Penney, Kohl’s battle for the middle

updated 2:17 p.m. ET Nov. 24, 2006

PLANO, Texas - Clutching a plastic J.C. Penney bag in one hand and reaching for her 4-year-old daughter with the other, Cathy Lewis sized up the department-store options for shoppers on a budget.

“I like the quality and price of the children’s clothes at Penneys,” the suburban Dallas woman said. “I like Kohl’s too. Their sales are good, but I don’t like their selection as much.”

That’s pretty much the competition, in the mind of Lewis, who works at home as a recruiter while raising two children. She said Macy’s and regional chain Dillard’s, both in the same mall as her Penney, are just too expensive.

As the holiday season begins in earnest this week, J.C. Penney Co. and Kohl’s Corp. will battle each other for the purses and wallets of moderate-income shoppers who feel left behind by Macy’s and are looking a bit more cachet than they find at Wal-Mart Stores Inc.

Both Penney and Kohl’s have been posting impressive sales gains and hope to carry that momentum through December. Not coincidentally, both are also on major expansion binges, building new stores at the fastest pace in years.

The holidays, however, pose their own special challenge to these two retailers.

Being a destination for that special gift “probably wasn’t one of our strengths,” said Myron E. “Mike” Ullman III, Penney’s chairman and chief executive.

“People want to be proud of where they shopped for the gift,” Ullman said. “Penneys has changed. We are a desirable place to shop and a desirable place to get a gift from.”

To convince shoppers of that transformation, Penney has added more electronics, jewelry, toys and fancier clothes such as cashmere sweaters. It is highlighting “redbox gifts” from massaging slippers to iPod-wired jackets. And it is launching a nostalgic TV-advertising campaign filled with vintage film of families celebrating Christmas decades ago.

Kohl’s holiday plans include increasing inventory in menswear — executives said they hope to repeat successful Father’s Day sales — and pushing watches and jewelry, from circle pendants to the diamond substitute moissanite in about 200 stores. Kevin B. Mansell, president of the Menomonee Falls, Wis.-based company, said he expects luxury home items to be big sellers — high-thread-count sheets, goose down comforters and cashmere throws.

Both chains enter the holidays on a winning streak.

Kohl’s posted a stunning 16.3 percent September gain in sales at stores open at least one year — a key measurement in retailing — although it slowed to 4.2 percent in October.

Penney put up consecutive same-store gains of 8.7 percent in September and 8.1 percent in October, better than Neiman Marcus and not far behind Saks Fifth Avenue and Nordstrom, chains whose upscale customers are less vulnerable to economic swings.

While Penney and Kohl’s eye each other, they also must contend with other rivals, from discounters to other department stores.

Penney is making a determined pitch for former customers of regional May Co. stores such as Foley’s in the central states and Hecht’s in the Mid-Atlantic. Those names were wiped away when Federated Department Stores Inc. bought May and converted the regional stores to the slightly more upscale Macy’s or closed them.

Kohl’s touts frequent sales events and is willing to cut prices to steal shoppers from other stores, said Richard Hastings, a retail analyst with Bernard Sands LLC. That pits Kohl’s against chains such as Target Corp. and Gap Inc.’s Old Navy.

Hastings said Kohl’s is more willing than Penney to sacrifice some of its profit margin to attract customers, “and it’s working for them. They are very aggressive about getting market share.”

Penney has a distinct advantage over Kohl’s in at least two areas: It has a strong Web presence and big private-label brands that generate strong profit margins.

In its annual report, Penney said the Web site had 2005 sales of $1.05 billion. Internet Retailer, an industry publication, ranks jcpenney.com the 13th largest Web retailer by sales. Kohl’s does not disclose Internet sales; Internet Retailer’s estimate is $29 million.

Penney is trying to transfer some of its online strength to its 1,000-plus stores by installing 5,000 terminals to let shoppers place orders through the Web site.

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