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Best In Class: Kohl's Brands Success

Kohl's ranks best in class among department stores, boasting exclusive merchandise at recession-friendly prices.

NEW YORK (

TheStreet

) -- Value and exclusivity in retail generally don't go hand in hand. Indeed, they are often mutually exclusive. Still,

Kohl's

(KSS) - Get Report

has managed to successfully combine the two, producing a formula that has helped guide the company through the recession.

There's no doubt the

department store downturn was among the worst in the retail sector. Even before the widespread economic recession, department stores were taking a hit, losing their relevancy with consumers.

But Kohl's -- rather incongruously -- has used this to its advantage. Under the reign of CEO Kevin Mansell, the mid-tier department store has created exclusive partnerships with designers and brands like Simply Vera by Vera Wang, Candies, Chaps and Rachel Ray, which now make it a go-to destination for both price and fashion.

Mansell has been a part of the Kohl's team for more than 20 years, but it wasn't until the crux of the recession -- August 2008 -- that he took the helm of the company. Under his leadership the campaign "Only at Kohl's" took off, as Mansell pushed the department store's collaborative efforts, which had started under former CEO and Larry Montgomery.

Mansell continues to hone these relationships. Last week, the company announced a deal with footwear and accessories retailer

Aldo

, which will produce an exclusive line of shoes for Kohl's that will be available in spring 2011. While another one of its exclusive brands, Elle, is also expanding beyond clothing and accessories into home products this fall under the label Elle Décor.

These partnerships have been lucrative for Kohl's, accounting for nearly half of total sales in the first quarter. The company also saw a 7% increase in same-store sales during the quarter, as transactions grew 9%, the biggest jump Kohl's has seen in eight years.

While Kohl's discovered this tactic early on, its competitors weren't as astute. Rival

J.C. Penney

(JCP) - Get Report

, for one, took a different approach and now is trying to play catch up. But Stifel Nicolaus analyst Richard Jaffe says these partnerships will become harder to develop as there are less "good" brands to chose from. Still, J.C. Penney has managed to recently snag an exclusive deal with

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Aside from its successful merchandise program, Kohl's off-mall format and real estate tactics have also given it an edge. The company acquired real estate from now defunct Mervyn's and Caldor's on the cheap, allowing it to expand its presence on the West Coast and Northeast.

Of course, Kohl's would like to garner more real estate deals like those, but they are difficult to find. In terms of store growth, Kohl's continues to open new locations, but at a much slower pace than in the past. In 2010, the company is targeting square-footage growth of 3%, or about 20 new doors.

And while other retailers slashed jobs in an effort to cut costs, Kohl's has nearly doubled its staffing at its headquarters in Menomonee Falls, Wis., over the past five years.

Kohl's may also be eying Canada, which would mark its first foray outside the U.S. This news was originally reported by the

Toronto Globe & Mail

and Kohl's responded by denying any imminent plans, but did confirm that it was checking out Canadian real estate as part of its routine real estate-related practices.

Still, Kohl's real growth story is in its direct business, which Jaffe said could easily comprise a significant portion of its business. Currently, the company's direct unit is about 6% of sales; in May, Kohl's saw e-commerce sales more than double.

In addition, its advanced operating systems that are years ahead of the competition, Kenneth Stumphauze, analyst at Sterne Agee said. With its size and markdown optimization programs, Kohl's can proactively adjust slow-moving merchandise. As a result, the company was able to avoid a decline in gross margins amid the recession.

But what makes Kohl's especially attractive is its stock -- which, along with the rest of department stores, remains one of the most depressed. Shares of Kohl's are currently trading 14% below its 52-week high of $60.89 and some analysts predict the stock could reach as high as $75.

Still, Kohl's comparisons get tougher in the second-half of the year and, like most retailers, Kohl's management is remaining cautious. For the second quarter, the company expects earnings between 70 cents and 75 cents a share, while analysts are calling for a profit of 92 cents.

Management did up its full-year outlook to $3.57 to $3.75 a share, but this still falls short of Wall Street's forecast of $3.77 a share.

Add it all up, and Kohl's expects same-store sales to grow between 2% and 4% in the second quarter and in the range of 3.5% to 5% for the year.

-- Reported by Jeanine Poggi in New York.

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