Outlets Are No Longer Outlets in the Traditional Sense

by Brian Sozzi

Growing up, I always dreaded weekend shopping ventures with my mother and younger brother (which is strange as I am pro fashion today). There was nothing I hated more than rising at 6:00 am to get dressed, get hurried out the door to frequent a local diner, and then shepherded into Roosevelt Field mall to wait for JC Penney (JCP) to open its doors.

At the time, Roosevelt Field mall was not the grand spectacle it is today. The mall lacked ritzy specialty retail stores and a top-flight food court. Despite my crankiness that arose upon being toted to the mall for a markdown hunt, I despised even more a trip to the outlet center. Nothing against Tanger Outlets (SKT); it's a clean, fun place to partake in ultimate consumerism. I go there all the time to shop and do some "channel checks." But, as an eight year old who would rather be riding a bike than holding mom's hand while she perused the underwear section, the day-long, outlet tour de force flat out stunk (by comparison, the aforementioned Roosevelt Field trip lasted 3-4 hours excluding driving time).

If memory serves me correctly, outlet stores of the 1980s and 1990s were much different than those currently dotting the U.S. landscape. Back then, retailers primarily utilized outlets to sell discounted, full-priced product that did not move off the racks at mall-based stores for whatever reason (it was of greater efficiency to use this strategy than sell product at a loss to discounters). Retailers lacked the technology they boast about today in terms of assortment planning and insights into minute to minute sales trends. The tools simply did not exist; also the supply chain has become quicker and larger to be able to source products at lower costs.

Those tools surely exist now. Retailers, as a result, continue to operate mostly on lean inventories, partially because their systems and processes allow it (the other part is mixed economic conditions throughout the country). I happen to think consumers are unaware that outlets are no longer outlets in the traditional sense, places where deep discounts could be won with a hard fight through the racks and tables. In fact, shopping online could probably unearth juicier discounts than wasting the gas to visit an outlet.

Why is this the case? It all boils down to "made for factory products" by retailers, a hidden truth that consumers, and many investors in the sector (individual investors), are unaware of as outlet strategies are generally not disclosed in SEC filings.

Why made for factory exists:

• High lease costs to be part of outlet centers.
• High costs to move product from full-price stores and manufacturers.
• Development of new outlet centers is virtually nonexistent, meaning retailers have to find a way to squeeze productivity from existing boxes.

I pulled up the SEC filings for 16 publicly traded retailers that are some of the high profile names in the outlet centers. Names included trendy J Crew (JCG) right on down to shapewear maker Maidenform (MFB). Only 11 of the companies explained their outlet strategies in the filings (I used 10-Ks). Of those 11, six of them acknowledged to selling made for factory products. Made for factory essentially means lower quality products compared to full-priced stores but that are not discounted because the consumer already thinks he/she is snagging a rare steal (truth is, better quality product from full-price stores...could be found online).

A glimpse at what the retailers had to say about their outlets:

Coach (COH) ("Coach Factory")
* Outlets are "efficient means to sell manufactured for factory product."

Nordstrom (JWN) ("Nordstrom Rack")
* "Rack stores purchase merchandise directly from manufacturers (aka made for factory) and serve as outlets for clearance."

Guess (GES) ("Guess Factory")
* "Sell selected styles of men and women Guess apparel and licensed products at lower price points."

New York & Co. (NWY) (new entrant to outlet scene)
* "The company also plans to offer merchandise specific to outlet stores."

J Crew Group ("J. Crew Factory Store")
* "We design and develop a specific line of merchandise for our factory stores based on products sold in J Crew retail stores, catalog, and website."

Polo Ralph Lauren (RL) (won't find "factory" on this premium brand...)
* "Factory stores obtain products from suppliers, our licensed partners, and retail stores."

Children's Place (PLCE) ("The Children's Place Outlet")
* "Given the brand's value orientation, we also sell an assortment of full-priced merchandise at our outlet centers."