Luxury Retailers Pivot to Outlets for Growth: Unlocking Value for Aspirational Shoppers and Boosting Key Stocks

Higher-end retailers are strategically investing in their outlet operations to attract a broader base of aspirational, value-conscious shoppers. This evolving approach could significantly benefit certain stocks within the luxury retail sector. Companies like Tapestry-owned Coach and Ralph Lauren have successfully transformed their discount stores from mere clearance bins into elevated destinations, catering to customers who are willing to stretch their budgets for premium brands.

Kinshuk Jerath, a professor at Columbia Business School, notes a significant shift: "Until 10 years back, outlets were thought of as an inventory clearance mechanism. Now it's kind of different…outlets are like an alternate channel for value-conscious consumers who still want to spend the money to get a sort of a premium brand."

This dual-tier strategy comes as the demand for traditional luxury goods has waned. A Bain report indicates that the luxury market has shed approximately 70 million customers since 2022, projected to reach around 330 million by the end of 2025. This downturn is reflected in the sector; the U.S. Global Investors Funds Global Luxury Goods Fund (USLUX), which includes giants like LVMH, Ferrari, Hermes, and Christian Dior, is down about 7% year-to-date, contrasting sharply with the S&P 500's over 8% gain.

Bernstein analyst Aneesha Sherman highlights that "the ultra-wealthy are actually quite a small percentage of revenues...even for those high-end luxury brands. The majority of the revenues are kind [coming from] of aspirational consumers who are well off, but it's a splurge for them." Professor Jerath adds that the focus has shifted from trading up less affluent consumers to recognizing them as a stable segment that will continue to patronize outlets.

To cater to these customers, brands like Ralph Lauren and Tapestry now offer made-for-factory apparel and accessories alongside select mainline products at their outlets, reserving the highest-quality items for their regular retail locations. Citi analyst Paul Lejuez commends Coach and Ralph Lauren for "elevating the outlet experience, becoming less promotional [and] introducing more full-price products that they know are working in other channels. It's a way to connect with new customers."

Ways to Play the Trend

Despite their recent gains, analysts believe Coach and Ralph Lauren still have significant upside. Wells Fargo's Ike Boruchow, in a note to clients, pointed to Ralph Lauren's "additional room to grow from greater quality of sales." The brand's net sales have nearly doubled since fiscal 2021, exceeding $8 billion in the fiscal year ending March, with analysts projecting $8.627 billion for the current fiscal year. Wells Fargo maintains an overweight rating on Ralph Lauren, raising its price target to $425 from $415, suggesting a 14% upside.

Tapestry is also expected to benefit from expanding its customer base. Bernstein's Sherman notes that "new customers are entering at higher [average until retail] and higher spending levels," which should boost shares. Coach has seen sales growth of 20% or more for several quarters, outperforming high-end luxury brands that are experiencing low-single-digit growth or no growth at all. Sherman holds an outperform rating on Tapestry, with a $180 price target, implying a 26% upside.

Another Name to Watch

Sherman suggests Michael Kors, owned by Capri Holdings, could replicate Coach's success by embracing the elevated outlet model. "Over the last year [or] year-and-a-half, they've changed their strategy," she explained, noting they've adjusted full-price products to a realistic level and are now upgrading outlet assortments. A new product line launching in the fall is expected to kick off this strategy.

Sherman has a market perform rating on Capri Holdings with a $24 price target, suggesting a 55% upside. Citi's Lejuez also sees potential, giving Capri Holdings a buy rating and a $31 price target, which implies a substantial 100% upside, given the similarities between Michael Kors and Coach's businesses. Shares of Capri Holdings have declined 36% year-to-date, potentially offering an attractive entry point for investors.