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Off Price Becomes Hot

Discounters on a roll because of economy.

T-J-Maxx

Selling off-price is becoming stylish.

For luxury stores such as Saks Fifth Avenue and Neiman Marcus, what’s always been perceived as a less glamorous and more desperate side of the fashion business — selling at a steep discount in the relatively austere outlet environment — is gaining appeal, profitability and prestige in an otherwise dismal retail climate.

The 48-unit Off 5th division of Saks Inc. recently launched an outlet prototype to fuel expansion, Neiman’s has been steadily supporting the growth of its Last Call clearance centers and even Baccarat has joined the fray, opening its first outlet early this summer.

Meanwhile, traditional off-price players are on a roll as consumers’ wallets slam shut.

“We see enormous growth potential in the future and have solid strategies in place to support our goals,” said Carol Meyrowitz, president and chief executive officer of TJX Cos., on Tuesday, when the giant off-pricer, the nation’s largest, reported that second-quarter profits tripled from a year ago, when there was a big charge for a credit card security breach. The retailer also raised its outlook for the year, and Meyrowitz, in a conference call, expressed confidence that new customers will remain loyal when the economy improves. (See story, this page.)

As if it could read the economic tea leaves and the nation’s mass trading down, the $18.65 billion TJX two years ago quietly started innovating in its stores to play up hot categories such as accessories and shoes and maximize some that were undertapped, like contemporary sportswear. TJX also has been showcasing high-end designer labels at certain locations, and testing StyleSense, a new chain for family footwear and accessories in Canada. Germany is another country where TJX sees growth.

In a recent research note on TJX, analyst Mark Montagna of CL King & Associates noted that the company’s store base isn’t anywhere near maturity, believing 1,500 to 2,000 units could be added, on top of the 847 TJ Maxx stores, 776 Marshalls and 289 HomeGoods units already operating in the U.S. The company also has 129 A.J. Wright stores and 34 Bob’s Stores.

Regarding TJX’s archrival, Ross Stores, Montagna sees a bright future, as well, recently writing: “We believe Ross is now at an inflection point for an acceleration in margin expansion, given comp momentum, lean inventories and reduced new store openings.” He also cited fresher merchandise flows, and the fact that Ross’ same-store sales in California and Florida, two of the country’s most economically depressed states, are in line with the performance of the rest of the chain in other states.

“The Street loves some of these companies. When you consider the profit margins are low, the return on capital is outstanding,” said Gilbert Harrison, chairman of Financo Inc. “TJX trades at 18 times earnings, whereas Macy’s trades at 5.2 times earnings.

“In my 36 years of doing mergers and acquisitions, the best deal I ever did was the merger of Marshalls with TJ Maxx in 1995, when you look at the value created,” he said. “In 1995, the total capitalization of the combined company was $1.1 billion. In 1998, it was $7.5 billion.” Currently, it’s $15.3 billion.

In the last two years, TJX has been testing several initiatives to elevate the offering, bolster sales and seize upon industry trends, including expanding the accessories and handbags department and doubling the size of jewelry cases at TJ Maxx. About a year and a half ago, The Cube at Marshalls made its debut. Executives described the concept as a 1,000-square-foot store-in-a-store prototype for contemporary merchandise. The Cube recently received the green light for a rollout.

Two years ago, the Runway at TJ Maxx was launched and it has been installed in roughly 40 to 50 stores. The Runway displays higher-end designer labels and has its own signage to make the space distinct from the rest of the store.

“We are definitely looking at vendors that [we] haven’t done business with, or maybe not that much business, in the past, that are bringing some nice results,” said Gail Karagianis, general merchandise manager of women’s sportswear at TJ Maxx and Marshalls, in a recent interview. Her responsibilities cover the misses’, career, casual, better brands, special sizes, knits and sweater categories.

Stores that haven’t established Runway shops are still being shipped “an enhanced flow of labels,” she said. “The Runway is really trying to provide the ‘wow’ factor.”

In yet another major initiative, 5,000-square-foot shoe “megashops” at roughly two-thirds of Marshalls locations were introduced. The biggest change is a shift from presenting shoes by size to presenting them by style. “Shoes have become more of a destination versus a department,” said Karagianis.

