Shopping Season

Holidays 2007: Retail Winners And Losers

What to do with a tight holiday budget? Buy electronics and hit the discount clubs for everything else. Department stores? Forget 'em.

That's the consumer story so far for Christmas 2007. "The only safe haven is technology; everything else is weak," says retail economist Richard Hastings of the Federation of Credit and Financial Professionals. One reason: Many retailers worked hard to keep from discounting, focusing on inventory control and profits. It backfired. They failed to ignite excitement among cash-strapped shoppers who opted for Wal-Mart (nyse: WMT - news - people ) instead.

Traditional mid-market department stores "just haven't given customers the kind of deals they want," says Britt Beemer, head of industry tracker America's Research Group. Beemer estimates industry same-store sales growth at 1.8% from the 2006 holiday season, which would be the weakest in 10 years. The big losers this year figure to be the mall-based apparel retailers like Macy's (nyse: M - news - people ) and Sears, the most common places at which consumers getting pinched with $3 a gallon gasoline are cutting back, according to ARG surveys.

A couple of exceptions to that trend, Beemer notes, are Kohl's (nyse: KSS - news - people ) and J.C. Penney (nyse: JCP - news - people ), department stores that are benefiting from slightly more aggressive promotions. Penney is also reaping the dividends of a recent revamping, one that's resulted in most of its newer stores as stand-alones rather than mall anchors.

Good news for electronics firms like Best Buy (nyse: BBY - news - people ) and Circuit City (nyse: CC - news - people ), which selectively discounted some plasma television sets, digital cameras and global positioning systems, among other goods, but not with "50% off" fanfare. Both companies have 10% to 25% sales scattered around their Web sites; Circuit City is also offering free installation to nudge more people into getting a GPS for their car.

Wal-Mart, which sells a lot of consumer electronics goods at cheaper prices, also figures to do well from the surge, as customers walk over from the apparel and toy sections to spend on videogames and television sets.

The other big winners this season figure to be membership clubs specializing in savings--Costco (nasdaq: COST - news - people ), BJ's Wholesale and Wal-Mart's Sam's Club--as consumers supplement their pricey tech toy purchases with cheap clothing and basic staples.

Even the luxury sector, where customers aren't as affected by little-people problems like gas prices, hasn't been immune from this year's slowdown. ARG is looking for 4% growth at big luxury players like Saks (nyse: SKS - news - people ) and Nordstrom (nyse: JWN - news - people ). That's better than the overall industry, but lower than the typical 6% to 8% growth of recent years. Wall Street bonuses are down, a leading indicator that life for some at the top is at least a tad less cushy.

"You can't have the same year-over-year growth every year anyway, unless there's an economic improvement," Hastings says, noting that as the industry's base sales number increases every year, growth becomes more difficult. The rule of thumb: When economic conditions stay the same, the pace of growth drops. That doesn't add up to much growth in 2007. Unless you're selling a GPS or a flat screen television.