Mid-Tier Retailers Try New Brands On for Size

Chains Look to Stand Out In Crowded Marketplace

This back-to-school season will go down as the Battle of the Brands.

Kohl's launched six new lines of clothing this summer with a star-studded advertising campaign featuring celebrities from Lenny Kravitz to Hayden Panettiere. JCPenney introduced another half-dozen labels, the department store's biggest crop of new brands, with looks including urban rock and all-American. And Dillard's is chasing soccer moms with a line designed by Sheryl Crow that hit stores this month.

It's all part of the no-holds-barred fight among middle-market retailers for consumers' hearts and wallets this back-to-school season, the second-biggest shopping bonanza of the year. Lacking the cachet of luxury stores and the discounters' trump card of price, mid-tier retailers have been struggling to stand out in an increasingly crowded field. Now, the economic downturn has raised the stakes, and the battle is likely to last well into the holiday season.

"In this environment, when consumers are more discriminating with their purchases, we've recognized the importance of ensuring that our merchandise is compelling," Ken C. Hicks, president and chief merchandising officer of JCPenney, said in a recent conference call.

According to research from NPD Group released this month, department stores ranked third as back-to-school shopping destinations. Discounters topped the list, with 81 percent of consumers planning to shop there. More than half of consumers listed value and necessity as driving their purchases.

Wal-Mart has been the big winner this season, with July sales at U.S. stores open at least a year up 3 percent and second-quarter earnings up 17 percent. The store also debuted its own lines this summer and purchased exclusive rights to the tween brand l.e.i., which was formerly found in department stores.

Meanwhile Kohl's same-store sales dropped 10 percent in July, while profit fell 12 percent during the second quarter. JCPenney was down 7 percent in July and earnings plummeted 36 percent. Dillard's posted a 2 percent increase in sales in July but yesterday reported a loss of $38 million during the second quarter, compared with a $25.2 million loss the previous year.

"They're in a tougher position because they don't compete on price," said Stacy Janiak, U.S. retail leader at Deloitte, a consulting firm. "But they also have other tools at their disposal to try and lure the consumer."

For Kohl's, that has come to mean branded, exclusive merchandise. The Wisconsin-based retailer once was a Wall Street darling posting double-digit sales increases with its no-frills stores and "racetrack" layouts that helped customers easily find what they were looking for -- proof that there was money to be made in the middle of the market. But in recent years, Kohl's has made some merchandising missteps and become hamstrung by mediocre inventory gathering dust on the clearance rack.

Now the economy is taking its toll even as Kohl's attempts to refresh its assortment of apparel. Nearly 43 percent of sales during the second quarter were of private-label products. Chief executive Kevin Mansell, during a conference call with analysts this month, called its Elle collection of clothes and accessories that debuted last year "an overwhelming success" and said he was pleased with initial sales of the new Abbey Dawn line for juniors inspired by pop-rock singer Avril Lavigne.

Mid-tier retailers are counting on such proprietary labels not only to create buzz, but also profits. Margins are higher for merchandise that they've developed, giving them more room to slash prices as needed -- a strategy Kohl's plans to use through the fall and holiday seasons.

The retailer has also decreased merchandise in each store by about 15 percent, which cuts down on both clutter and markdowns. Although Kohl's has identified more than 1,400 locations for new stores, the company said the credit crisis and weak consumer spending makes the future uncertain.