Outlets for Profits

Ann Taylor announcing today it's planning to significantly expand its factory outlet footprint. The retailer, which already has 110 outlets, is set to open about 35 new LOFT outlet stores and five Ann Taylor Factory stores in 2011.The new stores expected to generate $75 million dollars in revenue in their first year.

Woman selecting clothes from rail in shop
Lucas Lenci Photo | Riser | Getty Images
Woman selecting clothes from rail in shop

It comes after Coach, which has a big outlet presence, announced on Tuesday its quarterly results beat the street. That retailer's net income rose 20 percent as revenue jumped 34 percent to $911.7 million. Coach, which has 128 outlet stores, traded at three year highs on the news.

Coach may be considered a high end retailer — but it has clearly been banking on the lower end. Much of its outlet merchandise is made specifically for the factory stores, since leaner inventory has been creating fewer opportunities to shuffle older merchandise into the outlets.

"I think the factory channel is a key growth driver for Coach both in terms of new concepts, such as men's factory stores in the U.S., and overall unit growth outside the U.S." says Wall Street Strategies retail analyst Brian Sozzi. He has a buy rating on Coach shares and upgraded the retailer this week to $55.00 a share from $52.00.

Sozzi's research finds most companies explain their outlet strategies in their SEC filings. But, not all of them acknowledge to selling made for factory product.

"Made for factory essentially means lower quality products compared to full-priced stores, but that are not discounted because the consumer already thinks he or she is snagging a rare steal," says Sozzi.

Coach isn't the only retailer buying into this strategy.

Gap, , J.Crew and Guess also have items sold specially in the outlets.

And, it's a growing landscape. Macy's began opening Bloomingdale's outlet stores in the summer. The retailer betting the move will attract more budget conscious consumers.

CNBC contributor and Style File Group retail industry expert Hitha Prabhakar has visited some of the new stores and calls it a great business model.

"Brands that have factory outlets have strong brand integrity. So, if they are making pieces directly for the outlet, quality isn't going to be compromised that much. You have to remember that brands use the same factories to make their product regardless if it is priced at $1600 for a handbag or $300," says Prabhakar.

Overall, Prabhakar believes the luxury factory stores will be a profitable outlet for retailers this holiday season. And, that's good news for Coach. The holiday quarter is expected to account for 30% of its annual sales.

Stephanie is Squawk Box producer and senior NetNet retail correspondent. Follow her on twitter @StephLandsman


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