AMAZON:FUNDAMENTAL ANALYSIS+PRICE ACTION & NEXT TARGET|LONG🔔

The uptick in retail stocks in the middle of the week of August 19, after two major department store chains posted excellent results, subsided slightly after the Wall Street Journal reported on leaked information about Amazon's plans to open department store-style stores in some U.S. cities. The store openings, which could herald Amazon's broader entry into physical retailing, couldn't keep the stock market's buoyant bias down for long, but it does raise some questions.

If Amazon does attempt to position itself in retail, will it triumph, and will it eventually put other retailers out of business? Thorough scrutiny of the situation shows that there is nothing wrong here, at least at the moment.

After Amazon, with its e-commerce model, bypassed and closed many previously thriving department store chains such as Sears, ushering in an era of "retail apocalypse," Amazon now plans to open its own "brick-and-mortar" retail outlets. Sources told the Wall Street Journal that some of the first stores are planned to open in California and Ohio. Apparently, the stores will be filled with Amazon-branded merchandise.

According to insiders, the 30,000-square-foot stores will each be one-third the size of conventional department stores. Nevertheless, they will be much larger than Amazon's existing Whole Foods stores. They are expected to be organized along the same lines as department stores. Still, the stores will presumably be closely integrated with Amazon's delivery, return, and other e-commerce services.

This plan may have been nurtured long before the coronavirus, so there is a possibility that it was put on hold due to retail store closures last year. In May 2019, the Wall Street Journal published a video on YouTube reporting that Amazon had bought several former malls in Ohio, including Randall Park Mall in North Randall and Euclid Square Mall in Euclid.

Nonetheless, these malls are much larger than the 30,000 square feet mentioned in the rumors: Euclid Square is 642,528 square feet and Randall Park is 2.2 million square feet, making them more suitable candidates for fulfillment centers. Nevertheless, these facts suggest that Amazon has been interested in buying indoor retail space in Ohio for several years.

Some publications, such as The Verge, have noted that Amazon first put department stores and malls out of business because of its triumphant e-commerce model, and now seems to be trying to replace them in physical retail.

The stock market reacted briefly but sharply to the news of Amazon's new venture into physical retail, causing even retail winners of the day Macy's and Kohl's to dip into negative territory, though both soon went back into positive territory. Dozens of other retail stocks also fell at the same time on this news. Investors clearly see Amazon's entry into physical retail as a likely critical aspect not only for the e-commerce titan but also for a number of its possible competitors.

However, previous experience suggests that there may not be much cause for concern in the short to medium term. Amazon bought Whole Foods Markets for $13.7 billion in 2017, but the grocery retailer remains relatively weak relative to other business sectors and has not dominated the physical grocery store arena. Of Amazon's $115.1 billion in revenue in the second quarter of 2021, only about $4.2 billion, or 3.65%, came from physical stores, which mostly consist of about 500 Whole Foods locations.

Over the past six quarters, four reports have shown negative growth for physical stores. Even when there is positive growth, it is only 8% to 10%, while Amazon's online stores are up 13% to 49% and third-party vendor revenue growth is 31% to 60%.

Physical retail is clearly Amazon's weakest point, despite the e-commerce giant's many attempts to break into this market. Given the company's relative lack of success in this area and the small size of stores compared to other department stores, limiting the selection of items that can be featured in any future "Amazon department store," it is hard to see this idea as a serious threat to department stores like Macy's and Kohl's, or more specialized retailers such as Nordstrom or Ross Stores. Nor does it seem likely that the stores would significantly improve Amazon's shipping and return service, given how fast and efficient these services already are.

At this point, the idea of another Amazon physical store complex is unlikely to have much impact on other retailers that have so far managed to survive the retail apocalypse. Perhaps, at best, it will make little profit for Amazon itself, given the dominance and efficiency of its e-commerce operations.

As long as the new "department stores" don't turn out to be something unexpectedly new and game-changing, investors interested in retail stocks may view this latest experiment as neutral for both Amazon and various big box stores, department stores, and clothing stores. It is true even if the stock market briefly responds (or perhaps overreacts) to the new information on this issue.