Going Up or Down: Five Retailing Leaders -- and Five Laggards

September's sales figures were strong enough

to give many hope that retailing may start climbing out of its two-year funk this holiday season. But some companies will have a tougher climb than others.

Many merchants adjusted quickly to the "new normal" of penny-pinching shoppers and were rewarded with rising sales in the middle of the downturn -- or at least a quicker return to growth. But many others are still losing out in the competition for shrinking consumer budgets or by headwinds they were already fighting before the bottom fell out in 2008. Here's a look at the two groups that are going in two different directions.

THE LEADERS

Aeropostale (ARO): This teen apparel retailer stole Abercrombie & Fitch's (ANF) lunch because it reacted faster to the recession. It cut prices and stocked up on low-ticket items like graphic T-shirts. As a result, it kept posting rising sales, even as the rest of retail lingered. Abercrombie finally reacted and began playing the markdown game late last year. It's starting to get its groove back and trying to lure back those customers. This holiday season will be a test to see if Aeropostale can hang on to those fickle teens as Abercrombie and other competitors such as American Eagle Outfitters (AEO) go after them with promotions.

Best Buy (BBY): Nothing beats a monopoly, and since the demise of rival Circuit City two years ago, Best Buy has owned the electronics big-box store market. Its only real brick-and-mortar competition is from the other big box, Wal-Mart Stores (WMT). On a smaller scale are regional appliance chains and specialized retailers like Apple Stores. Online, of course, there's Amazon (AMZN) and eBay (EBAY). Credit Suisse First Boston analyst Gary Balter recently recommended Best Buy as a market share gainer in what he called "the underloved consumer electronic segment."

Kohl's (KSS): In a good example of not letting a crisis go to waste, retail experts seem to agree that Kohl's has been doing all the right things lately. It has taken opportunities, such as the demise of the Mervyn's chain in West, to expand its footprint, and it hasn't taken its eye off the ball. It's giving its closest rival, J.C. Penney (JCP), a run for its money in the midprice department store segment at a time when that low- to middle-income shopper they both target is under pressure. But while Penney's has been stumbling (more on that later), Kohl's has been cruising: Comparable sales are up 5.3% year-to-date.

Macy's (M): The holiday season will be decisive, but the parent of Bloomingdale's seems to be climbing out of a fallow period. After several years of struggling to absorb acquisitions following the merger of Macy's and Federated Department Stores, it hit upon the My Macy's strategy that put stores under more local control, so the merchandise and marketing are a better fit with local shoppers. So far, it seems to be working. CEO Terry Lundgren says Macy's had its best back-to-school season in years, thanks to exclusive brands like Madonna's Material Girl clothing line. "Macy's arguably is on an upswing. The next month or two will confirm if that is the case," says Kenneth Stumphauzer, analyst at Sterne Agee.

Nordstrom (JWN): Department stores took a beating early in the recession, but Nordstrom reacted faster and better than most to adjust its prices and products for the newly thrifty shopper. The move paid off, and the chain is emerging from the downturn with an even more loyal customer base than before. It just reported that sales are up 9.3% year-to-date. And unlike other department stores, which are banking on private brands and exclusives, Nordstrom is doing it by focusing on customer service and stocking just the right things for shoppers. "One thing Nordstrom has always done well is the customer experience," says Joel Alden, a principal at consultant A.T. Kearney.

THE LAGGARDS

Borders (BGP): The ugly proxy fight at rival Barnes & Noble (BKS) took some of the focus from this bookstore chain's troubles. First it shed DVD and CD aisles to focus on areas such as children's books, where it figured it could make its mark. Then it stumbled as it tried to get into e-books by hooking up with the wrong e-reader technology. This summer, while everyone watched the brawl at Barnes & Noble, it laid off employees and sold its Paperchase stationery unit to a private equity firm to reduce its debt. It makes one almost nostalgic for the days when B&N was considered a category-killer that put neighborhood bookstores out of business, like in You've Got Mail with Tom Hanks.

Dillard's (DDS): The recession hasn't been a good time for traditional department stores, but especially for the mushy middle that's neither aspirational luxury (i.e. Nordstrom) nor low-price (Kohl's). Retail experts keep looking for signs of impending bankruptcy in this regional department store based in Little Rock, Ark. Its sales had been dragging even before the recession. While it has managed to boost its fortunes during the downturn with cost-cutting and closing a number of stores in 2009, it's still getting squeezed by competition from the likes of Macy's and from falling mall traffic.

Gap (GPS): While its Old Navy sibling is doing relatively well, the mothership Gap brand keeps lurching along, trying to find a fashionable sweet spot. It did well briefly with its 1969 jeans line, but sales aren't budging. It's hard to get customers to pay mid-level prices for basics like T-shirts during an economic slump. Many customers are simply trading down to the cheaper Old Navy basics as an alternative.

J.C. Penney (JCP): Like Macy's, Penney's has looked to exclusive brands and a corporate restructuring to come out of a downturn. It's banking on technology (it recently dropped its catalog business to focus on online sales), and new exclusives with Liz Claiborne and Spain's Mango fast-fashion chain. But it's facing fierce competition from Macy's and Kohl's, and a drop in traffic at mall, where most of its stores are located. Penney's has been expanding its off-mall stores and improving the in-store environment with everything from Sephora cosmetics shops to kiosks that let shoppers order online any item they can't find in the store. But the heavy competition is forcing it to play the promotions game, which keeps hurting the bottom line.

Kmart/Sears: As many retail analysts like to point out, it's no fun being third in a retail segment. Kmart is up against Target (TGT) and Wal-Mart among discounters, but it doesn't have Wal-Mart's mass or Target's class. It can't match the pricing power of the world's largest retailer, and with Martha Stewart's departure late last year, it lost the one brand where it competed with Target in style props. Parent Sears Holdings (SHLD) can't catch a break, because just like Kmart is getting squeezed among discounters, Sears has sunk to third-wheel status behind Penney's and Kohl's among mid-price department stores. Sears Holdings has been making up for the merchandise shortcomings by adding lay-away (in-store and online) and Christmas Clubs for cash-strapped customers, improving online shopping and adding a rewards program to build customer loyalty. But it's an uphill climb. Says Stumphauzer: "Sears and Kmart both have been bleeding market share for the last couple of years."