Four Club and Bombfell), all include a “stylist” angle. These models offer assortment curation services that are charged for with a non-refundable “styling” fee credited towards your purchase with each delivery. Prime Wardrobe distinguishes itself in the flexibility they offer members to choose and try on what they want, without a fee — catering to a different customer than these curation-focused models. While the key differential of this type of model is not currently reported to be the strategy for Amazon, it’s easy to see that shifting over time. More importantly (in our view), the key problem for these models has been very high new customer acquisition costs. The concerning response to that problem at Amazon is that they can easily (and cheaply) cross sell these services to their active Prime base of 70+ million people (our estimate). Below we compare Prime Wardrobe against some of the players in the “try before you buy” space.
What Does This Mean For Our Space? As investors fled the sector yesterday (our space -2.6% vs. SPX -0.7%), the launch of Prime Wardrobe is simply another headwind that that investors in the space are forced to grapple with (on top of concerns around real estate, channel shifts and changes in consumer preferences). Simply put, it’s a negative. It doesn’t help bring any kind of clarity or confidence to the outlook for our coverage universe. That said, in our view, we don’t see the negativity as broad strokes across all companies, rather we see subsectors that are squarely in the crosshairs (namely department stores), while others that should not be viewed in the same light (vendors, offprice).
Another Nail in the Coffin for Department Stores? Department stores have been in a tough spot for several years already (as mall traffic wanes, wallet share shifts to e-commerce and online pure plays find new ways to offer incremental value and convenience to customers). Prime Wardrobe capitalizes on all of these aspects, providing Prime members access to a broad assortment of real brands (presumably, broader than any single department store given the current and likely future breadth of AMZN’s assortment) in one place, at an already familiar point of sale, with minimal friction (free delivery/returns). Simply put, this adds another nail into the department store coffin.
Summed up…
It’s an understatement to say, “You have to give Bezos credit for playing the long game and sticking to it.” I saw the possibility back in the 90’s but did not imagine the breadth of his creativity, fortitude, and innovation. Today there is a possibility he may apply his vision and innovative capacity to healthcare, where that type of focus is sorely needed. Though I still can’t stomach his tolerance for risk, he certainly has the knowledge, experience, and capability to carry just about any risk that captures his interest. Change happens, and he somehow knows how to get in front of it in a big way. He’s a pure force. If health issues don’t interrupt his processes of discovery and exploration (more than space exploration), we’ll continue to be surprised by him in one way or another.