Amazon (AMZN) Will Soon Be the Largest Apparel Retailer in the U.S. - Cowen

In a collaborative report today on Amazon (NASDAQ: AMZN), which was upgraded, analysts including John Blackledge, John Kernan and Oliver Chen believe Amazon's US Apparel and Accessories business will displace Macy's (NYSE: M) as the #1 US Apparel retailer by 2017. This will be driven by accelerating purchaser growth due to more selection, rising 1P brand relationships and the best fulfillment, the analysts said. The dramatic change will benefit Nike (NYSE: NKE), Under Armour (NYSE: UA) and other global brands. Meanwhile, "middle of the mall" retailers are at most risk near-term, with longer-term risks to dept. stores and broadlines.

In the report, the analysts note Amazon's US Apparel purchaser growth is accelerating, growing 36% year-over-year in the 1st-half 2015 versus. 28% last year and much faster than EGM purchaser growth overall. For Amazon Prime subscribers the growth picture is even better - 57% year-over-year purchaser growth vs 43% last year.

The Cowen reports also notes that selection and 1P brands relationships are ramping. "By our count, Amazon has ~19MM apparel-related SKUs (1P and 3P) and 1.2MM SKUs that qualify for Prime," the analyst said. "AMZN also has ~343K SKUs related to leading brands selling directly or on a 1P basis, ahead of the traditional retailers. As a compare, WMT has 292K Apparel-related SKUs, JWN (85K), M (85K), and TGT (35K)."

They added, "In our view, the product diversity advantage is directly tied to AMZN's ramping brand relationships, we show 118 brands with products sold on a 1P basis across Men’s and Women’s clothing, Accessories, Shoes, Kids and Athletics. Nike has over 90K listings and Ralph Lauren has over 25K listings, almost entirely on a third-party basis. PVH
(Calvin Klein, Tommy Hilfiger), Columbia, Fossil and Kate Spade all have over 1,000 1P listings. Managing visual presentation of product and pricing will be critical to maintaining brand equity with any 1P efforts with Amazon, and brands will need to monitor the quality of 3P seller efforts. 3P sellers largely offer more commoditized brand offerings as they don't have access to exclusive product."

The firm said Amazon's Apparel momentum will likely contribute to further consolidation, M&A, and physical store closures. They see non-differentiated retailers at greatest risk, with longer-term risks to department stores and broadlines.

Cowen also noted that Amazon is increasingly penetrating Target (NYSE: TGT) and Wal-Mart apparel purchasers. "...11% of TGT apparel purchasers also purchased apparel items from AMZN in 1H15, up from 8% the prior year (interestingly, the numbers for WMT were nearly identical)," the analyst said. "This suggests that AMZN is increasingly encroaching on TGT and WMT customers, with overlap on a product like-for-like basis, and underscores the risk of share loss over time."

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