Retail's Best Bet? Follow the Crowds at the Outlet Malls

Saks Fifth Ave.
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It's been a mixed picture for pure luxury retail recently, particularly as the wealthy worry about looming tax increases, but many consumers are finding value in off-price luxuries at outlet malls.

On some of the most critical days of this holiday season, outlet mall traffic surprised some analysts.

Citi's Deborah Weinswig said she was surprised by the crowds of shoppers and the excitement she saw at Saks Off Fifth on Black Friday.

"Some of the earliest signs of the successful early openings on Thanksgiving night and Black Friday were at some of the outlet centers and malls, people were really lined up," said Wendy Leibmann, CEO of retail industry consultants WSL Strategic Retail.

And even better news for outlet mall retailers and developers: the crowds weren't just window shopping, they actually bought items.

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According to Capri Capital Partners, outlet mall retailers are seeing sales increases in the 13 percent to 15 percent range compared with 2011. Looking at sales on an average square foot basis, the outlet malls rang up a 9 percent gain from 2010 to 2012, while traditional retail malls saw a 4 percent increase during the same period.

And despite rising rents at outlet malls — they rose about 8.5 percent from 2010 to 2012 — average outlet mall occupancy is nearly 95 percent compared with just over 90 percent for traditional malls.

"The consumer has began to make some significant statements in terms of their preference, and the outlet malls are really starting to find some distance from their performance and the performance of other traditional mall and power centers," said Ken Lombard of Capri Capital.

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The Robin Report's Robin Lewis said Nordstrom's growth plan sends a message. The high-end retailer is on track to open 15 Nordstrom Rack locations in fiscal 2012, but just one full-line store.

"The outlet store strategy is baked into the cake going forward for these luxury retailers," Lewis said. "They're finding that's a very successful growth strategy."

Shares of Simon Property Group and Tanger Factory Outlet, some of the nation's biggest outlet mall REITs, have grown 70 percent in five years, outperforming the S&P Retail Index's 56-percent gain in that same period.

"Now outlet malls are starting to gain the attention of institutional investors, which have really been on the sidelines in terms of retail investments for probably the last two or three years," said Lombard. "The pocket of cash coming from this group is really going to be an interesting dynamic to keep our finger on the pulse as we look forward over the next 24 to 36 months."

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