Value is top of mind for consumers these days, and department store chains are taking note with the all-important holiday season fast approaching. Shoppers expect to get more in terms of quality, design, and brand for less in today's environment. Even high-end goods consumers who tend to be less price sensitive are mindful of the cost of a designer frock these days. We think department store chains that are able to offer consumers a differentiated, yet relevant product at a smart price are likely to fare better this holiday season and into 2010. In addition, a solid balance sheet and national presence should help those chains that are able to get the merchandising right gain market share as struggling retailers continue to close stores.

Consumers' Spending Dollars Up for Grabs

With the recent downfall of a few regional department store chains and specialty retailers, market share is up for grabs this holiday season. More than 450 stores were closed when regional chains Mervyn's and Goody's were forced to liquidate in the last year, and we believe other small department stores like Bon-Ton and Belk are under pressure, having leveraged up their balance sheets to buy various chains in recent years. Additionally, we estimate regional player Dillard's will have closed more than 25 stores in the last two years as it works to preserve cash in this uncertain economy.

In all, we estimate that $10 billion in sales could be available for the taking during the next couple of years from small regional department stores either going out of business or closing a sizable portion of their stores. Some of this revenue will evaporate as consumer behavior resets, and some will go to competitors outside of the department store market. Still, national department store chains are in a position to pick up sales this holiday shopping season and beyond. As an example, Sears Holdings (SHLD) is setting up 20 Toy Shops in stores located in malls where now defunct KB Toys once operated in an effort to gain share of toy sales this holiday season. We think this is a good move and believe other department store chains will need to be opportunistic with their product offering and promotional activities to woo consumers into their stores.

Value Proposition Will Be Key

Department stores are no longer the de facto choice for American families looking to purchase goods and services. With today's consumer placing a greater emphasis on convenience, value, and brands, department store chains have struggled to respond, letting big-box, off-mall retailers and specialty stores gain share.