Bracing for a prolonged economic downturn, luxury retailers are lavishing new attention on their lower-end factory-outlet stores.
The efforts reflect a new reality for retailers that are being squeezed by one of the worst consumer spending slumps in years. Sales at outlet stores are growing faster than those at full-priced stores at many chains.
Saks Inc. is renaming its Off Fifth outlets "Saks Fifth Avenue Off Fifth" -- in hopes that a closer association with the luxury department store will be a bigger draw. The 48 outlets also began using the Saks label and selling more merchandise that is tailored for them, as opposed to goods that aren't selling at higher-end stores.
Nike Inc.'s Cole Haan unit is renovating and opening 40 total outlet stores resembling beach houses in the next two years, in a bid to capture luxury customers who might be shopping for bargains. And Liz Claiborne Inc. is changing the format of its outlets, devoting less space to its flagship Liz Claiborne brand and carving out off-price standalone stores for its Juicy Couture, Lucky Brand Jeans and Kate Spade labels.
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The trend is evident at Simon Property Group Inc., the nation's largest mall operator. The company reported Tuesday that comparable sales per square foot at its Chelsea Premium Outlets division rose 5.4% to $511 as of March 31, compared with a year ago. That's far better than the anemic 0.8% increase to $491 per square foot at its regional malls.
The pattern is far more pronounced for some retailers. At Coach Inc., same-store sales at factory outlets rose a healthy 17.7% in the quarter ended Dec. 29, while sales at full-priced stores fell 1.1%; Coach no longer breaks out retail and factory-store results. Nordstrom Inc.'s sales at its high-end department stores, meanwhile, have fallen four consecutive months, most recently by 11.4% in March, while sales at its Nordstrom Rack clearance stores have continued to grow, rising 1.7% last month.
Howard Weinberg, a retiree in Framingham, Mass., who says he generally has been spending less, noticed that several stores at one local outlet mall he shopped at recently were "packed with people," although "some of the stuff there looks like it's a castoff."
The resurgence of outlets entails new risks for retailers. For one thing, shifting sales to what is by definition a discount format can put pressure on profit margins. Coach, for instance, says it sweetened its discounts of handbags at its 101 outlet stores last quarter by 10% to 12%, contributing to a decline in gross margin for the company. "We've had to be more promotional" to take advantage of the higher traffic at outlet malls, says Coach CEO Lew Frankfort.
What's more, outlets are facing greater competition from the so-called off-price retailers, such as Ross Stores Inc. and T.J. Maxx, a unit of TJX Cos., which can buy more discount designer merchandise than before -- a typical byproduct of the economic slowdown that is hurting sales at full-price stores. "The current environment is favorable in terms of availability of product," says Katie Loughnot, a Ross Stores vice president for investor relations.
There's also a chance that outlet operators might cannibalize sales at their own full-priced stores, particularly as new outlets open closer to suburban and urban malls. "The key is to not proliferate the outlets too much, and to be choosy about location," says William McComb, chief executive officer of Liz Claiborne. So far, it has closed or renovated a third of its old Liz Claiborne outlets, which he describes as "relics."
That's one reason jeans maker VF Corp., which plans to open 75 to 100 stores in the next few years, isn't planning a push into outlet malls. "We wouldn't want to drag our brands down with too many outlet stores," says Michael T. Gannaway, vice president of the VF Direct division. The company's brands include Wrangler, Lee and 7 for All Mankind jeans, Vans and John Varvatos.
To avoid hurting full-priced sales, most of the outlet divisions of retailers intentionally don't sell online. One exception is Neiman Marcus Group Inc., which has a Last Call clearance feature on its Web site.
Many retailers, including Neiman Marcus, don't break out the performance of their outlet stores. Saks Chief Executive Officer Steve Sadove said at a conference Tuesday that its Off Fifth business has the potential to deliver "outsized growth" in monthly same-store sales. Saks expects its overall same-store sales, including outlets, to grow by the low- to mid-single digits in the first half of this year.
At Simon's Chelsea outlet malls, "we are still on a positive track" with "no meaningful weakness in tenant demand or in the shopper," says Leslie T. Chao, chief executive officer of Chelsea Property Group.
Outlet centers in New York, Las Vegas, Texas and Seattle have seen "sizable gains" in sales, thanks to the weaker U.S. dollar and an influx of foreign tourists, he notes. But even in other markets "we are holding our own" -- with outlet malls sales flat or slightly up so far, he says.
Even Talbots Inc., which plans to close its 78 children's and men's apparel stores by September, said this month it will open as many as 40 upscale factory stores in premium outlet malls in the next three years. Talbots currently has 25 clearance centers -- locations that Linda Humphers, editor-in-chief of Value Retail News, an outlet-industry magazine, describes as "totally dismal." The new upscale outlet stores will carry merchandise specifically made for them, Talbots says.
Source: Wall Street Journal
Labels: Liz Claiborne, Nike, Nordstrom, Retail Trends, Saks
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