Today, the Wall Street Journal announced that Amazon plans to open “Large Retail Locations Akin to Department Stores” (Source: WSJ, Aug. 19, 2021).

This news comes at the heels of the latest e-commerce report from the Census Bureau posting record sales of $225 billion in the second quarter of 2021. This represents a  9.1% growth from a year ago – which is a deceleration from the 30%+ growth we’ve been seeing over the past year (Exhibit 1). The 9.1% e-commerce growth is also the smallest growth seen in over a decade. Still, the Refinitiv IFR data suggest that the amount of money consumers spent online will pick up and continue to grow in the double digits for the remainder of the year.

Nevertheless, e-commerce accounts for just 13.3% of total U.S. retail sales, suggesting that for the most part consumers prefer to visit brick-and-mortar stores. This represents a huge amount of business that Amazon has not fully tapped.

Exhibit 1: E-commerce growth data

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Source: Refinitiv IFR

The e-commerce growth deceleration is also in line with the latest U.S retail sales numbers for the month of July. The biggest threat to consumer spending is the new Delta variant. The Refinitiv Consumer Sentiment Index saw its second consecutive month of decline.

The sentiment data has a strong correlation with consumer spending. Over the past year and a half, the data has shown that sentiment tends to improve when vaccination rates rise and Covid cases drop. Thus, once consumers’ confidence in the economy and job security improves, they will start to spend more freely again.

However, the opposite is also true. As Delta cases continue to rise, we are seeing consumer confidence continue to decline. Consumers’ economic outlook and job stability have been deteriorating and if this continues, they will put their hands in their pockets and hold back on spending. Hence, the weaker than expected July retail sales and e-commerce growth numbers.

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Exhibit 2: Consumer Confidence

Source: Eikon

Prior to today’s news on Amazon, the online giant had seen a dip in the StarMine Analyst Revision Model (ARM). The StarMine ARM model is highly predictive of both the direction of future revisions and price movement. Amazon scores a 20 out of a possible 100 suggesting that analysts are likely to revise earnings downward. Still, it will be interesting to see if the ARM score improves on the back of today’s news.

Exhibit 3: StarMine Analyst Revision Model – Amazon

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Source: Eikon

Department stores

Department stores have been out of favor for some time, even before the pandemic. The StarMine Combined Credit Risk (CCR) model systematically calculates the default probability (DP%) within the next 12 months, for all companies, by region. It then ranks those probabilities on a 1-100 scale, with 1 having the highest probability.

Currently, two of the three major U.S.-listed department stores score in the bottom quintile (Exhibit 4). Their scores of 20 and under also correspond to model-implied credit ratings of BB or worse – below investment grade. Each of the three department stores currently have a low DP% of under 1%. Obviously, unless the department stores reinvent themselves and see a pickup in store traffic and sales, the worse the financial health of these companies.

Exhibit 4: Department Stores and Combined Credit Risk Model 

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Source: Eikon

Reinventing the department store

Department stores have been struggling to reinvent themselves in recent years. Amazon might be able to accomplish this, with all its massive data knowledge. Amazon is sitting on a massive amount of consumer shopping behavior data, and knows what consumers are ordering and where strong demand lies.

This data is also very detailed and can be broken down geographically to cater specifically to local communities, an advantage over many other retailers.

On the flip side, it will be very interesting to see which apparel brands Amazon partners with as traditionally Amazon is not most popular for selling fashion. Not having the right apparel brands is one of the factors that weakened department stores sales.

Moreover, being located on mall properties had also worked against the department stores – a move that Amazon seems to be avoiding. The news today mentioned that Amazon intends to provide smaller stores. This would allow them to offer a more curated amount of merchandise on Amazon Prime Day or Black Friday – two holidays where consumers want their orders instantly.

When it comes to competition, Walmart and Target have excelled at competing with Amazon, due to their mastery of logistics. These discounters use their stores as warehouses, giving them a competitive advantage over Amazon — one the online giant apparently now is seeking.