By Karen Talley
Luxury retailers in the U.S. are finding their outlet stores are
starting to outnumber their traditional stores, a development that
could up-end the way upper-end shopping is perceived.
For decades, names such as Saks Inc. (SKS) and Nordstrom Inc.
(JWN) stood for the very best a consumer could afford. In recent
years, though, luxury retailers have opened scores of much-smaller
outlet stores. While the locations, in many cases, were at first
used to house full-line stores' cast-offs, they now are shopping
destinations in their own right. The outlets still generally carry
the full-line stores' products but also have lower-costing designer
wares, as well as a variety of other products.
"When you open full-line stores, they are bigger projects," said
Nordstrom spokesman Colin Johnson. Outlets "get up and running
quickly and generate very strong returns," Mr. Johnson said.
Nordstrom by the end of this year will see the number of its
Nordstrom Rack outlets outdistance its full-line stores, 119 to
117, and the retailer expects to have more than 230 outlets by
2016.
During a conference call to discuss Nordstrom's second-quarter
earnings, Chief Financial Officer Mike Koppel said outlet stores
generate lower gross profit, but selling, general and
administrative costs are also lower. The result is that margins on
earnings before interest and taxes tend to be "slightly better"
than full-line stores, Mr. Koppel said.
According to the most recently available data, Nordstrom's
full-line stores generated $1.7 billion in sales in the first
quarter, while Rack outlets had sales of $557 million.
A concern, though, is that the increasing number of
outlets--with products considered of lesser quality than those sold
in full-line stores--could dent the stores' reputation.
Luxury retailers "are taking a high-risk approach," said Eugene
Fram, professor emeritus at the Rochester Institute of Technology's
E. Philip Saunders College of Business. "You have the potential for
changing shoppers' perception to one of a lower-priced
operation."
This is a problem because, "Once you lose your image, it's hard
to get it back and it also causes confusion," Mr. Fram said.
Luxury stores "are known for catering to certain kinds of
customers," said Sheri Bridges, faculty director of Wake Forest
University's Center for Retail Innovation. "Outlets lessen this
exclusivity, so the name starts to stand for something else.
Everyone can have it."
As a result, the retailers and their merchandise "are no longer
status brands," Ms. Bridges said.
Luxury retailers have worked hard to maintain their images as
they expand their outlets.
"Outlets try to keep to the experience of a full-line store, and
there are core items they sell in their stores they will never sell
in an outlet," said Stephen Wyss, partner in the retail practice at
BDO USA.
Saks has been operating more outlets than full-line stores for
the past couple of years and by the end of 2012 will have a ratio
of 66 Saks Fifth Avenue Off 5th outlets to 45 full-line stores.
For Saks, there are only a limited number of markets in the U.S.
that make sense for a full-line store "and we already have a
presence in the vast majority of those markets," spokeswoman Julia
Bentley said. "Typically, you need a major metro area with a large,
affluent population and/or a robust tourist industry."
Plus, there is very little traditional mall expansion going on,
Ms. Bentley said. Luxury retailers often serve as anchor tenants
for malls, while outlets are frequently huddled into centers with
similar stores or located in off-mall locations.
Meanwhile, retailers have scant plans for full-line locations.
Saks has tentative plans for one in Puerto Rico in 2015, and
Nordstrom has one planned for San Juan in late 2014. Nordstrom is
also looking in Canada for sites, although the company declined to
say if it was for full-line stores or Racks or both.
Among other upper-end retailers, Coach Inc. (COH) operates
full-line stores and also sells through its outlets and department
stores. Neiman Marcus Group Inc. has a mix of full-line stores and
outlets.
Write to Karen Talley at karen.talley@dowjones.com.
Subscribe to WSJ: http://online.wsj.com?mod=djnwires