J. Crew to Sell Outlet Only Merchandise On Line

J. Crew Group Inc. will put its outlet-store clothing online in September, making its lower-cost offerings more accessible at a time when the company says consumers are hesitating to pull out their wallets.

The New York-based clothing retailer is gambling that it can expand sales without cannibalizing demand for more expensive merchandise at its mainline stores. Apparel companies typically locate outlet stores in out-of-the-way malls, forcing customers to drive long distances to get access to the discounted goods. J. Crew is among the first to risk selling outlet gear over the Internet.

The move comes as J. Crew reported an 88% jump in profit in its fiscal second quarter but lowered its outlook for the full year.

"They're deferring, they're waiting, they're comparison shopping, and people are a little nervous," Chief Executive Millard "Mickey" Drexler said, describing the mood of his customers on a call with analysts Thursday.

For the quarter ended July 31, J. Crew posted a profit of $34.9 million, up from $18.6 million a year earlier. Revenue grew 14% to $407.5 million.

Online and outlet sales have each seen consistently strong growth through the recession and bumpy recovery, bright spots in an otherwise lackluster retail environment.

J. Crew, like most speciality retailers, manufactures merchandise specifically for its factory channel. It's a different model than that of many apparel manufacturers and department stores, which use their off-price channel to liquidate excess merchandise.

Some retail analysts believe that the customer base for outlets, which at J. Crew offer merchandise 30% below the cost of clothing in the company's mainstream stores, is distinct enough that cannibalization is a low risk. Others, like Piper Jaffray Cos. analyst Jeff Klinefelter, agree, but think making outlet gear more accessible online will cause shoppers to cross over.

"It will be an interesting test of more traditional belief that Factory requires a geographic separation that has often been the hallmark of outlet centers," Mr. Klinefelter says.

Mr. Drexler downplayed the risk that the online off-price channel would steal market share from the company's full-price division.

"If there were a huge cannibalization issue, we would stop it immediately, but it's different goods," he said. "It's an opportunity for a hugely larger reach."

Richard Jaffe, a retail analyst with Stifel Nicolaus, estimates there are roughly 100 strong outlet centers in the country, but says the demand for their products could support several times that. J. Crew's test will allow it to see, in a very short period of time, if expanding access works.

J. Crew said it would increase its factory outlet square footage by at least 10% over the next three to five years. The company also plans to expand the its outlet offerings to its kids brand, Crewcuts.

"They're sincerely concerned about the outlook for their consumer in the second half," Mr. Jaffe said.

SOURCE: The Wall Street Journal  By ELIZABETH HOLMES