Many department stores have traditionally set themselves apart by installing in-house labels and designer lines made exclusively for them. The move was designed to produce higher profit margins than national brands when times were good, but many fear that the strategy could come back to haunt them now that the markets have turned. Many stores are being forced to mark down the prices of such exclusive lines in a move that could end up hurting the brands' image.

Unfortunately, retailers are also unable to siphon off some of the pain to suppliers since they are themselves the manufacturer. This means that instead of the markdown allowances that national brands provide, these retailers are stuck with even greater losses than they have already experienced. In effect, the strategy is a "double edged sword" says one analyst with Deutsche Bank.

To make matters worse, many retailers are also forced to pay minimum royalties to the brand designers. The WSJ highlighted one such example with Sears Holdings Corp. (NYSE: SHLD) and Kmart, who agreed to pay a minimum of $65 million last year and $20 million this year to Martha Stewart Living Omnimedia despite the lines not meeting sales targets by a long shot.

In the end, many retailers still insist that these products are necessary to differentiate themselves from their competitors. But in a poor economy, it may be wise for investors to start looking at the income states and sales forecasts more closely to see just how much of a retailer's inventory is tied up in these goods.

Related Companies
Kohl's Corporation (KSS)
J.C. Penney Company, Inc. (JCP)
Retail Ventures, Inc. (RVI)
Wal-Mart Stores, Inc. (WMT)
Macy's, Inc. (M)