The Fight For the Middle

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There's also plenty of action in the retail-technology department. New point-of-sale software at both chains has helped them keep the optimal mix of inventory on store racks, according to Citigroup's Weinswig. "It's increased profit margins and made them more efficient," she says. Specifically, Penney will have installed 35,000 new devices at checkout counters by the end of the year.

Is this a newly minted version of the classic Macy's vs. Gimbel's rivalry? "It's absolutely a battle," says Steven Keith Platt of the Platt Retail Institute, an industry think tank in Hindale, Ill. "They're both going after the same market--the female. She controls the purse strings." Both chains dismiss the notion of a retail slugfest. But it is clear that each chain is borrowing a page from the other's business model. For example, 22 of the 25 stores that Penney opened in the third quarter were situated in very Kohl's-like locales, a different approach for the mall-based Penney. Myron (Mike) Ullman, the former Macy's honcho who is now CEO of JCPenney, bristles at the comparison. "Let me point out that James Cash Penney opened his first store in 1902, off-mall. This is not new for us," he says. "Kohl's is a great competitor. But this isn't their turf. We had to put stores where people are in order to grow."

Meanwhile, Kohl's, a chain known for selling brand-name merchandise at discount prices, is adapting Penney's successful, exclusive-label strategy--that is, getting well-known designers or brands to create products that will be available in its stores only. It already has partnerships with Estée Lauder, which has created other exclusive brands for the retailer; Ralph Lauren (Chaps); skateboarder Tony Hawk; and Cuban-American model and actress Daisy Fuentes. Next up in early 2007: a blockbuster partnership with designer Vera Wang and an exclusive housewares partnership with the Food Network. Says Kohl's president, Mansell: "We're creating an umbrella of 'only at Kohl's' to highlight our differentiation. It's what our core female customer wants." For the moment, private labels and exclusive national brands account for about a third of Kohl's revenues.

Despite Kohl's new marketing initiatives, Penney still has the edge in private brands. About 45% of its revenues come from the store's 34 exclusive labels, like a line of women's working clothes by Nicole Miller and bedding, bath items and linens from home-design celebrity Chris Madden. In early 2007, the retailer will introduce two new exclusive Liz Claiborne lines and launch its biggest house label yet, Ambrielle, a collection of intimate apparel that is likely to compete with Limited's Victoria's Secret chain. "It's clear to our customers that our brands have the style and quality that are comparable to higher-end department stores, at a smarter price. That may sound casual, but it's our underlying premise," says Ullman, who points out that the retailer's seven major private brands contributed $5 billion in sales to the company's coffers this year.

Penney has another feather in its cap: a more established online presence than Kohl's. Last January, in fact, its online sales hit $1 billion--and in the third quarter, sales via the Internet rose an impressive 27%. Ullman boasts that the company is "the largest mass merchant" online. A key advantage: the infrastructure set up to support the company's decades-old catalog business.