Outlet stores

Express dives into the factory outlet business


In an approach that reflects a major change from its traditional economic model, Express (NYSE: EXPR) recently announced the opening of the first of many outlet stores. The first store, which will open at Tanger Outlets National Harbor in Washington, DC, will be just one of thirty Express outlet stores the company plans to open throughout the year. Given that the move represents a big change from its long-standing business of selling trendy clothing and accessories at full price, what are the implications for investors in the business?

Impact the brand
One of the first rules of fashion is to always have a new product to want for your customers. Express has always excelled in this area as it regularly rolls out new clothing lines every season. Although the company often runs coupon-based promotions every now and then with occasional sales, the extent of discounts it offers to customers remains largely controlled for its highly desirable products.

By opening a factory outlet, the company is breaking away from its traditional economic model by selling slightly dated products at factory prices, all under the “Express Factory Outlet” banner. According to its website, Express plans to open 30 more outlet stores across the country throughout the year. While the move may very well increase its overall sales, it is possible that the move will begin to reduce sales at its traditional stores. In order to get a glimpse of what might happen, we need to look at what happened to competitors who have also made the move to opening factory outlets.

Competing factory outlets
The first of Express’s competitors to operate factory outlets was The hole (NYSE: GPS), in particular through its Gap and Banana Republic brands. Both brands have a number of outlet stores across the country and have achieved decent results. Although the company does not provide financial results for its outlet division, we can get some idea of ​​the performance of its brands. According to the company’s latest 10-K annual report:

As we shifted to a global brand structure to drive long-term global growth, we opened 190 company-operated stores, primarily through expansion into Asia, growth in our global outlets and Athleta stores. in the USA. Specifically, we expanded our Gap store base in China, opening 34 stores for a total of 81 specialty and outlet stores, and opened 17 additional Old Navy stores in Japan for a total of 18 stores. We have opened 58 outlets around the world for a total of 532 outlet stores. We also opened 30 Athleta stores, ending fiscal 2013 with 65 Athleta stores. Our franchisees added 72 new stores and five new markets.

It is clear that opening factory outlets is a major part of The Gap’s growth strategy in the coming years in addition to international growth. This makes sense given the company’s presence across the United States.

The recent performance of Express in the outlet market is even more useful to assess H&M. H & M’s entire business model revolves around a sort of factory outlet model, with the majority of its in-store products generally being much cheaper than competing Express products. This business strategy has worked well for H&M. In fact, the company had just under 3,000 H&M branded stores at the end of fiscal 2013.

H&M same-store sales were unchanged for the year, which is impressive considering the company opened 356 new units, an increase of more than 10% for the year. This is all the more impressive given that Express experienced a 1% drop in same-store sales in fiscal 2013 and a 3% drop in sales in fiscal 2012, when sales in row were excluded from the results.

Express’s decision to open factory outlets is all the more logical given that its main competitors in the field of discount fashion, TJX (NYSE: TJX) and Ross (NASDAQ: ROST), continue to grow their profits and comparable store sales by leaps and bounds. Both companies excel at selling trendy clothing at heavily discounted prices, months after they hit the market. The results of these companies have been excellent in recent years.

2011 financial year

2012 financial year

2013 financial year

TJX Sales

$ 23.19 billion

$ 25.88 billion

$ 27.42 billion

TJX comparable store sales growth

5%

6%

3%

Ross Sales

$ 8.6 billion

$ 9.7 billion

$ 10.23 billion

Ross comparable store sales growth

5%

6%

3%

Clearly, the results of TJX and Ross give Express a good reason to go into the factory outlet business. It is unfortunate that the company did not take the step sooner.

Take away food
There is a strong incentive for Express to start selling according to the factory outlet business model. The fantastic results from TJX and Ross, along with the fact that its competitors at The Gap and H&M are doing the same, shows that Express needs to at least have a presence as an outlet retailer. It will need to do this in a way that does not harm its traditional stores, as it is and will remain its core business for many years to come. Dumb investors should keep an eye out for any changes in Express store sales as its outlet stores open.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.