FRISCO, TX—Declining retail sales in what has been a high-growth segment prompts a closer look at the department store off-price sector. Possible strategy changes including the distances retailers will put between off-price and full-line stores, as well as factors that could be contributing to falling sales were outlined in a recent report by Kroll Bond Rating Agency/KBRA.

Historically, the underlying assertion was that department stores wanted to ensure that off-price distribution channels didn't compete directly with full-line business locations. This was intended to limit off-price stores cannibalizing sales from full-line offerings and avoid the dilution of brand identity.

However, with department stores struggling, fewer off-price stores opening and different location strategies emerging, sales siphoning could be taking place. Some retailers observed that there could be benefits by positioning off-price and full-line offerings in closer proximity.

Nordstrom is one of the retailers that may be going in that direction. Based on KBRA's analysis which utilized Nordstrom financial disclosures through second quarter 2017, the distance between Nordstrom Rack and the retailer's full-line offerings will increase in the future.

Of the existing stores, approximately 42% of the off-price locations were situated within five miles of the nearest full-line store–the comparable figure for scheduled openings is just 17%. Perhaps this has to do with the availability of real estate. However, it could also signal that the retailer is trying to mitigate the potential for cannibalization and brand dilution.

In DFW, there is a real-time example as Nordstrom Rack opens today at 3241 Preston Rd. in Frisco, TX. This Rack will be approximately 6/10 miles from the full-line Nordstrom and only one of two out of 18 total Nordstrom Rack scheduled openings that will be within one mile of a Nordstrom store, in this case, Stonebriar Centre in Frisco, GlobeSt.com learns.

Nordstrom Rack opened six new US stores in the first half of 2017, has 11 more planned for this year and is slated to add another seven in 2018 and 2019. Nordstrom Rack had a comparable same stores sales decrease of .9% for the six months ending July 29, 2017 and a decline of 1% for second quarter 2017, says KBRA.

In contrast, the Hudson Bay Company reported that HBC Off Price (Saks OFF 5TH, Gilt and FIND@Lord&Taylor), reported a comparable same store sales decrease of 4.6% for the 26-week period ending July 29, 2017 as well as a 2.3% decline for second quarter 2017.

Saks OFF 5TH (124 existing stores) only opened two US stores in the first and second quarters of 2017. This is in contrast to 2015 and 2016, during which the retailer had a net increase of nine and eight US stores, respectively. And, instead of opening any stores, Neiman Marcus announced on September 12 that it will close 10 of its 37 remaining Last Call off-price stores.

A contributing factor to the sales declines could be the growth within the segment, surmises KBRA. Off-price stores appear to be over-retailed, prompting more competitive pricing and discounting within the sector. In addition, off-price stores may also be losing out to the aggressive sales, promotions and coupons that seem to have become a pervasive part of the full-line store strategy. How this all plays out is still too early to tell, but it seems to be clear that the department store off-price business model is being re-assessed.

KBRA also looked at CMBS exposure to the off-price department store segment. In total, it identified 54 CMBS retail property loans which included 71 off-price department stores with a total principal balance of $8.5 billion. The related loans were securitized in 87 transactions, inclusive of 21 loans with pari-passu notes spread across multiple transactions. Of these, 47 transactions were rated by KBRA.

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