By Garrett Glaser Correspondent
CNBC
updated 12/7/2004 4:47:02 PM ET 2004-12-07T21:47:02

It's a showdown that is taking place across the country. In this corner, a living piece of retail Americana, the mostly mall-based, mid-priced J.C. Penney. And in this corner, relative newcomer Kohl's.

Both retail chains are vying for pretty much the same customers -- usually, female and more interested in value than in high fashion.

After years of troubles with dowdy merchandise and a lack of focus, J.C. Penny is now firmly on the way back. There are now 1100 stores with a much improved product selection, solid new brands and annual sales are $18 billion.

Wisconsin-based Kohl's sells mostly apparel and accessories. And though it went public only a dozen years ago, its Midwestern roots trace back to the 1920's. Today, with it's off-mall, discounting strategy, it has more than 650 stores in 40 states and annual sales of more than $10 billion dollars.

“They are rivals,” said Jeffrey Klinefelter Piper Jaffray. “With Penney's recovery the last couple of years and Kohl's appearing to stabilize and going back to growth mode, they are clearly competitors.”

So, if J.C. Penney has clawed its way back to a position where it can effectively compete and grow again, the question may be: will the rate of growth ever rise to the level of a smaller competitor?

Because Kohl's is smaller than Penney's, some analysts see more room for growth.

“There isn't much in terms of square footage growth,” said Klinefelter. “Bottom line growth will be driven by margin expansion, share buybacks. Paying down interest will drive the bottom line. With Kohl’s, (there is) a square-footage growth profile in the double digits. And that will attract an entirely different kind of investor.”

While Kohl's stock has had a rough three years, Penney's is up more than 64 percent in the same period. And even though that would suggest a fuller valuation for Penney shares, it's not so, according to Citigroup Smith Barney senior retail analyst Deborah Weinswig.

“I would say that now is still an excellent time to buy the stock,” she said. “It's cheap. I mean if I look at it versus the others that I follow, it's trading at 12 times (earnings). With the kind of earnings growth they’ve got, I'd be willing to pay 15, 16 times (earnings.)”

It used to be, of course, that if you used the term “arch rivalry” and J.C. Penny in the same sentence, you had to be talking about Sears.  Not so for the time being, as Sears pursues integration with Kmart Stores following that company's $11 billion acquisition of Sears.

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