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Amazon's Running a Sale to Get Ready for Prime Day

By Adam Levy – Jun 4, 2020 at 9:15AM

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There's a big opportunity for the retailer as it tries to clear out its warehouses.

Amazon (AMZN -1.57%) is planning a sales event for later this month. The move marks a departure from Amazon's current pullback on marketing and promotional activities designed to reduce the stress on its overburdened warehouses and the workers fulfilling orders.

Amazon's calling the promotion a "Fashion Summer Sale Event." That suggests the focus of the shopping bonanza will be apparel and perhaps other items that have been slow to sell during the coronavirus pandemic.

There could be two factors at play in Amazon's thinking. First, it wants to spur sales in categories that haven't sold well recently, and a concentrated effort by Amazon and third-party merchants to draw in shoppers could prevent steeper inventory writedowns in the future. At the same time, it could permanently shift consumer behavior to buying those items online more often versus going in store. Second, Amazon needs to clear room in its warehouses for Prime Day, which is now reportedly scheduled for September.

A man grabbing an item off a robot-controlled warehouse shelf.

Image source: Amazon.

The hardest-hit category in retail

Apparel has been the hardest-hit category in retail. Clothing store sales declined 89% year over year in April, as consumers had no need to dress to impress while working from home.

Some retailers have been severely punished by that decline. Target (TGT -2.24%), for example, took significant inventory impairment costs as a result of the slowdown in apparel sales -- a category that typically accounts for nearly 20% of the retailer's revenue.

That said, digital sales of apparel have grown as more people shop online instead of going in stores. Sales increased 34% month over month in April, according to data from Adobe, fueled by steep discounts.

Consumers typically like shopping for clothing in stores, which allows them to feel the material and try on items. But seeing the results from heavy online discounting in April, Amazon may see an opportunity to shift consumer behavior to buy more clothing and apparel online. It's been an area of interest for the company for several years, and it sees an opportunity to grow that category right now.

The timing of the Amazon sales event is in line with the reopening of businesses in many states. As people start going back to offices or occasionally venturing out to local businesses, they may want to buy some new outfits. Target reported improvements in apparel sales starting in the second half of April.

Making room for Prime Day

Amazon has been forced to delay Prime Day due to the unforeseen surge in sales it saw starting in mid-March. Shoppers experienced severe fulfillment delays: It could take days or weeks for items to ship, especially if Amazon didn't deem them essential. It had to restrict new items coming into its warehouses in order to focus on faster-selling items.

In the meantime, however, existing inventory in categories that haven't sold well sit idle on its warehouse shelves. That capacity is needed for other items on big sales days like Prime Day, when warehouses are pushed to their limits.

When reports first surfaced that Amazon would delay Prime Day, the company reportedly estimated it'd come with a cost of $100 million. That loss is tied primarily to clearing out excess inventory. While the company initially expected to take that loss from sales of its own devices like Echo Dots and Fire TV Sticks, it may be able to take a smaller loss through apparel sales. And if it comes with the added benefit of shifting consumer behavior, so much the better.

Amazon already has the workers in place to support a big shopping event. It hired 175,000 new employees in March and April, and it's making most of those jobs permanent if the workers want them.

A successful event later this month could enable Amazon to host Prime Day sooner rather than later, which will let it get in on back-to-school shopping and reduce interference with the holiday sales season. Investors in the FAANG stock should look for the typical sales wrap-up press release from Amazon after the event.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Adobe Systems and Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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