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Americans aren't done with outlet malls just yet

Customers with shopping bags at the Outlet Shoppes of The Bluegrass in Simpsonville, Kentucky.
Luke Sharrett | Bloomberg | Getty Images
Customers with shopping bags at the Outlet Shoppes of The Bluegrass in Simpsonville, Kentucky.

Bargain-hungry Americans aren't finished with outlet malls just yet.

Traffic at these discount shopping centers recorded another monthly rebound in July, despite challenges regarding their value to shoppers and brands.

According to a monthly survey by Cowen & Co., 26 percent of U.S. shoppers visited one of these centers in July. That's up 4 points from March, when domestic traffic to outlet malls fell to its lowest point since June 2015. Cowen pulls its traffic figures from monthly surveys of about 2,500 U.S. consumers.

A pickup in visitors bodes well for outlet-based brands during the second half of the year, as it should help them clear through overly discounted merchandise. That, in theory, should help them generate healthier profit margins.

Still, as department stores and other retailers aggressively mark down merchandise to bring shoppers into their stores, the drive to outlet centers — which tend to be located farther away from major population centers — lacks the appeal it once had.

Adding to the pressure is the prevalence of off-price retailers including TJ Maxx, which also sell name-brand goods at discounts. And as a strong U.S. dollar and slowing economic growth discourage international tourists from traveling here, outlet stores are missing out on a piece of their usual revenue stream. Cowen's survey does not reflect the role of foreign tourists, who are some of the biggest spenders at outlet malls.

"Directionally, we think that the negative impact from the stronger U.S. dollar on tourist travel and spending could start to ease in [the second half] as these centers begin to lap easier traffic comparisons," Cowen analysts John Kernan and Oliver Chen said.

"But with changing consumer shopping behavior, an over-stored industry, extreme weather and persistent traffic headwinds, what was once a favorable channel could lose appeal in favor of online clearance and traditional off-price retailers, leading to an acceleration in store closings."

Retailers over the past few years have turned to outlet centers as a way to juice their revenues, as they tend to be heavily trafficked and offer more affordable rents. That's led to an uptick in square footage.

But even as developers continue to open outlet centers, their growth has been measured. The ribbon will be cut on 24 new U.S. outlet malls this year, bringing the total to 226 by year's end, according to the International Council of Shopping Center's Value Retail News. That compares with roughly 1,200 enclosed malls.

The rate of new outlet openings is expected slow, with 19 more U.S. centers planned through 2018, according to ICSC.

Over the past year, several retailers have blamed sluggish traffic at outlet centers for their muted sales. During the second quarter, luxury handbag maker Kate Spade said these malls were "more promotional than anticipated," and that spending was particularly weak in centers that cater mostly to tourists. Coach, meanwhile, said its performance in these centers was better than feared.

The pullback in tourist spending has also been one of the biggest headwinds for outlet operators. David Simon, CEO of Simon Property Group, said last month that excluding the drag from tourist-focused properties, sales per square foot at its outlet malls were flat. Likewise, overall traffic to its outlet centers is up more than 2 percent this year.

While a re-engaged U.S. shopper is good news for outlet centers, their visits will likely be "more than offset by weak tourism trends," Cowen's analysts said. Yet as Simon and Tanger Factory Outlet Centers said traffic at these malls increased for the second straight quarter, there are reasons for optimism in the second half.

"The negative impact from the stronger U.S. dollar on tourist travel and spending could start to ease ... as these centers begin to lap easier traffic comparisons," Cowen said.