Outlet Stores Are In: How They Went from Overstock Bins to Au Courant


Grant analyst Cheryl Guilford shops at the Nordstrom Rack (JWN) in Manhattan's Union Square about every two weeks.

"You can always find some great bargains there that are more my budget, which is below," Guilford said -- although her tastes run high. Some of her favorite brands: Dolce & Gabbana, Stewart Weitzman and Calvin Klein.

Cheryl Guilford
Cheryl Guilford

While the Brooklyn resident figures that most of the store's merchandise is a season behind, she relishes the fact that the same UGGs she spotted at Nordstrom's full line store for $295 were selling for $199 at the Rack, she said.

Little did Guilford know that most of the merchandise at the Rack has never seen the inside of a Nordstrom store.

Contrary to popular belief, the bulk of goods sold at outlet stores today -- be they from retailers like J. Crew and Saks' Off 5th (SKS) or designer brands like Kate Spade -- are new.

No longer mere repositories of last season's cast-offs, outlets -- or "factory stores" -- are hawking in-season, trendy merchandise made expressly for these lower-priced spin-off stores.

The makeover dovetails with the recession whetting consumers' appetite for outlets, which have been one of the fastest growing retail sectors in a down economy.

They've become an even bigger draw for shoppers like New York University student Annie Young, 20.

Rent and books alone are enough to sap the journalism and drama major's budget, so in addition to thrift stores, Young shops the outlets where she can find "fun and different things," she said, eyeing a purple Free People dress at Nordstrom Rack.

The dress was marked down to $44.97 from $110, which "I would never pay," she said.

A Sea Change in Outlet Sales

"Outlets always saw an upswing during tough times. But something fundamentally changed with this downturn," Carrie Geldner, senior vice president and chief marketing officer of Tanger Outlets, tells DailyFinance. "The whole value equation is really embedded in the way consumers shop today and will be in our future."

Even well-heeled consumers.

Tanger's average shopper, for one, has a household income of $69,000, way above that of the average American family, which takes in about $48,500 a year.

It has become chic to shop at the outlets, and to say, 'I got this [designer] shirt for $49 instead of $100.'"

In turn, retailers ranging from Nordstrom Rack to the Gap (GPS) are now opening more outlets than main-brand stores, just as chains like H&M and Under Armour spread their outlet-store wings.

At the same time, outlet malls, once to be found primarily in far-flung places, are ramping up their presence where more of us live -- closer to traditional shopping malls.

Tanger, for one, is penetrating big cities and larger markets; CEO Steve Tanger believes the company is in a better position than ever to compete with traditional malls. It will open outlet malls near Phoenix, Houston and Washington, D.C., late this year or early 2013.

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And just as "people are looking for value, outlets are giving retailers great returns," Paul Swinand, equity analyst with Morningstar, tells DailyFinance.

Best Deals at the Outlets
Best Deals at the Outlets

Overstock Drought Changes Outlet Shopping Experience

Go back 10 years or more, and the outlet store mix was primarily overruns from department stores, discontinued merchandise, goods from prior seasons and irregulars.

Overstock goods can still be found at outlet stores, but there's a lot less of it these days.

While retailers are increasingly looking to offer outlet shoppers new merchandise --"I don't want them bringing stripes in the stores if stripes are last year's idea" -- Gap's CEO Glenn Murphy said last year during an investor conference -- they've had little choice in the matter.

After the economy tanked in 2008, department stores as well as apparel retailers and wholesalers began keeping their inventory levels tight, so there hasn't been much in the way of surplus goods.

"At the same time, brands continued to see strong profits and consumer traffic from their outlet center channels, so they started creating merchandise exclusively for their outlets to fill the void created by lack of excess inventory," Geldner says.

Coach's (COH) outlet stores, for example, used to serve as a "disposition channel for product overruns," says Andrea Shaw Resnick, a spokeswoman for the high-end handbag company.

Today, a whopping 85% of the merchandise is made specifically for factory consumers featuring current-season merchandise.

Meanwhile, Nordstrom Rack which will double its store base by 2016, calls on the same clothing suppliers that can be found at its tony department stores -- be it Hugo or Vera Wang -- to "deliver on-trend fashion for the Rack" at prices 30% to 70% below those of the parent chain, although the apparel might not be the precise color and design available at the mothership, Kendall Ault, a spokeswoman from the retailer, tells DailyFinance.

The Rack has been ahead of the outlet-only-merchandise trend, she said, having always carried exclusive goods.

(While outlet stores have adapted to the dearth of overstock goods, closeout retailers such as Daffy's and Filene's Basement did not: The shift contributed to Daffy's and Filene's filing for bankruptcy, then shuttering their stores for good this year and in 2011, respectively.)

Tarnishing The Brand?

But as more and more outlet merchandise is made exclusively for the channel, the stores run the risk of nullifying their signature appeal to shoppers: The promise of an upscale, designer frock for a fraction of the full price.

"The customer wants to think that they got the deal and there's no difference" between the quality of the merchandise sold in both places, Swinand says.

"They want to say that they got the same $500 designer bag or pair of shoes for $300 ... If somebody perceives that brand to be different, you're going to run into trouble. The big concern is that the merchandise is not the same level of quality."

Indeed, the quality of outlet-only merchandise can sometimes be a notch below what's sold at brands' full line stores -- a difference that can be seen by taking a close look at the fabric, stitching, lining and buttons of a garment, experts say.

Will shoppers become hip to the fact that much of their outlet finds these days aren't upscale items that just didn't sell? And if they do, will they care?

Shoppers interviewed at the Nordstrom Rack store, admittedly a self-selecting group, didn't know that the merchandise was, by and large, new for the store.

Annie Young
Annie Young

Landing deeply discounted designer duds from upscale stores is the thrill of the outlet shopping hunt for Meera, a consultant who declined to offer her last name.

"I prefer overstock from designers like Calvin Klein, Tahari and Diane Von Furstenberg," versus the idea of outlet-only finds, she said.

And "I don't care if merchandise is two seasons old," added NYU student Young.

But overall, the news that these bargain spin-off stores are selling more of their own fare than overstock goods was mostly greeted with a shrug.

Guilford, for one, actually likes the idea that outlets are now churning out brand-new fashion. "I do like that it's current," she said. "I want to be up with the style."

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