Amazon Stock Is a Buy as Luxury Retail Play Promises Prime Profits

  • Amazon’s (AMZN) latest investment should help push Amazon stock higher in the years ahead. 
  • The luxury market could be lucrative when leveraged through its Prime membership.
  • Its logistics experience should help drive Saks Global’s growth. 
Amazon stock - Amazon Stock Is a Buy as Luxury Retail Play Promises Prime Profits

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Yea or nay to Amazon (NASDAQ:AMZN) stock after it was announced July 3 that it and Salesforce (NYSE:CRM) would take minority stakes in Saks Global, the name of the company paying $2.65 billion to acquire privately held Nieman Marcus.

On the surface, it seems odd that Amazon and Salesforce would be involved in this kind of acquisition. However, the Hudson’s Bay Co., the owner of Saks Fifth Avenue, is trying To create an exceptional omnichannel experience like no other in the department store industry. 

Amazon and Salesforce have significant customer engagement experience that would be useful for growing the combined entities’ dormant sales. Further, who better to deliver omnichannel than Amazon, a logistics dynamo. 

Together, Saks Global will have 39 Saks Fifth Avenue stores, 36 Neiman Marcus stores, and two Bergdorf Goodman. In addition, both Saks and Neiman have outlet shops and online businesses. The head of Saks’ online business, Marc Metrick, is heading up Saks Global.

I believe the deal makes sense for several reasons. Here are three reasons why. 

Amazon Gains Access to Luxury

If there’s one thing that Amazon doesn’t have in its e-commerce business is an abundance of luxury and that’s where the margins are in apparel retail, which could give Amazon stock a boost.

“The involvement of Amazon ‘adds a bit of spice to an otherwise predictable deal,’ GlobalData analyst Neil Saunders wrote in a research note. Its stake makes sense, he said, ‘as it has ambitions to play more heavily in the luxury space and this would give it a toehold,’” Bloomberg reported the analyst’s comments about the deal. 

Since it acquired Whole Foods in 2017, Amazon’s done little in the way of expanding its place in physical retail. Being a part of this combination enables it to better understand the luxury retail market. 

Heck, maybe with a little time and understanding, Amazon could become the LVMH (OTCMKTS:LVMUY) of North America. 

Even if that’s not the company’s intention with this investment, it’s not beyond the realm of possibility. Far better to be the logistics champions for brands that have 70% gross margin than those with 20% or less.

Why Not Get a Bigger Piece of the Pie?

Amazon likely could have stayed out of the investment side of the transaction and just focused on its logistics business helping the merged entities save money on their online fulfillment and store product distribution costs. 

That would have netted it healthy fees. However, anything Amazon does, it does in a big way. It is not a consultant. It’s an owner of many billion-dollar businesses that work together to generate significant profits and cash flow.

“‘How do you future-proof a brand like Saks or Neimans or Bergdorf? You do that through technology,’ Marc Metrick, chief executive officer of Saks Fifth Avenue’s online operations, said in an interview. That includes gathering high-quality data on customers, analyzing it effectively to offer them more personalized options online and improving logistics to make it easier for consumers to shop.” Bloomberg reported.  

If this merger is approved by the Federal Trade Commission — and that’s up in the air given the agency’s penchant for blocking deals under the Biden administration — I could see Amazon buying the entire business once it’s better understood the opportunities that exist. 

By taking a minority stake, Amazon gets a cheaper way to learn about luxury on the fly without taking a major bath to do so. 

A New Generator for Amazon Stock

In March 2018, I suggested Amazon would own more of your home sooner than you expected. The premise being that the Amazon Prime membership — 90 million U.S. members at the time — would drive great sales from each customer. Data showed that Prime members spent $1,300 annually, nearly double nonmembers. 

Now imagine if there could be Amazon Prime Luxury, a high-end membership that puts you in a league of your own when it comes to luxury in the home. Access to all these Saks/Nieman customers would get the membership off to a running start. 

Imagine how much an Amazon Prime Luxury member would spend each year? If I had to hazard a guess, I’d say $5,000 or more per year, a big step up from the regular prime member.

In the six years since my article, the number of U.S. prime members has doubled to 180 million. Based on a U.S. population of 337 million, approximately 53% of Americans have a Prime membership. 

Imagine if only 5-10% of Americans could be Amazon Prime Luxury members. That would be some revenue and profit generator. 

The Saks/Neiman investment is another reason to own Amazon stock. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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