OUT OF STEAM; HEADY TIMES IN OUTLET INDUSTRY HIT THE WALL.

Byline: Leslie Kaufman The New York Times

After nearly a decade of explosive growth and outsize profit margins, the outlet industry has run into trouble. Facing increased competition from fashion-conscious discounters, sale-happy department stores and increasingly savvy shoppers, outlets, which feature direct-from-manufacturer merchandise at supposedly bargain prices, got a rebuke from both consumers and investors in 1998.

At the end of October, sales in outlet center stores open at least a year, a standard industry measurement, were down nearly 2 percent, according to Value Retail News, a unit of the International Council of Shopping Centers. Regional malls, by contrast, were up 3 percent.

A fairly robust Christmas season probably gave the outlets a lift, but even so, Prime Retail Inc., the biggest player in the field with 25 percent of all outlet space nationwide, predicted that holiday sales would bring its overall figures for stores open at least a year at its malls only to last year's level - significantly lower than the 5.9 percent growth the entire retail industry experienced in 1998.

Some 50 percent of outlet space is owned and operated by real estate investment trusts, publicly traded real estate holding companies, and stock prices for these trusts were also down significantly for the year. Prime Retail ended the year with its value down 21 percent. Tanger Factory Outlet Centers Inc., the nation's No. 2 outlet real estate trust, recorded an even more precipitous 25 percent drop. Chelsea GCA Realty Inc., which rounds out the top three REITs, did considerably better, but still returned under 1 percent to investors. Overall, according to the Morgan Stanley index, REITs were down 17 percent for the year.

Disappointing sales numbers and stock prices do not give a full picture of the industry's health, of course. Operating costs for outlet stores are still relatively low, and sales per square foot are still relatively high. Unlike department stores, which run on much tighter margins, profits for outlet retailers can be good even in an off year.

Still, there are plenty of signs that outlets have hit harder times. From 1988, when outlet mania began, to 1997, the number of outlet centers roughly tripled, from 108 to 329, according to Value Retail News. By the end of 1998, there were only 301 such malls. The number of chains with outlet stores also declined from a high of 543 in 1996 to 493 at the end of last year.

More significantly, many big-name designers, whose stores usually anchor the outlet malls and are the primary draw for shoppers, had a bumpy year.

Jennifer Black, executive vice president of Black & Co. and an apparel and footwear analyst, said that ``every single blow-up'' among the companies she follows this year ``had to do with outlets.''

The industry is suffering, in part, from reckless expansion.

``Half the centers should never have been built, period,'' said David Fick, a senior analyst at Legg Mason who specializes in retail real estate investment. ``As they start to fall off the cliff, their numbers are dragging the industry down with them.''

That's why top mall operators say the current contraction is not grave news but a necessary corrective that will leave many outlets stronger. David Bloom, chairman and chief executive officer of outlet mall developer Chelsea GCA, foresees a weeding out of the weak centers and manufacturers that are giving outlet stores a bad name.

``You are going to see a shift away from centers that were poorly planned and tenanted,'' he said. ``If the shakeout happened sooner, we would welcome it.''

CAPTION(S):

Photo, 3 Charts

PHOTO (Color) Outlet stores such as this Off 5th in Harriman, N.Y., the Saks Fifth Avenue Outlet, report decreasing sales after a decade of growth.

Joyce Dopkeen/The New York Times

CHART: (1--3) HUNTING FOR BARGAINS WHEREVER THEY ARE

Off-price outlets have taken a hit in 1998, facing aggressive discounters, department store sales and skeptical shoppers.