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Grove City outlets soar, but parent firm struggles with debt

Friday, September 20, 2002

By Teresa F. Lindeman, Post-Gazette Staff Writer

Prime Outlets at Grove City, a sprawling community of stores overlooking Interstate 79, has triumphantly held onto its ranking as one of the top 20 outlet centers in the country.

"It really is a fabulous center," said Steven A. Sless, director of public relations for the 533,000-square-foot center's owner, Prime Retail Inc. "The people in Pittsburgh are lucky."

So it might strike some as odd that the owner of all this glorious shopping is struggling to get its numbers on track. Baltimore-based Prime Retail had to concede a few weeks ago that there is, in the company's words, "substantial doubt about its ability to continue as a going concern."

The rather blunt statement should not, Sless said, be seen as a dire reflection on Prime Retail's future. Neither should the fact that the company has hired a financial adviser to explore strategic alternatives.

"We are a stronger company, frankly, today than we were last year at this time," Sless said.

Prime has already taken numerous steps to reduce costs and trim its debt, including selling a majority interest in at least eight of the company's malls. Still, it is behind on remaining debt payments and hopes to refinance at more favorable terms.

Prime's biggest issue may be that it splurged on its own bargain hunt just when the outlet industry, indeed the retail business overall, was about to slow dramatically. A $1 billion merger in 1998 that gave the company enough property to claim title as the world's largest owner and manager of factory outlet centers also loaded its balance sheet with more than $500 million of new debt.

"The problem with Prime is they had so much debt they had to operate in a perfect environment," said Roger Lowenthal, vice president of The Greenberg Group, a Hewlett, N.Y., real estate company that advises retailers.

Few retailers -- outlet or not -- would describe the past couple of years as perfect. A slowing economy, terrorist attacks and a whale of a bear stock market have all contributed to make store owners nervous. In July, sales in factory outlet stores open at least a year dropped 4.5 percent, according to the International Council of Shopping Centers.

Some operators were better able to weather the slowdown. Chelsea Property Group and Tanger Factory Outlet Centers, both owners of numerous centers, have met analysts' expectations and continue to acquire new malls.

Horizon Group Properties Inc., owner of the Factory Outlets at Georgian Place in Somerset, Somerset County, has had its own issues with debt. Recently, the Chicago company managed to refinance a key loan, giving it more breathing room.

"Securing the new loans allows us to take a longer-term view of both our properties and the strategic options available to us," Horizon Chairman Gary J. Skoien said in a quarterly earnings release issued last month.

The long view of the outlet industry is probably not as bleak as the recent bumpy climate would make it seem -- though the heyday may have passed.

"Fifteen years ago, you could put an outlet center anywhere," said Lowenthal. "The outlet center isn't the guaranteed success that it once was."

That's partly because the competition has changed since then. Discounts can now be found closer to home at places such as Wal-Mart, Target and even the heavily promotional department stores, said Linda Humphers, editor-in-chief of industry publication Value Retail News.

"The outlets' biggest problem is the convenience factor," said Humphers. "They're not five minutes away like your regional mall is. They're not five minutes away like Wal-Mart is."

Most were built away from city centers to avoid the appearance of competing with the manufacturers' first point-of-sale in the department stores and traditional specialty shops. Even if they have lower prices -- and they say they do -- the trade-off between time and money is often not as dramatic.

Still, manufacturers like using the stores as a means to distribute excess or unsold goods. And consumers like the feel of snagging a deal, especially on a rainy vacation day.

Prime Retail's gems include centers at Grove City; Williamsburg, Va.; Birch Run, Mich.; Ellenton, Fla.; and San Marcos, Texas. All made the top 20 list published by Value Retail News, based on 2001 sales reports from outlet stores.

In general, the most successful of the existing centers tend to be large and often near tourist locales.

Somerset's Factory Outlets at Georgian Place, for example, has only about 30 stores compared with Grove City's 140. Last year, it struggled to keep the storefronts filled.

But sales there in stores open at least a year were up 19 percent in July, aided by some new additions, said Gina Slechta, director of field marketing for Horizon. Earlier this year, for example, a Colonial Outdoors outlet opened featuring canoes, sporting equipment, even an indoor archery range to appeal to sports enthusiasts who visit the scenic area. In addition, children's stores, antique shops and other smaller specialty stores have leased space even though they aren't manufacturers' outlets.

Given the industrywide slowdown, fewer new outlet centers are being built. While 22 grand openings were held in 1995, only five came in 2000, according to Value Retail News.

Even so, the Pittsburgh region may be one of the few areas in line for another new outlet center. Discussions are continuing for a proposed 500,000-square-foot outlet center in Wheeling, W.Va.'s downtown. The developers, who are asking for millions in state assistance, have cited an abundance of tourist attractions in the area and proximity to the Pittsburgh region.

Teresa Lindeman can be reached at tlindeman@post-gazette.com or 412-263-2018.

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