China’s coronavirus outbreak could be taking a toll on yet another sector in retail: brick-and-mortar fashion outlets.
A slowdown in sales at outlet stores selling fashion, footwear and accessories could be due in part to reduced activity from so-called “bulk buyers,” a category of shoppers previously called “diverters” who buy product in a large quantities to be transported elsewhere for resale.
It’s a practice that most brands don’t like discussing, but a necessary part of their overall sales structure.
“At The Citadel Outlets in L.A. near where I live, they’re not getting the busloads of Chinese tourists. And they’re not getting the big drop off of BBs, as the bulk buyers are sometimes called,” Gabriella Santaniello, founder of research firm A-Line Partners, said.
Brands with a sizable outlet presence run the gamut from accessible luxury players like Coach, Kate Spade and Michael Kors, to perennially desirable labels including Ralph Lauren, Nike, Tommy Hilfiger and Under Armour, according to Santaniello. A Cowen & Co. report echoes those findings, but indicates that The Gap Inc. is deemed to have higher exposure in bottom-tier outlet centers.
U.S. tourism from China has all but come to a standstill in the wake of the COVID-19 global health crisis that has sickened more than 77,000 people, with a death toll that has risen past 2,200 worldwide. From high-end to mass market, many brick-and-mortar brands rely on Chinese tourists to sustain foot traffic and drive a considerable portion of their sales.
Sluggish outlet sales stem from an array of factors, including foreign exchange rates and government restrictions on luxury gifting to officials. But recently, many outlet stores have seen sales growth decline after the Chinese government imposed travel restrictions within parts of the world’s second-largest economy.
Bulk buyers, for their part, typically purchase between 20 and 25 items, the minimum required to get first dibs on new-in outlet merchandise. But when sales at outlet stores begin to fall off, associates sometimes notify bulk buyers that minimums have been lifted as an incentive to drive sales.
Santaniello’s team at A-Line Partners has visited outlet centers in Los Angeles and Orlando, Fla., documenting a “significant drop in traffic” at some factory stores. Many, she said, fell short of the sales goals for the Chinese New Year, traditionally a time of bustling business. One brand missed by “such a large margin,” Santaniello added, that store sales associate believes there’s no way to make up the lost sales. Another staffer at a brand that plays in the luxury and mass luxury space described sales numbers “trending in the negative mid-twenties,” she noted.
For many brands, outlet sales represent nearly 50 percent of total direct-to-consumer sales, industry sources said. If the current sales trends continue, Santaniello expects an impact on earnings for the current quarter and one to follow.
“This is such a profitable business for brands,” she said. “They are creating special lines just for the outlets, and I imagine that [as the situation continues in China], the brands will start rethinking their supply chains and inventory levels for their outlet stores.”
Reducing their product orders is just one option for companies casting about for ways to mitigate the impact, Santaniello added.
Most slow-selling products are cleared out of struggling department stores through regular and and end-of-season clearance sales. Some of that merchandise might still eventually land in the outlet channel, but usually not until a year later.
PVH-owned Calvin Klein and Tommy Hilfiger appear to be over-distributed in both the outlet sector and in the off-price channel across both men’s and women’s apparel. “Much of this product is licensed from G-III [Apparel Group], but makes it difficult for either brand to return to full-price selling in North America when layering in the additional outlet exposure,” John Kernan, Cowen’s apparel analyst, said.
Under Armour’s strategy of promoting “outlet product” on its e-commerce website is “cannibalizing its brick-and-mortar outlet business,” he added.
The Cowen report estimates that top-tier malls operated by Simon Property Group and Tanger Factory Outlet Centers are “sustaining traffic” in the range of down low-single-digit percent to up low-single-digit percent. In contrast, the Cowen analysts believe traffic at the bottom-tier malls is down in the double-digit percent range.
According to the report’s estimates, outlet sales per square foot for handbag brands average $1,120, versus an $840 estimate for full-price sales per square foot. For apparel brands, the estimate is $390 per square foot for outlet sales, $10 higher than full-price.
The balance of outlet stores to full-price varies by brand. The ratio stands at 119 to 94 for Kate Spade, 191 to 200 for Coach, 262 to 392 for Gap, 135 to 251 at Michael Kors, and 167 to 18 at Under Armour.