The recession has breathed new life into US off-price clothing chains as consumers look for thrifty ways to shop without compromising on style.

Off-price clothing chains in the US have traditionally been a dumping ground for full-line department stores to offload last season’s merchandise and off-sizes.

However, the recession has breathed new life into these stores as consumers look for thrifty ways to shop without compromising on style. As a result, upscale department stores such as Saks, Nordstrom and even Bloomingdale’s are investing in these formats - both in terms of physical expansion and merchandising improvements.

“There is a customer who’s very price-focused, who wants brands, so there is a growth opportunity there,” said Saks chief executive Stephen Sadove at the company’s fourth-quarter results last week. Nordstrom feels the same: 16 of its 19 stores scheduled to open this year will be Rack outlets.

Even Bloomingdale’s will launch its first off-price stores later this year. “The timing now is right given the consumer’s particular focus on value in addition to fashion and quality,” said Terry Lundgren, chief executive of Bloomingdale’s parent Macy’s.

The success of discount-led TJX has proven that there is a growing appetite across all income levels for off-price stores. Now, the upscale stores are attempting to grab a piece of that pie.

Nordstrom Rack and Saks Off Fifth in particular are being rejuvenated with merchandise created specifically for these formats - as opposed to stocking product that didn’t sell in full-line stores - as well as improvements in layout and design.

Although strong fourth-quarter momentum from Saks and Nordstrom indicate the luxury goods sector is beginning to

show signs of stabilisation, the chains are still vastly underperforming compared with pre-recession levels. Last week, Saks posted a full-year net loss of $57.9m (£38.8m), while same-store sales fell 4.2% over the year at Nordstrom.

Expansion of the off-price format will therefore be the holy grail for Saks and Nordstrom, which are both forecasting like-for-like sales growth in the low single digits in 2010, compared with two consecutive years of negative like-for-likes.

On the back of ambitious plans for growth, by 2015 off-price stores are expected to account for 14% of Nordstrom’s total sales and nearly a quarter of Saks’. While there remains a degree of risk in expanding these formats - namely self-cannibalisation and brand equity issues - it seems they could provide the topline growth desperately needed by the US’s department stores.

Natalie Berg is research director, Planet Retail

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