Why Luxury Goods Are Scarce at Outlet Malls

As Jennifer Mason searched the racks at a Neiman Marcus Last Call outlet in Virginia this month, she was hoping to find Gucci or Prada as she did last year. No deal. "I've gotten a little skeptical," says Mason, who owns a printing supplies company and frequents the Potomac Mills mall outside Washington. "It doesn't feel like it's really deals."

Not long ago, the upscale outlet was a secret weapon for fashionistas seeking leftover Dolce & Gabbana dresses at 75 percent off. Over 30 years ago, almost all the clothes at upscale outlets came from the main locations of tony retailers like Nordstrom (JWN). Now as little as 10 percent is made up of designer goods actually sold at upscale retail stores. That means fewer bargains for chic-hunters like Jennifer Mason.

Increasingly, merchandise is made specifically for the outlets and sold nowhere else at full price (even though it may be made by a top brand like Calvin Klein), says retail consultant Steven Dennis, who dubs the phenomenon "faux clearance." Explains Goldman Sachs (GS) analyst Adrianne Shapira: "The perfect storm is when there is excess inventory and these guys are flush with great buys. That has reversed."

One reason: It's simply harder for outlets to get their hands on the real deal, Dennis says. U.S. department stores slashed inventory as consumers pulled back on spending over the past two years, leaving less to end up in the outlets. Inventories at Saks (SKS), for instance, were worth $649.2 million on Jan. 30, 2010, down 24 percent from two years earlier. Meanwhile, competition for the best goods has grown as outlets multiply and online purveyors such as Gilt Groupe, which offers discounted luxury goods during limited-time "flash sales" online, entered the market.

"You don't have nearly the quality you had in the recent past and you don't have the degree of discounts," says Dennis, founder of Sageberry Consulting and a former Neiman Marcus senior vice-president. "It's hard to believe all of these players can operate 50 to 100 outlets successfully. There's going to be a shakeout."

The outlet concept took off in the 1970s, when VF (VFC), the world's biggest apparel maker, began letting shoppers rummage through cardboard boxes of its excess hosiery at its mills, says Linda Humphers, editor-in-chief of Value Retail News. About the same time, Nordstrom opened the first Rack in the basement of its Seattle flagship store to get rid of its leftover shoes. Outlet malls proliferated in the early 1990s. By 2008, the U.S. had almost 13,000 stores in outlet centers, and everyone from Anne Klein (JNY) to Kenneth Cole (KCP) to Elie Tahari had hopped on the trend.

Outlet shoppers found plenty to buy that year, because the onset of the recession left upscale merchants holding huge stocks of luxury goods—which they unloaded at outlets at deep discounts. Then fashion overstock began to dry up as retailers bought less, forcing department stores to fill their outlets with faux clearance.

At Saks' Off 5th stores, 10 percent to 20 percent of the merchandise is clearance from Saks' full-priced stores, about 20 percent is Off 5th store-label goods, and most of the rest is made for the chain by vendors, says spokeswoman Julia Bentley. The clothes are in-season, she adds, and sold at substantial savings. Ginger Reeder, a spokeswoman at Neiman Marcus, declined to comment about the selection at its Last Call stores.

About 20 percent to 25 percent of the merchandise at Nordstrom's more than 80 Rack outlets is clearance from its full-price department stores, says spokesman Colin Johnson. The rest is mostly vendors' excess inventory. "Little" is made-for-outlet, says Johnson. The challenge is obtaining the best quality merchandise, says Blake Nordstrom, the retailer's president: "We're working on that."

Sales at Rack locations open at least a year fell 2.4 percent in August and September, compared with a 1.7 percent gain a year earlier. At Saks' Off 5th stores, performance was below the company average for the second quarter, a reversal from a year ago.

Saks said last week it was closing its Off 5th store in Reno, Nev., because the store was underperforming. Similar disappointments may follow if shoppers like Mason head back to full-price stores seeking the genuine article. "Tomorrow," she says, "I think I'm going to get the real clothes."

The bottom line: Outlet stores selling designer goods have been forced to stock less glitzy merchandise as excess luxe inventories are harder to find.

    Before it's here, it's on the Bloomberg Terminal.