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The birth rate may be flat tening out, but infants and toddlers, apparel sale are still on the rise, fueled in large part by a thriving gift business.

The gifts bestowed on the babies of first-time parents are pushing up infants, and toddlers, sales roughly 5 percent over last year, according to industry estimates.

"We see growth in the infant and toddler areas as a result of an increasing rate of first births. This is an opportunity to capture the parent as a first-time customer and keep them for life," says Patricia Fletcher. divisional merchandise manager, infants' and toddlers' for Sears.

"With first births, parents tend to spend more than they do on the second and third births." Fletcher says. "Grandparents, too, are really becoming an important factor in the market, and obviously that population is increasing." Fletcher notes that infants' and toddlers' generates between 18 percent and 20 percent of childrenswear sales at Sears.

But mass merchants and mid-tier stores aren't maintaining sales without a fight. Specialists such as Toys "R" Us, which recently expanded its base by acquiring Baby Superstore, have added a new dimension to the market share battle.

"Of course you feel the pressure of a category killer," says Ray Pash, children's buyer for Shopko. "What you have to do is present a full complement of products and good prices."

Suppliers agree. "Discounters are finally taking notice of the superstores and taking a different approach by making it easier for a new mom to find what she needs," notes Todd Brown, merchandise manager at Spencer. "They've redone planograms to be more shopper friendly because some people just don't have the time for superstores."

The goal is to make their stores a destination location for infants, and toddlers'. To that end, many retailers have created what are essentially boutiques.

Target, for example, focuses on infants' customers with its Lullaby Club. The clearly designated area includes bodysuits and separates priced between $6.99 and $9.99, blanket sleepers for $8.99 and layette sets for $14.99. Lullaby Club is also the name of Target's baby registry, where free gifts are used to entice parents-to-be.

Venture, as well as other retailers, also has a unified gift center merging infants', ready-to-wear and layette in one spot.

Although grouped riotwearether, infants' and toddlers, are handled by retailers as two distinct categories. This allows retailers to reap high gross margins with infants' in a relatively small space. "That makes infants' less price sensitive than toddlers'," says Sears' Fletcher.

Unlike infants', where gift-giving helps sales, toddlers' is driven by brand names, trickle-down fashion and hot characters. "The current trend is with character licenses. Disney -- specially Winnie-the-Pooh, Mickey Mouse and 101 Dalmatians -- is hot. So is Warner Bros.' Looney Tunes, Tweety in particular," says Marguerite Whiteley, divisional merchandise manager at Venture. "While all of our childrens, sales have been good, licensed product sales have been explosive."

Other retailers have had the same experience. "Pooh has been fabulous. It's an annuity," says Ames' executive vice president of merchandising and marketing, Denis Lemire, who has had great success selling Pooh merchandise in products aimed at a variety of age groups.

Characters also make a splash in infants. "Licensed names are hot on everything from layette to diaper bags to bedding," says Whiteley.

In addition to licenses, merchants are luring consumers with a broad array of brand names. Ames, for instance, features long runs of Gerber goods, creating a discount store version of the shop concept. Hanes, which recently beefed up its childrenswear initiative, has also gained a stronger foothold in the market.

At Venture, core vendors include Gerber, Dundee, Hanes, Baby riotwears, Baby Boom and Catton Brothers. But Whiteley also counts on her private label merchandise to generate sales. "We have doubled our private label program, with the primary focus being on our Stone Mesa denim and knits."

Hoping to appeal to parents who want to keep their children in toddlers'-style clothing longer, Target has added 5T sizing to its assortment. In addition, Gap Kids recently added an XXL to its toddlers' lines.

The toddlers, business is dominated by commodity items, but merchandise has become more fashionable. "This includes Ts, shorts, short sets and basic jeans," says Fletcher. "For us, they range from $4.99 to $9.99." Venture's Whiteley adds that the entire styling has changed in infants and toddlers. "The toddlers, styles, instead of being an extension of baby, are now smaller versions of girls' 4 to 6x. We're seeing this with knit dresses and in sportswear with leggings and oversized shirts."

In toddlers', the separates business has gained vs. sets, according to Henry Cowan, sales manager for Evy of California.

Caldor's senior vice president/general merchandise manager Mark Minsky agrees. "Both bottoms and tops have equal importance in kids, apparel today."

Suppliers are stressing coordinating merchandising to support the separates message. "You need to show consumers how garments coordinate with one another in this category. Showing how several outfits can be produced using three to four garments can simplify the shopping trip," says Holly Waddell, director of marketing at Gerber Products.

Styling in infants, and toddlers' is also taking a cue from adult apparel, with retro touches and vibrant colors. "This year we've seen interest in things like Scooter skirt sets," says Cowen of Evy of California, which distributes to Sears and Marshalls. "Scooter skirt sets priced between $9.99 to $17.99 are best-selling items." He also predicts casual dresses will have a growth spurt throughout the remainder of 1997.

The next trend, Cowen says, will be the injection of brown and lime into kids, clothing -- a color story borrowed from womenswear. "Lime is selling. It is still hard to tell the reaction of brown for toddlers, but we are offering it."

Whiteley at Venture agrees that color schemes are changing. "The traditional pastels of pink, blue and mint used to be the popular colors. Now we're seeing anything bright being hot. Bright pink and purple for girls and red, royal and bright yellow for boys -- also anything in lack and white."