The latest retailer to join discount deluge

The off-price space is about to get even more cramped.

Lord & Taylor on Monday became the latest department store to throw its hat into the off-price ring, saying it plans to open its first Find @ Lord & Taylor location in Paramus, New Jersey, next month, with six more stores slated for next year.

The announcement makes Lord & Taylor the third major department store to enter the off-price market this year alone, as competitors who already have an established presence there continue to grow their reach.

A Lord & Taylor shopping bag at a mall in Fairfax, Virginia.
Andrew Harrer | Bloomberg | Getty Images

It's also the latest indication that traditional retailers are having to stretch outside their comfort zones as they attempt to drive their revenues higher, while at the same time jeopardizing sales growth for the overall sector.

"Lord & Taylor's saying 'OK, if I can't do my regular gross margin ... let's go get more sales with outlet stores,'" said Ron Friedman, leader of the national retail and consumer products group at Marcum, an advisory firm.

Find @ Lord & Taylor isn't parent company Hudson's Bay's first foray into the bargain space. As of Aug. 1, the retailer already operated 85 Off 5th stores — a lower-price alternative to its Saks Fifth Avenue nameplate — which it plans to further build out in coming months.

In the company's most recent earnings release, management said it is investing an additional $50 million in growth initiatives this fiscal year, including the addition of 15 Off 5th stores. And in 2016, Hudson's Bay will expand both Saks nameplates into its home country, Canada.

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Similar to Nordstrom, Saks' off-price stores already outnumber those of its full-line shops. As of Aug. 1, Hudson's Bay operated 38 Saks stores, compared to 85 Off 5th locations; Nordstrom as of that date had 118 traditional shops and 178 Rack stores. And in a recent SEC filing, Neiman Marcus said it operated 41 full-line Neiman's stores as of Aug. 1, two shy of its Last Call nameplate.

In addition to these department stores, which have already planted their stake in the off-price sector, Kohl's over the summer launched Off-Aisle by Kohl's in Cherry Hill, New Jersey. Macy's this fall entered the off-price arena with five Backstage stores, and another opening soon.

A spokeswoman for Kohl's did not immediately respond to a request for comment as to how its store is performing, or whether there are plans to further build out the concept.

A spokeswoman for Macy's said the company has received positive customer feedback, but it is still in a testing and learning phase. Earlier this year, Macy's also said that it plans to grow the outlet footprint for its higher-price Bloomingdale's brand.

Although space is getting tight, it's easy to understand why retailers are drawn to off-price stores. With the exception of a brief hiccup in the first quarter, same-store sales at Nordstrom's Rack division have outpaced those at its full-price stores for nearly three years.

And at Saks, comparable sales increased just 0.1 percent in the most recent quarter, compared to growth of 12.7 percent at Off 5th.

Craig Johnson, president of Customer Growth Partners, said that although Macy's and Lord & Taylor are "late to the dance," it's better late than never. Whereas department stores have been losing share over the past few years, off-price names have been gobbling up a half point in share each year in the apparel category — a trend he doesn't see slowing down.

"People still like to have the designer brands but nobody wants to pay retail," Johnson said. "Only a sap pays retail."

Johnson said the key for retailers is to ensure they are not selling the same product in both their full-line and discount stores, to avoid cannibalizing their sales. Friedman sounded a similar note, saying the off-price strategy is still a good lever to pull for growth.

"The space is definitely crowded, no question about it," Friedman said. "[But] it makes sense if you're having some ... issues in your main store and you need an alternative."

Keeping up with consumers
Keeping up with consumers

In addition to tapping into consumers' discount-driven mentality, these stores also help retailers attract younger shoppers, who can't always afford to shell out top dollar for name-brand merchandise.

Hudson's Bay CEO Jerry Storch listed the opportunity to "introduce the Lord & Taylor brand to new consumers" as one reason it decided to expand in the off-price arena.

But such robust expansion also raises challenges. With the retail sector already under severe pricing pressure, adding yet another set of discount stores makes it even tougher for the industry to generate sales gains.

The National Retail Federation listed deflation as one reason why it expects holiday sales to increase 3.7 percent this year, compared to last year's 4.1 percent growth.

"Everyone is concerned about profitability," Friedman said.