Bracing for a challenging holiday season, retailers are scrambling to appeal to penny-pinching shoppers worried about the economy.

Stores will be slashing prices, stepping up customer service or offering more one-of-a-kind or private label merchandise - all in an effort to set themselves apart from competitors and drive sales.

Although sales did improve last month, they did so after disappointing sales in August and September at many of the biggest U.S. chains, leaving the outlook somewhat uncertain for this holiday season.

"It's going to be a shoppers' Christmas - there are going to be a lot of bargains out there," said Phil Rist, vice president of strategy for BIGresearch, a Columbus, Ohio-based consumer research firm.

"Everybody's a discounter this year. Even the high-end department stores will be looking more and more like discount department stores."

Retailers are keeping expectations low and planning conservatively to try to balance inventories and meet sales goals.

"We weren't counting on an economic recovery at this time of year," said Bernie Feiwus, senior vice president of J.C. Penney Co.'s catalog and Internet division. With that in mind, the catalog and Web site are offering more merchandise selling for less than $50. "We believe we're well-positioned for this season."

Despite reporting strong sales for last month, Gap Inc. said its fourth-quarter outlook will remain cautious "until we see more consistent performance over time," said Heidi Kunz, Gap's chief financial officer.

Better planning and expected improvement in the economy could lessen the blow for some retailers this month and next month, some analysts said.

For one thing, some economists expect a record level of home mortgage refinancings to put more money into consumers' pockets and spur consumer spending, especially on items for the home such as consumer electronics.

But consumer electronic chains have struggled. Circuit City Stores Inc. has said it will post a loss for the third quarter, which ends Nov. 30 because of slowing sales on higher-profit items such as cellular phones and satellite television.

Best Buy Co. Inc. is counting on a continuation of consumer electronics products as hot sellers during the holidays, as has been the case for the past six years, and is pushing the latest video games, home theater systems, digital TVs and handheld electronic organizers.

Retail sales for most categories - especially apparel - were disappointing in August and September, rising 1.6 percent. Sales improved last month, rising 3.1 percent, according the Bank of Tokyo-Mitsubishi Ltd. Consumers have tightened spending as weekly earnings have shrunk and as unemployment rose to 5.7 percent last month while consumer confidence plunged to a nine-year low.

Some economists say slow growth in retail sales can also be attributed to lower prices.

"That's having a dampening effect," said Carl Steidtmann, chief economist of Deloitte Research in New York. "Retailers are seeing good volume, but the cash register sales are weak because of the phenomenon of deflation."

Though prices are expected to stay low, Steidtmann thinks consumers will feel less anxious about the economy in coming weeks.

Optimistic forecast

That could translate into average holiday season sales 5.5 percent higher than those in last year's season, Steidtmann predicted. His company's forecast is among the most optimistic.

The National Retail Federation, the nation's largest retail trade group, is calling for sales this month and next to climb 4 percent from the $201 billion spent in the corresponding period last year.

Most shoppers are expected to spend about as much on holiday gifts this year as last, according to the National Retail Federation's Holiday Consumer Intentions and Actions Survey, conducted by BIGresearch. Consumers surveyed said they plan to spend an average of $649, which would be 2.6 percent more than they spent last year.

Retailers are scrambling to capture their share of the gift buying.

At Hecht Co., "the best thing we can do is to have products at compelling prices and make them visible and easy to shop for," said Diane Daly, a spokeswoman for the department store chain. "We've taken a lot of time to consider how [merchandise] looks, how easy it is for someone to come in and pick up an item."

Toward that end, Hecht's has developed its first illustrated gift guide brochure, categorizing items by price. Shoppers can pick it up in the stores. And more items than ever, such as cashmere sweaters and satin pajamas, will be on sale, marked with yellow "superior value" signs.

In a similar move, Penney has reorganized its merchandising on the Internet and in its catalog by price and theme, such as gifts for children for under $25, rather than by merchandise classification, such as toys, electronics or apparel. The catalog offers more than 500 items for less than $25 and more than 1,000 items for less than $50.

Besides those changes, "we tried to find more unique items than in the past," some developed specifically for sale at Penney, such as a cordless hand vacuum that looks like a cow, Feiwus said.

Wal-Mart Stores Inc. plans to offer deals the day after Thanksgiving on several big-ticket items. It did so last year on televisions and DVD players, said Sharon Weber, a spokeswoman.

"There are a lot of places folks can shop," Weber said. "We try to keep merchandise in stock and be the best value in town."

Others are counting on a strategy of constantly turning over merchandise to keep customers loyal, especially during the holiday season. That strategy has worked this year for Chico's, a women's apparel retailer with 375 stores nationwide, where same-store sales last month were 18 percent higher last month than in October last year.

"A lot of product hits the floor that's new every month, and we follow it up with marketing," said Jim Frain, vice president of marketing. "When you retrench and don't take chances on new merchandise, you're obviously not going to have fresh new looks for the customer, and they're not going to come in and buy them. If you sell a rehash of the prior year, you'll have a lot less luck getting the customer in to buy."

Experts expect bargains will be out there for the holiday season, but in a more targeted way than in years past.

"If anything, retailers have been too conservative, and inventories are very lean," Steidtmann said. "The leanness of inventory suggests a little less promotional activity than in the past - it will take longer to make markdowns. The primary reason you do unplanned markdowns is too much inventory, and that's not going to be the case."

Selective markdowns

For the first time this season, technology has become sophisticated enough that retailers will be able to mark down prices more selectively. Rather than taking markdowns chainwide, retailers can target promotions on particular products to particular geographic areas.

"The difference this year is there will be more-thoughtful marketing based on planning and much less of categorywide and storewide total price reduction," said Tom Holliday, president of the Retail Advertising and Marketing Association, a division of the NRF.

Last year, he said, retailers' margins were hurt by a more panicked approach, "launching the season with everything we have. This year you won't see that among the major players. It will be more category by category, item by item."

Some retailers said they'll be able to gauge their performance only later in the season.

"If the season does come, it will be late compared to most," said Feiwus, "The confidence index is low, and most consumers, particularly those that are value-oriented, will wait until the end to see what the best values are."