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Artist’s rendering of Holt’s Hr2 outlet: A bid to broaden the retailer’s customer base by offering discount designer lines.

Amid stiffer foreign retail competition, luxury purveyor Holt Renfrew & Co. will launch a new chain early next year called hr2 in a bid to broaden its customer base by offering discount designer lines.

On Monday, the country's premier upscale merchant will unveil hr2, borrowing from the playbook of premium U.S. retailers, including Nordstrom Inc., that have benefited from drawing budget-conscious – and often younger – shoppers to their discount chains. Holt's initiative will arrive before Nordstrom opens its first store in Canada in 2014 and, eventually, its lower-end Nordstrom Rack.

Nordstrom carries 49 of its top 50 designer lines, the likes of Hugo Boss and Michael Kors, at its Rack outlets, although in different styles and colours from those in its conventional stores. So-called off-price retailers also stock suppliers' excess inventory, clearance items from their mainstream stores and private label offerings.

"It's a completely new opportunity for us to grow," said Heather Arts, a vice-president at Holt who heads hr2. "There's definitely a void in the market. … It's really going after another customer."

As it faces a flood of new foreign rivals, Toronto-based Holt is rushing to snatch more sales by branching out into the fast-growing off-price sector. The retailer is betting it can entice aspiring luxury shoppers to head to hr2 for affordable brand-name fashions without bruising its core business or premium image.

"People are very happy to brag that they've been prudent in their shopping, " said Andrew Resnick at retail consultancy Boardroom Metrics, which advised upscale U.S. fashion chain Ann Taylor on setting up shop here this fall. "People don't say any more: 'This is a Hugo Boss suit.' They say: 'This is a Hugo Boss suit that I got for $499" or half price.

Off-price retail is one of the country's fastest growing apparel segments. In the 12 months ended Aug. 31, its sales jumped 10 per cent, representing about 5 per cent of the overall $23.3-billion Canadian clothing market, while total apparel sales didn't budge in that period, according to market researcher NPD Group.

Globally, off-price luxury fashion sales are forecast to soar by 30 per cent to $16.8-billion in 2012, three times faster than sales gains in the overall luxury fashion field, a study this month by consultancy Bain & Co.

"We are seeing the consumer's average week include shopping for both high-end apparel brands as well as lower-priced apparel brands, so a trading up/down effect," said Tracey Jarosz, executive fashion director at NPD.

Attempting to cash in on such shifts, the fast-emerging U.S. premium outlet mall business is bulking up in Canada. U.S. developers recently teamed up with Canadian counterparts to build luxury outlet malls for chains such as Polo Ralph Lauren and Coach to run discount stores.

Privately held Holt, with estimated annual sales of close to $800-million, now intends to bank on the burgeoning trends. Its hr2 will help the retailer, owned by the W. Galen Weston family, which also controls grocer Loblaw Cos. Ltd., reach its $1-billion annual sales target in two years, observers predict.

Holt's hr2 will start with a store in March at the Quartier DIX30 mall in Brossard, Que., and another unidentified one in Ontario. At the same time, U.S. cheap-chic Target Corp. will roll out its first stores in Canada while Winners, owned by U.S.-based TJX Cos., aggressively expands its off-price outlets.

But Ms. Arts, a former Winners executive who joined Holts in May, said the luxury chain has been mulling a concept such as hr2 for a couple of years, before Target and Nordstrom confirmed their plans for Canada. She said hr2 will have a "strong" national presence by the end of 2015, but didn't elaborate. Industry sources said Holts will convert its Last Call clearance outlet in Ontario to hr2.

In the past several years, Nordstrom has put a bigger push on its Rack outlets, which generated almost 20 per cent of its total $10.5-billion (U.S.) sales in 2011. "The productivity of these stores surpasses our full-line stores," president Blake Nordstrom said last month.

Rack stores ring up more than $500 of sales per square foot, compared with about $400 at mainstream Nordstrom stores, estimated Dorothy Lakner, a managing director at Caris & Co. in New York. The retailer spends about one-tenth the money to build a Rack compared with a full-line store in about 25 per cent of the space, she said.

She predicted that Holts, which has nine mainstream stores, eventually could run at least twice that number of off-price outlets. The strongest off-price chains bring fresh merchandise to the floor, rather than clearance items, as Holts does now at Last Call, she said, adding that Holts needs to move quickly to learn about operating the off-price model and catch up with Nordstrom.

Outlet stores have been helped by suppliers that have developed lower-cost lines, especially for the discount chains. Holts already deals with many of the vendors for its mainstream stores. Nordstrom Rack generates operating margins that are higher than those at the full-line stores because of lower costs, even though Rack's gross margins are thinner, Nordstrom executives have said.

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