Outlets Boost Nordstrom in Recession

A lot has been written about the phenomenon of trading down from one retailer to another in the recession, but another phenomenon impacting a number of companies is trading down within a portfolio of stores.

Nordstrom, for example, operates outlet operations in addition to department stores. Nordstrom Rack outlets appeal to customers who like the department store and the labels it carries but not necessarily the prices. Outlet shoppers visit to take advantage of bargains on items that didn’t sell at the department store or didn’t make it as far as the sales floor when a product line was discontinued.

However, not all outlet merchandise was ever intended for the department stores. When outlets took off in the 1980s, many retailers saw them as a way to reach new customers who wouldn’t pay full prices at their main-line stores. To ensure a constant supply of merchandise across all colors and sizes, operators developed outlet items. They weren’t always less expensive than main store sales items nor were they necessarily manufactured to the same quality standards, but the outlets developed their own following anyway. That helped traditional department stores compete for customers they might have lost to Kohl’s, T.J. Maxx, JCPenney and even Target stores.

Recent financial results suggest that, in the recession, outlets may be giving shoppers who aren’t inclined to splurge at their favorite luxury department stores an alternative where they can shop and still feel financially responsible.

In March, Nordstrom’s beat analyst comparable store sales predictions, a relatively positive development despite the fact that those sales, generated in stores open for a year, were off by 13.5%. Outlets helped mitigate greater softness elsewhere with comps at Nordstrom Rack up 0.1% versus down 16.9% at department stores.

In the recession, Nordstrom has been adding Rack locations not just to satisfy bargain hunters but also to take advantage of good real estate deals that have been emerging, said Michael Koppell, Nordstrom CFO, at the Bank of America Merrill Lynch 2009 Consumer Conference in March. “The Rack has been a great vehicle for us to offer Nordstrom products at an off price as well as other products that we buy,” he said.

A danger Nordstrom faces is the potential disenchantment department store customers might feel with quality encountered in the outlets, not to mention lesser service levels. If that’s the case, lower-end department stores such as Macy’s and Dillard’s might seem like more attractive alternatives than they had been in the past, not to mention Kohl’s, J.C. Penney and Target. All posted negative comps in March but none in the double digit range, except Dillard’s, that luxury department stores suffered and each beat analyst expectations, again, except Dillard’s. And T.J. Maxx parent TJX posted comparable store sales that actually gained two percent. So, despite the risk, it seems as if outlet stores could play a positive role for luxury department stores, at least slowing the pace of customer erosion to other retail segments.