Last Retailer Standing Wins

Suppose a nosy journalist snooped through your closet today. Naturally, she'd find the latest spring fashions-pulled straight from the racks at Barneys and Neiman Marcus -- displayed on your hangers, right?

If you're anything like most of us, probably not. Retail sales during the Christmas shopping season slipped 3% from the same period in 2007, and the National Retail Federation projects a 0.5% decline in sales for all of 2009. Linens 'n Things, Circuit City, KB Toys and Sharper Image are just a few of the household names that have already succumbed to the hostile climate. Stalwarts such as Home Depot and Macy's are laying off thousands of employees.

But a small number of companies are quietly thriving. Some are big enough to offer the best deals on the essentials, some benefit from the demise of rivals, and others offer products too near to customers' hearts for them to forgo. Add these retail survivors to your shopping list for your next stock-buying spree.

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Whales in the pond. Americans are not only buying less of everything, but they're also spending fewer dollars on the items that they do buy. Hence, the big discounters -- Wal-Mart Stores (symbol WMT) towering above the rest-have been scooping up new business with ease. "Consumers will continue to trade down to the lowest-cost retailer, and Wal-Mart is it," says Standard & Poor's analyst Joseph Agnese.

In January, even as most retailers suffered, Wal-Mart posted solid sales growth.

As the world's largest retailer, Wal-Mart can cut costs to keep prices rock-bottom. "It's wrung pretty much every expense out of the business," says Steve Rogé, manager of RogŽ Partners fund. Although customers may enter a store intending to stock up on groceries or to buy generic prescription drugs for $4, once they're through the doors they'll often shop the general merchandise as well. "People who in the past might have said, 'I would never shop there,' are becoming more open-minded," says S&P analyst Marie Driscoll.

Wal-Mart's resilience shows. The company generated $13.6 billion in profits over the 12 months through October 31 (its 2009 fiscal year ended January 31), up 10% from the same period the year before. Its stock was one of only two in the Dow Jones industrial average to rise last year.

Wal-Mart may rule in small towns and suburbia, but Amazon.com (AMZN) reigns supreme online. From its humble roots as a bookseller, Amazon has become the world's largest online retailer, peddling everything from golf clubs to engagement rings to ukuleles. "Amazon is much closer to realizing its vision of becoming a true mass merchant of the online age," says Love Goel, chief executive of Growth Ventures Group, a private-equity firm.

The company is solidifying its place as shoppers' first stop on the Web. Amazon Prime membership, which encourages repeat business by offering customers free shipping for a $79 annual fee, is up 70% from one year ago. And, says Goel, "its customer service is the industry standard."

Recession doesn't seem to be in Amazon's vocabulary. The company reported $19 billion in sales in 2008-a stunning 29% increase from the previous year -- and profits of $645 million, or 36% better than in 2007. Trading at 45 times estimated 2009 earnings, the stock looks frothy. But you could wait a long time if you held out for a better price.

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Bankruptcy beneficiaries. In the long run, the winners in retailing will be those that can emerge from the recession with a bigger piece of the pie. So the demise of Circuit City and Linens 'n Things can only be a blessing for Best Buy (BBY) and Bed Bath & Beyond (BBBY).

Best Buy stands to expand its share of the consumer-electronics market (about 21% today) as Circuit City liquidates its 567 U.S. stores. Chief executive Bradbury Anderson has hinted that Best Buy may purchase some former Circuit City locations, if such a move doesn't undermine the company's financial position.

The electronics giant hasn't been immune to the recession. December same-store sales (sales at stores open at least one year) fell 7% from the same month in 2007, so management plans to slash capital spending by 50% in 2009.

You might wonder why Bed Bath & Beyond will fare better than Linens 'n Things. The big difference: Linens, which had been taken private in a leveraged buyout, perished under an unmanageable debt load, while Bed Bath & Beyond doesn't owe a cent. "In retailing, the mantra right now is 'Balance sheet, balance sheet, balance sheet,' " says Don Wordell, manager of RidgeWorth Mid-Cap Value fund.

But there's more to Bed Bath & Beyond than a squeaky-clean balance sheet. A decentralized decision-making model, which allows managers broad discretion over what their stores stock, helps the company squeeze more sales out of each square foot of retail space than competitors do. And 57% of the chain's locations are within 10 miles of a former Linens 'n Things.

Must-have purveyors. Then there are those coveted items that shoppers will find a way to buy, recession or no recession. Edgy apparel retailer Urban Outfitters (URBN) is as close as you'll come to a recession-proof clothier. For the fiscal year that ended January 31, the company reported that same-store sales were up 8% over the year before, and revenues were up a whopping 22%, to $1.8 billion.

Smart management and limited store growth have preserved the hip mystique of Urban Outfitters' brands, and the teen-through-thirtysomething customers the stores serve keep coming back. The company offers brand-name clothes, accessories and home furnishings alongside its own private-label items in its three chains: Urban Outfitters, which accounts for 50% of sales; Anthropologie, 40%; and Free People, about 10%. "Urban Outfitters knows how to merchandise really special things," says Driscoll.

This recession has felled century-old financial institutions, led to millions of job losses and cost future U.S. taxpayers trillions of dollars. But it hasn't yet come between kids and their video games. At least that would help explain the bang-up results at GameStop (GME).

GameStop is something of a benchmark for the video-game industry because it sells game consoles of all makes and models, plus new and used games. Its used-game business has been the biggest driver of growth in recent months, in part because gamers can trade in used games for store credit. And Game-Stop's gross profit margin of nearly 50% on used games is nothing to sniff at. "GameStop makes more selling $30 worth of used products than it does selling $60 worth of new products," says Janney Montgomery Scott analyst Tony Wible.

The company managed to boost profits by an eye-popping 55%, to $368 million, over the 12-month period that ended October 31. At that rate, Wible says, GameStop could be holding $1 billion in cash by the end of 2009, which it could use to buy back large chunks of its stock.

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