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LITTLE ROCK, Ark. - For years, Dillard's Inc. managed to fight off the competition posed by Wal-Mart and other discounters by focusing on tradition - its history as a grand old department store.

But tradition has been forced aside by reality - changing consumer buying habits have prompted the nation's third-largest department store operator to embrace discounting and focus more on lower-priced private label merchandise to stop the flight of customers to other shopping venues.

Like other department store companies that have seen their sales figures turn dismal, Dillard's has had to change its business, both on the selling floor and in back-room operation at its 300 stores in 29 states.

The changes appear to be helping. During March, the company's sales at stores open at least a year, a widely used yardstick of retail strength, rose a solid 5 percent, and children's clothing sales were up 21 percent. Dillard's had sales of $8 billion last year.

"We feel our recent financial improvement is a direct result of our efforts over the past year or so to dramatically improve our merchandise mix," said Julie Bull, Dillard's director of investor relations.

Long averse to marking down merchandise, Dillard's is now moving items out by putting them on sale, sometimes at very deep discounts. Like Federated Department Stores Inc. and May Department Stores Co., it is also emphasizing its own labels, which are priced lower and generate more profit than the designer labels that were Dillard's hallmark for the last decade.

A recent walk through the Dillard's in Hot Springs revealed plenty of designer and house brand items at full price but also an assortment of jewelry and apparel marked down 75 percent. Asked if any sport coats were on sale, a sales clerk said, "No," but volunteered that a sale was planned for June in Little Rock.

Shoppers Pauline Hollomon, and her daughter Terri Nichols, both of Malvern, said they are regular Dillard's shoppers and appreciated the changes.

"They always have markdowns," Hollomon said. "When they put them on sale, they really put them on sale."

Hollomon said she sensed that Dillard's is using deep discounts to keep its merchandise updated. "It makes you want to go back," she said.

Behind the selling floor, Dillard's has cut costs through better inventory management, a reduced payroll and tighter advertising and administrative expenses. It has also been paying down its debt.

The groundwork for the moves was laid starting two years ago, and chief executive William Dillard II has expressed optimism that the company's efforts will have a long-term effect on profits.

"Those strategies are paying off, beginning now," said retail analyst David Lamer of Baltimore-based of Ferris Baker Watts Inc. His firm rates Dillard's shares as a "buy."

"The Dillards are very aggressive merchants, which Wall Street and the fashion industry underestimates," Lamer said. "They're not polished business executives like many of us are used to. They march to a different drummer."

"I'm confident what they are doing will work," he said.

Lamer said Dillard's move from "status brands" - the designer clothes that the chain has stocked in abundance - to its more affordable private label clothes will catch on.

Also notable, he said, is Dillard's hiring of the prominent Vince Camuto, founder and former chief executive of Nine West Group Inc., to do private-label footwear for Dillard's.

The changes, while designed to boost Dillard's sales, also could make the company more attractive should it go up for sale. There has been speculation since the death of founder William Dillard Sr. in February that the company might be sold, but Bull declined comment, saying Dillard's would not respond to questions about possible mergers or acquisitions.

Not all analysts like what they see at Dillard's. C. Britt Beemer, chairman of America's Research Group, based in Charleston, S.C., says he is not as optimistic about the retailer's future, based on consumer responses to surveys that his firm conducts bimonthly.

"Too many consumers list them as their second choice. I think that's a very dangerous position to be in," he said.

"Dillard's has got to stand for something," Beemer said. With the popularity of Target and Wal-Mart, it's not enough for a department store to just offer clothes, housewares, furniture and some electronics, he said, noting that other department store operators do have specialties. For example, Nordstrom is known for it shoes and Macy's, housewares.

But to some shoppers, Dillard's represents higher quality. Another Hot Springs shopper, Cathy Farmer, 41, was leaving the store after having bought an $80 swimsuit that she said was better than one she saw for the same price at the J.C. Penney in the same mall.

Farmer, who has lived in the area for about a year, having spent all her life in Southern California, said of Dillard's, "this is my Nordstrom's now," although Dillard's would rank No. 4 when compared to her favorite stores.

Beemer said the company is still not doing enough to bring in shoppers and should advertise more on television.

"Why should I shop at Dillard's first? What do you do better that would command my attention as a consumer?" Beemer asked. "I've never seen a private-label apparel strategy ever be a reason why consumers would shop there."

Lamer said Dillard's understood that it had to make changes, and has done what it needed to do to improve its bottom line.

"They bit the bullet and reworked their assortment. Dillard's is one of the few department stores … that can go from 3.8 percent (profit) margins to levels of 6 to 10 percent margins. I think investors will like that when that happens," he said.

Copyright 2002 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.