Should Apparel Retailers Sell Exclusively on Amazon?

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Apparel retailers operate in a highly competitive environment. They may sell fashionable items for a few years and then, suddenly, consumers will flock to something else. This leaves apparel retailers struggling financially and trying to figure out how to bring their customers back into the fold.

Apparel retailers may want to do away with their brick-and-mortar operations altogether, which come with leasing and maintenance costs, and partner up with Amazon.com Inc. (NASDAQ: AMZN). After all, Amazon commands a 9% market share in the retail discretionary sector. Apparel retailers can redefine themselves entirely as a branded apparel distributor, utilizing Amazon’s expanding distribution infrastructure to distribute their clothing.

Aeropostale Inc. (NYSE: ARO) is slowly coming to the understanding that it may need to turn to e-commerce to survive in the future. Its latest 10-K indicated:

Based on changing consumer patterns, we closed 126 P.S. from Aéropostale stores, primarily in mall locations, on or around the end of fiscal 2014. We also continue to focus on faster growing sales channels, including off-mall locations, e-commerce and international licensing of P.S. from Aéropostale. We are also exploring other potential third party distribution channels.

Aeropostale only saw growth in one segment over the past three years: international licensing. It went from $7.2 million in fiscal 2012 to $34.7 million in fiscal 2014. Unfortunately, it only represents a tiny 2% of the company’s revenue in fiscal 2014.

Perhaps Aeropostale could take it two steps further and focus exclusively on licensing all of its products to someone else and make Amazon the sole seller. Other branded apparel companies such as American Eagle Outfitters Inc. (NYSE: AEO) could follow in the same footsteps in an effort to avoid footing expensive leaseholds and labor for the stores.

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Thomson/First Call has a mean target price of $468.44 for Amazon.com, representing a roughly 10% increase in price from its current level, which isn’t surprising considering the market exuberance surrounding the company. However, the mean target price of Aeropostale is pegged at $2.75, representing a whopping increase of 48% over its current price. Investors should expect the company to gravitate toward the low target of $1.50, representing a 19% decrease.