(Bloomberg Gadfly) -- What happens to a cash cow after it stops delivering money?
Factory outlets that have been a boon to retailers in recent years, for example, are starting to slow down, and it's hurting chains that had become overly dependent on them.
As brick-and-mortar traffic slowed and online sales rose, outlets were a salve for many chains, giving them access to cheaper real estate and a stream of customers looking for bargains on Kate Spade handbags and the like. A relatively weak dollar, lower sales taxes and low prices helped make U.S. outlet malls tourist destinations, spawning a mega-industry of shopping excursions from China and other countries. About 25 percent of outlet centers are in or near major tourist destinations, estimates Garrick Brown, head of retail research at real estate firm Cushman & Wakefield.
But the dollar has strengthened lately, hurting tourist traffic. And outlets have had to fight harder to lure shoppers.
That includes cutting already low prices even more deeply just to stay competitive, Kate Spade CEO Craig Leavitt said on Wednesday. His company spooked the market with earnings that came in 23 percent lower than Wall Street estimates. Sales at established stores rose 4 percent from a year earlier, shy of consensus expectations for 13 percent growth.
Stripping out e-commerce, sales growth at Kate Spade stores would have been just 1 percent. Its gross margin fell to 59.7 percent from 61.6 percent the year before, driven by increased promotions in its outlet business. The company cut its 2017 sales and earnings guidance, prompting the stock to drop 20 percent.
Kate Spade has actually been ahead of the game in culling its reliance on promotions and outlet stores, a move brands such as Coach and Ralph Lauren are only now starting to follow. It's the right path, but not a smooth one. And the shift away from outlets marks an end to one of the few sources of growth for U.S. retailers in recent years.
Outlet mall square footage expanded by 33 percent over the past decade, according to Cushman & Wakefield. And a concept that began as a way to offer last year's fashions at cut-rate prices far from mainline stores soon grew beyond those boundaries.
Retailers such as Coach and Nordstrom opened more outlet locations than mainline stores. Outlets crept into cities, and in many cases opened just a short drive from a retailer's full-price store. Many of the same deals were available on the Web, saving shoppers the outlet trip. Further blurring the lines between outlets and chains was the growth of off-price retailers such as T.J. Maxx, which also carries discounted brand names.
Now, that retail growth engine is slowing. Retailers have put outlet store opening plans on hold. Real estate developers are wavering: There was 1.8 million square feet of U.S. outlet center space under construction in the second quarter, compared to 4.2 million square feet under construction during the second quarter of 2015, according to Cushman data.
After 15 straight positive quarters, outlet center construction growth turned negative at the end of 2015. In the second quarter, outlet center square footage under construction fell 24 percent from the year before, Cushman's data show.
For now, Cushman's Brown calls this "a pause." Developers are worried about where we are in the real estate cycle, and no one wants to get caught with a half-built shopping center, he said. Just like the best malls have defied a downturn in shopper traffic, the most compelling outlet centers will continue to thrive.
But for many retailers and brands, a slowdown in the outlet business could mark the end to what has been a bright spot in an otherwise bleak backdrop.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story: Shelly Banjo in New York at [email protected]
To contact the editor responsible for this story: Mark Gongloff at [email protected]
© 2016 Bloomberg L.P