May 28 (Bloomberg) -- Kohl's Corp. is charging ahead with a campaign to open dozens of stores and capture higher-income customers, at a time when J.Crew Group Inc. Chief Executive Officer Mickey Drexler says there are too many retailers and Talbots Inc. and Macy's Inc. have closed locations.

By pushing designer-label bargains such as $88 Vera Wang dresses and $175 Ralph Lauren Chaps blazers, the discounter is working to grab business from retailers including J.C. Penney Co. and Macy's. Sales at Kohl's will rise 3.5 percent in fiscal 2009, driven by an 8 percent addition to the number of stores, estimates compiled by Bloomberg show. At the older, predominantly mall-based operations of J.C. Penney, revenue will fall 2.3 percent, the estimates indicate.

``You see a real distinction in these companies' ability to control their operations in a slowdown,'' said Bill Dreher, director and senior retail analyst at Deutsche Bank Securities Inc. in New York. Kohl's is ``presenting perhaps the most believable guidance with the best square-footage growth and the best long-term opportunities domestically.''

Dreher, who recommends investors buy Kohl's and hold J.C. Penney, predicts the shares will rise 33 percent in the next year. Kohl's rose in 10 out of the 14 times since August that he advised buying.

Outperforming Peers

The discounter's shares dropped 4 percent, about half the decline posted by both the Standard & Poor's 500 Department Stores Index and J.C. Penney this year before today. Through yesterday, analysts surveyed by Bloomberg on average forecast a 22 percent increase for Kohl's in the next 12 months, versus 17 percent for J.C. Penney, 18 percent for Nordstrom Inc. and 16 percent for Target Corp.

Kohl's rose 35 cents to $44.34 at 4:15 p.m. in New York Stock Exchange composite trading.

A 22 percent increase in the stock would give Kohl's a stock market value of $16.5 billion, about the same as Target's before it almost tripled in value over the past 10 years.

``People aren't going to a Macy's or maybe had traded up to a Nordstrom and now are trading down to a Kohl's,'' said David Keuler, managing director at Mason Street Advisors LLC in Milwaukee. Mason Street, which oversees $77.3 billion in assets, boosted its Kohl's stake in the first quarter and reduced its holding in J.C. Penney.

As cost-conscious consumers visit shopping centers less, one advantage for Kohl's in an economic slowdown is its off-mall store locations, said David Abella, a portfolio manager for Rochdale Investment Management LLC in New York who is considering buying Kohl's and not J.C. Penney.

New Stores

While J.C. Penney is opening most of its new stores outside malls, more than 90 percent of its outlets are still in enclosed centers, compared with 7 percent for Kohl's.

Kohl's is opening 75 stores this year and had 957 locations in 47 states as of May 3. J.C. Penney, which had 1,074 stores as of May 15, plans to add 36 this year.

``For the upper-middle consumer, Kohl's is the favored format,'' said Abella, whose firm manages $2.5 billion. ``It's a nicer shopping experience. If I was going to bet on market-share gain, Kohl's versus Penney's, I would go with Kohl's.''

Even after earnings declined 27 percent in the first quarter -- about half as much as J.C. Penney's -- Kohl's is boosting its spending on marketing to win a disproportionate share of the money 130 million U.S. households will receive in tax rebate checks between April and July.

In particular, Kohl's has set its sights on high-end consumers. In September, the retailer introduced Simply Vera by designer Vera Wang, its most expensive label, amid skepticism that the prices were too high. Sales of Vera Wang are performing ``extremely well,'' Kohl's President Kevin Mansell said on a May 15 conference call.

Wealthier Shoppers

New brands such as Food Network cookware have also helped bring in higher-income shoppers, according to Kohl's. The chain booked ``phenomenal'' sales in the first quarter on its Ralph Lauren Chaps brand introduced in 2005, Mansell said on the call.

Brands designed for Kohl's accounted for a record 42 percent of sales in the quarter and will bolster profit margins this year, Mansell wrote in an e-mail to Bloomberg.

Kohl's will introduce brands including Fila Sport and Dana Buchman over the next year, Mansell said.

J.C. Penney carries lines designed by labels including Liz Claiborne and Nicole Miller. The company also has 72 in-store Sephora boutiques.

Lauren for Less

Mall shoppers will find ``surprisingly similar'' Ralph Lauren merchandise at J.C. Penney ``at a much better price'' than in department stores such as Macy's, said Uta Werner, an analyst at Sanford C. Bernstein & Co. in New York who rates J.C. Penney and Kohl's ``outperform.''

``We are the leader for several well-recognized national brands, and the continued strength of our private brands, which generate over 45 percent of our revenue, would speak to our strong customer acceptance and loyalty,'' J.C. Penney spokesman Quinton Crenshaw said.

J.C. Penney created its own brand with Polo Ralph Lauren Corp. called American Living. The home and clothing collection arrived in stores in February and is being billed by the retailer as its largest brand debut. The company projects sales will eventually top $1 billion annually.

While building an in-store brand can be successful, it is more vulnerable to curbs in consumer spending, said Jeffrey Klinefelter, an analyst at Piper Jaffray Cos. in Minneapolis who recommends holding J.C. Penney and buying Kohl's. Shoppers are drawn to ``recognizable'' labels, he said.

``Penney's two main initiatives are American Living and Sephora. American Living is not a brand -- it is two words that mean nothing to the consumer,'' said Deutsche Bank's Dreher. And Sephora ``will never be big enough to be a meaningful driver.''

To contact the reporter on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net.

Last Updated: May 28, 2008 16:29 EDT