Sizing Up Amazon's Apparel Initiatives

In addition to its proposed acquisition of Whole Foods WFM,

Amazon also struck a deal to sell Nike NKE products on the Amazon.com platform for the first time, which will give it greater credibility in apparel and footwear while allowing Nike to better regulate sales by unauthorized third-party sellers.

In many ways, we see similar motivations behind Amazon’s recent apparel moves and the Whole Foods acquisition: removing key barriers from accelerating growth in these large retail categories (making apparel returns an effortless process and tapping into Whole Foods’ supplier relationships), increasing consumer demand by bringing more established vendors onto the Amazon platform, significant private-label potential, and synergies with Amazon’s devices. Nevertheless, we believe investors should view Wardrobe, Nike distribution, and Whole Foods as more than just expanded pushes into these categories, but also meaningful sources of customer data that Amazon’s rivals can’t match while enhancing the network effect underpinning our wide economic moat rating.

We’ll maintain our $1,200 fair value estimate for Amazon until details on the Wardrobe program and Nike’s distribution plans are released, but we acknowledge there could be upside to our retail products and third-party seller revenue assumptions (where we forecast 16% and 27% growth over the next five years, respectively). Regardless, we view these developments as a positive for Amazon--which we view as the most attractively priced name in online retail--and a potential source of disruption for department stores and specialty apparel/footwear retailers.

Amazon hasn’t exactly been shy about its ambitions in the apparel and footwear space the past several years, including an uptick in apparel and footwear listings during last year’s Prime Day event and throughout key holiday events, developing several new apparel private-label brands across multiple target audiences, and the introduction of the Echo Look “style assistant” device (available only by invitation at present). While it’s difficult to pin down, we estimate that apparel and footwear represented $16 billion-$20 billion in gross merchandise volume in 2016, or approximately 7%-8% of Amazon’s estimated $245 billion in GMV. We believe this was one of the fasting-growing categories in Amazon’s mix, particularly in women’s categories, and expect this momentum will continue with the launch of Amazon Prime Wardrobe, which we’d expect ahead of the holiday season, assuming beta tests are successful.

Nike has distributed products on Amazon subsidiary Zappos.com in the past, but the partnership with Amazon will mark the first time Nike will directly distribute products on Amazon.com. In our view, this not only reinforces the power of Amazon’s network effect, but also offers a way to better police counterfeit or unauthorized third-party sales by utilizing Amazon’s Brand Registry platform. The key unknowns of the partnership are the mix of products Nike will distribute on the platform (footwear versus apparel, high-end performance versus mass market) and whether this move will encourage other apparel and footwear manufacturers to distribute through Amazon. We expect Nike’s initial product offering on Amazon will mirror its assortment on Zappos, weighed toward mass-channel products under $100 and not high-end products like Jordan, Air Force 1, and VaporMax. This would obviously be a negative to Nike’s existing mass-channel partners but could eventually open the door to new exclusive merchandise partnerships with Amazon over time.

We also think the intent of Amazon Prime Wardrobe is to address one of the major weaknesses of online apparel sales: the lack of ability to test size and quality. By offering the ability to select apparel to try on at no up-front cost, Amazon is effectively turning homes into fitting rooms. Given Amazon’s strong brand, selection of more than 1 million products, and encouragement to make purchases through discounts, we think Wardrobe will achieve healthy adoption rates, and we continue to favor apparel brands over retailers for investment as a result of this expected market share shift. Further, we think Wardrobe will allow Amazon to collect valuable data on consumer preferences, better enabling it to target ads and searches; we view this as another long-run negative to the department store sector, which relies on curation as a selling point.

Similar to the Whole Foods transaction, Wardrobe will also offer an outlet to showcase Amazon’s existing and future private-label brands. While the Amazon Essentials platform is a relatively well-known private-label brand offering everyday apparel, we believe the greater opportunity will ultimately be in bringing apparel private labels such as Ella Moon, Lark & Ro, Paris Sunday, Mae, Goodthreads, and Buttoned Down. We’re also intrigued by Wardrobe’s opportunities in children’s apparel (Scout + Ro is the only Amazon label that we’re aware of, but we expect this and future children’s private labels could develop into a meaningful opportunity, given recent store closures from players like Gymboree), as well activewear, where the company has been reportedly working on new private-label brands.