Midsection in a Squeeze

Kohl’s Inc. was awash in self-confidence when it made its splashy California debut, opening 28 stores in one day.

In retail, President Kevin Mansell said at the time, the action was in the middle market, and Kohl’s was going after it “with a vengeance.”

Nine months later, department stores that focus on bargain-hungry middle-income families are stuck in a vise. Competition has intensified on every level, especially in California, the most competitive retail marketplace in the nation. The pinch is felt intensely now, during the holiday season, when retailers generate about 23% of their annual sales.

Tweaking stores such as Kohl’s, Sears and Mervyn’s from below are the discounters, wholesale clubs and off-price retailers that continue to lure consumers who shun all but the lowest prices. Bearing down from above are the higher-end merchants such as Nordstrom and Neiman Marcus that suddenly are back in the game, as a healthier economy and buoyant stock market encourage people to “trade up,” as one analyst put it, to pricier goods.

Lately, catering to the middle is about as easy as walking a barbed-wire tightrope.

“Basically, I think the whole market has divided into the high end and the low end,” said Sung Won Sohn, chief economist for Wells Fargo & Co. Today’s shopper may leap from Target to Saks Fifth Avenue, he added, “totally skipping the midsection.”

Gisella Rewers is one of them. The corporate tax specialist from Santa Ana swore off mid-range department stores several years ago, preferring the deals at the bottom and the quality at the top.

“We always shop at Target,” said the 41-year-old mother of three after purchasing an $80 outfit at the Saks at South Coast Plaza in Costa Mesa on Friday for her 11-year-old daughter, Sarah. “For dressy or better clothes I will always spend more at a store like Saks or Nordstrom.”

The “thinning middle” has been on Marshal Cohen’s radar for the last 18 months. The chief industry analyst for market research firm NPD Group said total sales at the top end jumped 10% in the three months ended Sept. 30, compared with the prior year, while revenue at the lower end rose 2.3%.

In the middle -- which includes Kohl’s, Mervyn’s, Sears and Robinsons-May -- sales fell 8.8%.

“Mid-level retailers,” Cohen said, are “getting squeezed.”

That’s partly because discounters now offer more fashionable apparel and high-end retailers have trimmed the cost of luxury goods. “The consumer today buys $400 shoes and $25 jeans,” Cohen said. “Where does that put the middle retailer? The consumer’s making choices and the choices don’t always include the middle level.”

Sometimes, though, shoppers are choosing to trade up within retail’s midsection, shifting, for example, from Mervyn’s to Robinsons-May.

Still, their preferences are reflected in department stores’ so-called same-store sales, those of stores open for a year or more.

After 10 years of growth, Kohl’s same-store sales slipped 1.1% through November this fiscal year. The Menomonee Falls, Wis., company’s stock price hit a 52-week low Monday, closing at $43.30, down $1.71, on the New York Stock Exchange. What’s more, after 10 straight years of earnings growth, the retailer’s earnings were down almost 6% in the nine months ended Nov. 1, compared with the same period a year ago.

It has lots of company.

St. Louis-based May Department Stores Co., which owns the Robinsons-May chain, suffered comparable-store sales declines in 10 of the last 11 months, while Chicago-based Sears, Roebuck & Co.’s sales were down in nine of those months. Cincinnati-based Federated Department Stores Inc., whose stable of department stores includes Macy’s, reported negative same-store sales every month this year. Mervyn’s has logged declines for 26 months straight.

Department stores have been fighting an uphill battle for years, but retail experts say the hill got steeper in recent months, as luxury retailers began slicing themselves a bigger piece of the pie. Economists say “the wealth effect” is back in play as swelling stock portfolios are once again making consumers feel flush. That has benefited leather goods maker Coach Inc., which saw same-store sales jump nearly 18% in the quarter ended Sept. 27, and jeweler Tiffany & Co., which logged a 16% comparable-store gain in the period ended Oct. 31.

Kohl’s, Mervyn’s and others in the lower-priced department store sector have been offering more promotions than any retail segment this holiday season, a clear sign of the struggle, said Eric Beder, an analyst with Northeast Securities.

“This environment is very good for the customer -- not always good for the company’s bottom line,” he said.

A study released Monday by the International Council of Shopping Centers found that 37% of 1,000 Americans polled who had begun their holiday shopping said they had done most of it at discount stores, while 18% said they had shopped mostly at department stores.

Kohl’s did exceptionally well for years pitching itself as a retail hybrid of sorts. The idea was to offer the prices and convenience of a discounter with some of the same well-known brands sold in a department store. The company sells mostly soft goods, especially apparel, which has been battered by price deflation.

Full-line department stores, such as JCPenney and Robinsons-May, use Kohl’s tricks to their advantage, analysts say, including offering more clothes for a hefty “percent off,” instead of just charging a lower price from the start.

“What we hear from vendors is more and more retailers have become focused on Kohl’s rather than focused on each other,” said Jeffrey Klinefelter, an analyst with U.S. Bancorp Piper Jaffray. “They’re under a competitive microscope.”

California has been a tougher nut to crack than Kohl’s expected, some retail experts say. Although the state’s retail sales last year were a hefty $124 billion -- excluding autos, food, gasoline and some other items -- it’s a difficult place to break into because of the plethora of store brands and the diversity of its residents.

“In a crowded market, it’s hard for a new entrant to seize a large amount of market share early on,” said Robert Buchanan, an analyst with AG Edwards.

In addition, California is home to Mervyn’s, the struggling Hayward-based unit of Target Corp. that competes most directly with Kohl’s and has 126 stores in the state. Despite its difficulties, Mervyn’s is putting up a fight.

In fact, in November, a key month for retailers, Mervyn’s same-store sales dipped 1.5%, considerably less than the 6.4% analysts were expecting, while Kohl’s fell 4.4%, slightly more than anticipated.

“Mervyn’s and Kohl’s have pursued this scorched earth policy where both of them have dragged down the other,” Beder said. “There’s not one winner. There’s now two losers.”

Executives at both companies declined to comment.

Beyond being a battleground for virtually every national retail chain (one notable exception is Little Rock, Ark.-based Dillard’s) the state boasts such pricey shopping alternatives as Rodeo Drive in Beverly Hills, Melrose Avenue in Los Angeles and Montana Avenue in Santa Monica.

Kohl’s is continuing its push into the state, with plans next year to open seven stores in Sacramento, five in San Diego, three in Fresno and two in Bakersfield. Ultimately, Kohl’s aggressive push will prove to have been a wise move, Beder said, partly because of the state’s mushrooming population.

The retailer picked locations in high-growth communities. “The little tract houses will pop up all around them,” Beder said.

Brandon Lee, a single 27-year-old investment analyst, used to shop at Macy’s and at specialty stores such as Abercrombie & Fitch. Now, the Corona del Mar resident prefers D & G, a high-end men’s boutique, Target, Bloomingdale’s and Saks, where he was browsing Friday.

Might he head back to the middle at some point? Not, he said, “until I have a family and I have to start saving.”