The department store sector is remaking itself for the new era of retailing, continuing the resurgence it experienced over the past two years with the return of the mall.

But while department stores as a concept no longer seem headed for oblivion, there appears to be a sharp divide between those chains ready to embrace change and those unwilling or unable to reinvent themselves. The latter retailers will likely disappear from the landscape, either through consolidation or bankruptcy, according to Jason S. Baker, principal of Baker Katz, a Houston-based commercial real estate services firm and a partner with X Team International, a retail real estate brokerage alliance.

Given that the U.S. currently has more regional malls than there are customers to shop at them, those department stores that anchor the bottom 20 percent of malls are headed for closure, notes C. Britt Beemer, chairman and CEO of America’s Research Group, a Summerville, S.C.-based consumer behavior research firm.

“The department store sector is challenged and one of the big reasons is that most months only 28 to 32 percent of consumers go to a mall versus 90 percent of consumers who go to shopping centers and strip centers,” Beemer says. “I think there are some retail chains that are going to be vulnerable in the long term.”

The big picture

For the fiscal year 2011, department stores posted collective growth of 3.5 percent. Nordstrom and Macy’s turned in the best performances, at 7.2 percent and 5.4 percent respectively. JC Penney, on the other hand, ended the year with only a 0.9 percent increase in same-store sales. And sales at Kmart and Sears have been so dismal that even before the 2011 holiday season ended the retailer announced plans to close up to 120 stores.

The reason for such a mixed performance is that some chains, most notably Macy’s, have been making major strides in grabbing more market share by focusing on exclusive merchandise offerings and more convenient layouts. In 2010, Macy’s signed exclusive design partnerships with Kenneth Cole Reaction and Karl Lagerfeld. Last year, it teamed up with Madonna. And it’s been adding more private label linesin an effort to provide its customers with products they wouldn’t be able to find elsewhere.

Plus, Macy’s has been pruning its portfolio to get rid of underperforming stores in both its Macy’s and Bloomingdale’s divisions and rethinking the look of its stores. These are exactly the kinds of changes department stores need to make to distinguish themselves in a market currently dominated by discounters and warehouse clubs, according to Craig Johnson, president of Customer Growth Partners, a New Canaan, Conn.-based retail consulting firm.

“For many, many years, the specialty chains were where the excitement was in retail, they were bringing out the newness and fashion and the department stores were bland. There was no particular reason to go to a department store,” notes Johnson. Now “there is uniqueness and value that, if you want to get it, you have to go to a particular department store.”

The JC Penney way

Like Macy’s, JC Penny is also trying to improve its image. The chain has been underperforming for some time, but new CEO Ron Johnson —previously an executive at Apple and, before that, Target—unveiled several new initiatives last week meant to raise the brands’ value in consumers’ eyes.

To begin with, Johnson wants to do away with constant discounting, in order to make pricing less confusing for consumers and cut down on the air of desperation such discounting engenders. Instead, JC Penney will offer shoppers regularly-scheduled monthly discounts and best value pricing on merchandise that hasn’t sold well.

In addition, the chain will redesign its layout in a Main Street style, with eventually up to 100 brand boutiques lining a main thoroughfare in the middle of the store.

But while retail industry insiders praise Johnson for his willingness to try something new, they express major doubts about the ultimate success of the campaign, especially on the pricing strategy. In the past few years consumers have gotten so used to offers of 30, 40 or 50 percent off regular prices that JC Penney might have a difficult time luring them away from competitors who plan to continue offering discounts.

“I know Ron Johnson is brilliant, but the fashion world is a different animal from Apple,” says Baker. “Apple determined that they would not compete on price, but on quality. But with department stores the first stop is savings and value. His competitors are going to continue to operate on the promotional model and I don’t know if he’s accounted for that.”

“Penney’s is going to find itself in hot water when all of a sudden their [merchandise] is not going to be on sale and the consumer is not going to get it,” says Beemer. “And since Penney’s has such huge shopper overlap with Kohl’s, Kohl’s is going to love this.”

The idea of a Main Street layout and designer boutiques, such as Liz Claiborne and Nanette Lepore, gets more enthusiastic reactions, but even there, Penney’s management has to stay aware of redesign costs, says Baker. He estimates that a complete redesign might end up costing $1 million per store. If Johnson ends up redesigning 100 stores over the next few years, as he plans, that means a price tag of $100 million—not an inconsiderable amount at a time when most retailers are on a tight budget.

“At this point in the economy, $100 million is no longer a rounding error, it’s a big gamble,” Baker notes. “It makes me wonder if it doesn’t make more sense to experiment with 20 or 30 stores first and see how they do.”

Going away

When it comes to talk of which department store players might not make it in the long term, however, the names that come up are Sears and Kmart, not Penney’s.

While Penney’s has acknowledged it has problems and is working to solve them, Sears Holding Corp. has done virtually nothing to fix its stores, according to James C. Bieri, principal with Detroit-based Stokas Bieri Real Estate.

“It’s tough to think that Kmart is going to be around for a long time and Sears is not likely to survive in its current firm,” he says.

Like Beemer, Bieri believes that a number of existing class-B and class-C malls are headed for extinction, and with them will go the department stores that anchor them.

“It wouldn’t surprise me that if stores don’t hit a certain volume threshold, department store chains are just going to close them,” he says. “The new growth of department stores is going to be targeted because the poorer performing malls are going to close.”