New York ? Just like the stores in movies like “A Christmas Story” and “Miracle on 34th Street,” department stores were once magical places, with storybook windows, mounds of toys and gifts and Santa and his elves, enchanting generations of shoppers.

Now, after having lost their holiday sense of wonder for years, even decades, department stores are reigniting that spark with exciting displays, prettier decor and trendier merchandise. Their new-found status, expected to help them win back customers from specialty and discount retailers, will be most noticeable as the holiday season kicks off Friday.

J.C. Penney Co. is selling cashmere sweater sets for less than $100 and iPod friendly polyester jackets for $129.99. Macy’s is getting back into toys and electronics; it is rolling out vending machines that sell iPods and other gadgets. It also struck a deal with Martha Stewart to sell a new home furnishing collection to be in stores next year.

At the high end, Saks Inc., which shed its mid-tier department store business to concentrate on its luxury business, has had a fashion makeover. Holiday best-sellers for women include Burberry mufflers and cashmere fingerless arm warmers from Portolano.

At Bloomingdale’s, designer apparel and status accessories are doing well so far this season, offering the air of exclusivity, according to Michael Gould, chief executive officer.

Customers look over stuffed bears while visiting Toyland on Monday at Macy's flagship store in New York. Department stores, long buried at the bottom of shoppers' holiday buying list, are counting on more consumers to make them a top destination this season.

The changes on the selling floor are part of a major shift in the department store industry. Mergers and acquisitions helped eliminate weak stores, and the retailers have worked hard to develop exclusive fashions. The result: department stores are reversing their fortunes, achieving sales gains this past year that beat their discount and specialty store rivals.

A big turning point was Federated Department Stores Inc.’s acquisition last year of May Department Stores Co., creating a company with huge merchandising power and the ability to demand better prices from suppliers.

Federated’s conversion of most of the struggling May stores to Macy’s branches in September created a national brand that has energized the sector.

Department stores also have benefited from the woes of some of the national apparel chains like Chico’s FAS Inc., whose sales slowed this year, and Gap Inc., which has struggled for years to find the right fashion formula.

Department stores should also do well if consumers, as expected, return to more traditional gifts like apparel. Still, some analysts question department stores’ staying power beyond Dec. 25.

“Department stores are going to do fine this holiday season, but I am concerned where they are going to be next fall,” said Marshal Cohen, chief analyst at NPD Group Inc., a Port Washington, N.Y.-based market research firm.”The stores still haven’t done enough to connect with consumers. They still haven’t put service back in the equation.”

Meanwhile, while Federated’s conversion of the former May stores, which had nameplates like Hecht’s and Filene’s, has revived interest in department stores, it has also been a bit rocky. Federated recently reported that the newly converted stores still had disappointing sales, although the overall impact of the merger has been positive and Federated officials are still confident about their long-term strategy.