Mid-Priced Retailers Making a Comeback

Three years after diving into one of the deepest retail pools in the country, Kohl’s Corp. has proved at least one thing: It’s buoyant.

The retailer -- which made a splash in California by opening 28 stores on one day three years ago this week -- now has 73 here, about 10% of its total and more than in any other state.

And it wants more.

The Wisconsin-based chain is emblematic of a lower-priced department store niche that is coming back after years of being squeezed by luxe rivals on one end and discounters on the other.

The sector last year posted a 2.6% gain in revenue from 2004 after sinking annually since 2001, said Marshal Cohen, chief industry analyst for NPD Group.

Sales at established Kohl’s stores rose 3.4% in 2005 after being essentially flat the year before and down 1.6% in 2003. Other gainers last year included J.C. Penney Co. and Mervyns, which like Kohl’s consider California a crucial market.

Some shoppers who began “trading up” to higher-end retailers a couple of years ago have since retreated and are returning to stores that offer lower prices, Cohen and other retail experts say. That’s because Americans are increasingly worried about energy prices, interest rates, consumer debt and higher minimum payments on credit cards.

“We see people being more budget-conscious and making their dollars stretch farther,” said Phil Rist, vice president of strategy at BIGresearch, which surveys 7,000 Americans a month. “They’re spending at the retailers where they can do that.”

At the same time, the lower-priced chains have become savvier about fashion, analysts say. That has allowed them to compete more effectively with the higher-end likes of Federated Department Stores Inc.’s flagship Macy’s chain and even Nordstrom Inc.

Shoppers who wanted to “step up” are now willing to “step over to J.C. Penney,” Cohen said. Penney’s earnings doubled in 2005 to $1.09 billion; the Texas-based company, which has 76 stores in California, lost $928 million two years earlier. It opened 18 new stores in 2005, the most in eight years, and plans to open 27 more this year.

Even Mervyns, the longsuffering Hayward, Calif.-based retailer that has 125 of its 190 stores in the state -- and may have taken the most direct hit when Kohl’s showed up -- has shown that “they still have a pulse,” Cohen said. The privately held company, which has shuttered 66 locations since it was unloaded by Target Corp. two years ago and plans to close more, has posted rising sales at established stores for nine straight months, President Rick Lito said.

Kohl’s itself has been seen as a hybrid of sorts. It is known for neat, well-stocked locations that are smaller than most other department stores and are typically situated outside of malls. The company sells many brands found in traditional department stores -- such as Levi’s, Dockers, Nike and Adidas -- as well as its own private labels. Its centralized checkout stands are similar to those found at discounters.

After all its big moves of recent years, Kohl’s is still growing. In a recent conference call with analysts, Chief Executive R. Lawrence Montgomery said the company would be more aggressive about expanding in California in the next five years, during which time it plans to add 500 stores nationwide.

Kohl’s snapped up 13 former Mervyns locations in the Pacific Northwest and may seek to fill locations Federated is vacating as a result of its purchase last year of May Department Stores Co., parent of Robinsons-May.

“The consolidation and closures happening are probably creating conditions where we have a chance to expand market share at even a faster rate than we had planned,” Kohl’s President Kevin Mansell said in an interview this week.

Kohl’s may attract Robinsons-May customers as those stores close or are turned into the more upscale Macy’s locations, analysts say. As much as $6 billion in apparel revenue could be up for grabs as a result of industry consolidation, Jeffrey Klinefelter of Piper Jaffray & Co. said in a report this week. That’s 3% of the overall $191-billion-a-year market.

For all that opportunity, the retail game remains particularly brutal in California -- something Kohl’s learned the hard way, some analysts say.

“Prior to California, they had some phenomenal new market entries,” said Christine Kilton Augustine of Bear Stearns & Co. “They would go into these new markets, and they’d just take share from everybody. The competitors were just clueless.”

Here, it took Kohl’s longer to gain traction, analysts say. The chain’s generally basic merchandise -- which sold well elsewhere -- didn’t exactly dazzle shoppers in the land of 90210 and “The OC.”

“It’s been a steep learning curve, but they’ve learned a lot about the kinds of lifestyle brands they need to have in California,” Augustine said. “They have invested in a whole team of product development people that they never had, and they are much more focused on interpreting the current fashion trends.”

Although Kohl’s has posted rising revenue every year since it went public in 1992, long-term, comparable-store sales growth has slowed, said Michelle Clark of Morgan Stanley. Further, store productivity -- revenue generated per square foot -- has been declining, as has the median household income of its customers, according to her analysis of demographic data. In California, she said, sales need to be higher than in most other states to offset real estate costs.

NPD analyst Cohen said it was simply too soon to determine whether Kohl’s would find the California business to be “as financially viable as they would like it to be.” But Kohl’s “raised the bar” for competitors, he said, and as it gains a stronger foothold in the state, its results are likely to improve.

“They’ve proven that the Kohl’s formula can and will work in Southern California,” he said.

President Mansell, for his part, disputes analysts’ assessments of his company’s entry into the state, attributing the decline in comparable-store sales in 2003 to merchandise “misses” and difficulties in managing inventory, not anything specific to California.

He noted that mature company stores -- those open at least four years -- typically reap about $20 million a year in sales, while sales at new stores generally yield 70% to 80% of that amount. California stores fall within that range, Mansell said, and helped make the Southwest the company’s strongest region for comparable-store sales last year.

“From a first-year perspective, we were very pleased with California, and we’ve been incredibly pleased ever since then,” he said.

Kohl’s has won over Lisa Ward, 34, a Huntington Beach resident who used to shop at Mervyns and Wal-Mart Stores Inc. but now sticks mostly with Kohl’s. Its clothes are inexpensive but don’t look it, she said.

“I think it’s great,” said Ward, a customer service representative who dropped by the Huntington Beach store recently at lunchtime. “They’re always adding discounts on top of the sales. And that’s what I like about it.”

But Nancy DeWitt of Westminster, who stops at the same store regularly, said she seldom found clothes that she wanted for herself.

“I spend time looking but don’t buy,” the 70-year-old retiree said, adding that she wished the clothes were more fashionable. “You kind of always know if you go to Robinsons-May or Macy’s you’re going to find something, but not here.”

Still, she said, “I keep coming back. It’s a nice store.”