“There are lots of things we are testing, but not officially releasing,” she continued, ranging from new signage and advertising to pumping up activewear.

Amid the changes, TJX’s two major off-price chains maintain merchandising differences. There is no jewelry in Marshalls, only in TJ Maxx. There is family footwear at Marshalls, but just women’s footwear at TJ Maxx. And Marshalls sells men’s suits, while TJ Maxx doesn’t. “We really try to keep the two chains different with the way we buy and the way we ship. There’s very minimal overlap,” Karagianis said.

“TJX has over 500 buyers buying in more than 60 countries,” said Meyrowitz. “The impact of department stores tightening inventory gives us just as much opportunity.”

For TJX Cos. and other off-pricers, “this is a chance for them to shine, and build their base for the future,” said Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates. “These are established channels of distribution that have grown over the years and are particularly meaningful in tough economic times. They’re very profitable, and [are] doing even better than they ordinarily do.”

He explained that off-pricers and outlets operate on lower gross margins than regular-priced stores, but can afford to because they don’t spend as much on selling, general and administrative expenses, or build out, and typically situate in less prime or remote areas, where the idea is to not cannibalize the full-price business. Also, at outlets, the service provided is limited, mostly being self-service.

“There is much more customer interest and demand for these stores,” Aronson added, and part of it relates to the primal urge for a bargain among shoppers everywhere. “The hunt [for a great discount] has always been something people like. There is a sense of satisfaction finding that hidden jewelry or fashion deal they didn’t expect to find. But now a lot of people are doing it out of necessity, not simply thrill-seeking. I don’t think it’s fleeting. ”

Aronson cited several companies such as Brooks Brothers, Polo Ralph Lauren and Saks Fifth Avenue as among those that are particularly upbeat about the performance and future for their outlet businesses.

Baccarat is a newcomer to the arena. The French luxury crystal brand opened its first outlet in June in the 778,000-square-foot Prime Outlets International Orlando. The first Forever 21 outlet is expected to open there, too.

The center completed a $300 million expansion in May and provides a strong mix for those who love the thrill of hunting for a bargain. Among the designer and brand names are BCBG Max Azria Factory Store, Betsey Johnson Outlet, Coach Factory, Hickey Freeman, Hugo Boss Factory Store, Juicy Couture, Kate Spade, Kenneth Cole, Michael Kors, Saks Off 5th, Sean John Factory Store, Tommy Hilfiger, Victoria’s Secret and the only Neiman Marcus Last Call location in central Florida. The center is operated by the Baltimore-based Prime Retail, which has 21 outlet centers in the U.S. that average 250,000 square feet and comprise a total of 10 million square feet.

While traditional malls struggle with declining traffic, at Prime Retail properties, it’s up single digits year to date, according to Karen Fluharty, senior vice president of marketing. Prime measures traffic in the outlet centers through an infrared system that counts cars in the parking lots.

“In today’s environment, people are still looking for the brands they aspire to. They’re simply looking to find them in a smarter way,” Fluharty said. “Our standard messaging is 25 to 65 percent off every day, and in select markets we have amplified the size of that message.”

Michael Belleveau, president and ceo of Baccarat North America, said Prime Outlets International Orlando serves “a broad tourist market and the affluent population in Orlando.”

In June, Burt Tansky, chairman and ceo of Neiman Marcus Group, said that for two years, infrastructure has been added to support the growth of the Last Call clearance units, and that three would be opening soon, bringing the total to 27. Last Call stores sell goods from Neiman Marcus stores or from Neiman’s vendors. “During this challenging time, sales at our Last Call stores have remained strong,” Tansky said.

The $400 million Off 5th developed a 26,400-square-foot prototype, with a cleaner, more modern ambience that last spring replaced the existing outlet at Prime Retail’s huge outlet center in Orlando. The outlet sells labels sold at Saks Fifth Avenue and other high-end stores, as well as Saks’ private label. Discounts start at 30 percent off, and are as high as 90 percent off on clearance goods.

“We believe there is meaningful new store growth opportunity for Off 5th, and we look forward to expanding this new format into other markets,” Robert Wallstrom, president of Off 5th, told WWD at the time of the prototype launch. “Productivity is absolutely part of the goal.”