The Death Watch in retail is heating up. Fueled by an ongoing recession, retailers of all kinds are either falling under the knife or seem suddenly vulnerable. Even as well-known brands like Eddie Bauer, Circuit City and Linens 'n Things become nostalgia fodder, the ongoing lameness of the supposed "recovery" has also put some long-held conventional wisdom about the retail landscape to the test.  One such theory that's come under fire is the so-called "barbell" effect in retail. Translated into English, the barbell simply states that low-end retailers can survive during lean times, as can high-end, but the middle will be lean indeed. Now our panel of industry observers says that idea is no longer relevant in an era when even the well-to-do are doing less well.  First the macro picture: after climbing for months the U.S. Consumer Confidence Index took a noteworthy fall in June, falling 11.2% from May. The best the Conference Board, which produced the index, could say going forward is that expectations looking ahead are less bad as opposed to good.  Should you choose to invest here, be wary of firms that have loaded up on too much debt, says Gerard Klingman, head of Klingman & Associates. "The ones that were over-leveraged are probably not going to be able to last," he says. Klingman declined to name names, but some research unearths possible candidates.  Follow Intelligent Investing on Twitter.  Sign up for the Weekly Intelligent Investing Newsletter.  Some retail firms that have high debt-to-equity include: RadioShack ( RSH - news - people ), at 73%, hhgregg ( HGG - news - people ) at 73% and Macy's ( M - news - people ) , which has 191% leverage to equity.  Retail firms with low debt-to-equity include: Amazon.com ( AMZN - news - people ) at 3%, Barnes & Noble ( BKS - news - people ) with 0% and Bed Bath & Beyond ( BBBY - news - people ) also with 0%.  As for the high end, Klingman is skeptical that consumers are going to flock back anytime soon. "I think there's issues with high-end consumers only [being] willing to spend on certain types of products or consumption, whereas in the past they would be high-end in everything," he says.  It's a sentiment echoed by Michael Ervolini, head of behavioral finance firm Cabot Research. "There's a lot of discomfort with conspicuous consumption right now," he says. "And I wouldn't be surprised if that was relaying into that barbell thing not being as true as it had been."  Certainly industry trackers are worried about the prospects at the high-end. Bain & Co. notes that from 2007-08 the luxury market was flat, defying a compound annual growth rate of 6.5%, reaching back to 1995. Bain also expects the luxury market to shrink 10% in 2009, with decreased new store openings and aggressive markdowns to become the new norm. Bain also projects the Americas to take the biggest retail hit, down 15%, while China should uptick 7%. As for culprits, Bain blames plummeting consumer confidence and, perhaps ironically, the democratization of luxury. As the middle-class become more affluent luxury retailers set their sights on this demographic. This strategy then backfired as the middle class got squeezed hard by the world's ongoing downturn.  Even though some sparkling names--like Coach ( COH - news - people ), Sotheby's ( BID - news - people ) and Polo Ralph Lauren ( RL - news - people )--have seen their shares stay strong in 2009 our observers feel this may not last. Lynn Phillips-Gaines, an investment adviser with Raymond James, says she's seen her clients proudly trade down, as has she. "I do see within my own client base as well that that people who used to shop or buy things at upper end, it's now become more vogue to see what kind of real capability you have purchasing something and not pay much for it," she says. "It's become kind of like a badge of honor."  Forbes: It seems like retailers are going out of business, or at least a fair amount have. I believe Eddie Bauer went out of business recently. What is your take on retail as we head into the summer, which of course is also a reflection on consumer spending and the general state of discretionary dollars?  Gerard Klingman: There's no question there's been a huge slowdown in consumer spending. And I think that's going to continue for a while. Which retailers are going to survive has to do with how much debt they have going into this. The ones that were over leveraged and were part of private equity leveraged transactions probably are not going to be able to last. Whereas other retailers that have better balance sheets are going to be better able to weather the slowdown in consumer spending.  There is hope going into the summer that if the unemployment rate begins to slow consumer will start to come back. I think it's going be questionable whether they're going to be coming back on the high end. But the U.S. consumer, although damaged right now with the unemployment picture, and their leveraged balance sheets, still like to spend. And if there's some glimmers of hope in the economy, then I think it's reasonable that the U.S. consumer will start to spend again.  Forbes: What are some of the higher, more leveraged retail places you're thinking of?  Klingman: As a firm we don't analyze individual retailers. We allocate money across managers and asset classes. So unfortunately, I can't answer that question in an intelligent way.  Mike Ervolini: People have cut back on retailing expenditures but we're seeing some interesting things happening both from the business side and the consumer side.  And one is bartering. There are a number of professional barter organizations that are really beginning to expand in this marketplace. There are some that are national. And there are some that are regional. In fact, we just had in the news recently one that was pulling together professional service firms with farmers because farmers--particularly people who are doing organic stuff--they don't have the kind of cash to engage a PR firm or a design firm.  So what they're doing is they're bartering across; allowing them to spend wholesale dollars to get retail results. And there are professional firms that do this. And they charge 6%-7% of the trades. That's one thing. But the other thing I wanted to mention is more from the consumer side, is there's a great firm out of the Boston area called Second Time Around.  And what they're doing is they're working with women who enjoy high-end clothes, really designer stuff. So you go out and you buy clothes, and you might only want to wear it for a season. Well, you bring it to this consignment store, and they sell it to women who want to look like you, but just don't have the budget.  Lynn Phillips-Gaines: I saw something on that order where they're actually having those parties where each woman takes something they bought that didn't work out, they paid a lot of money for. And when you go home, you go home with something different.  Ervolini: This has some real behavioral things, this Second Time Around, because instead of discarding your clothes, you get to get some cash for that, which makes you feel good, and when you bring it to one of these consignment stores, they immediately mark your product and put it on their Web. And you can follow when it's sold. And you can actually get an e-mail when it's sold.  Ervolini: And you know when there's money in your account. And so it's a very, very clever business. And it's really it's been around for a while. But it's getting its due right now because it's bringing together the green concept, which is recycling, and a lot of behavioral stuff, which is getting a little reward for trading in my old clothes and buying new clothes. So there are some interesting things out there in the retail world that are different than what we're used to.  Forbes: One thing that I heard several months ago is there is expected to be a sort of barbell recovery in retail where lower end retailers, like Wal-Mart ( WMT - news - people ) will do well. And higher-end places like Tiffany ( TIF - news - people ) could do well. But the middle places wouldn't do as well. What do any of you think about that idea now?  Ervolini: That barbell approach was certainly historically true. But from what people in the retail sector are telling me that the high-end guys, even Saks ( SKS - news - people ), were discounting wildly last Christmas. And if you go into the high-end places consumers actually bring their own bags into the high-end places and put their purchases into different companies' bags.  There's a lot of discomfort with conspicuous consumption right now. And I wouldn't be surprised if that was relaying into that barbell thing not being as true as it had been historically, that there's just more pushed down into the extreme.  Klingman: I would agree to that. I think the barbell is somewhat simplistic. [As] people keep moving into the lower end, the Wal-Marts are relatively benefiting. But it's not as simplistic as saying the high-end is fine, the low-end is fine and the middle's getting crushed because there are issues with high-end consumers only willing to spend on certain types of products or consumption, whereas in the past, they would be high-end in everything. So I think it's across different retail sectors and different companies that are still perceived as providing some level of value vs. others that aren't.  Phillips-Gaines: I totally agree with what both Gerry and Mike said. And the reason for it is that I do see within my own client base as well that people who used to shop or buy things at upper end it's now become more vogue to see what kind of real capability you have purchasing something and not pay much for it.  I think Michelle Obama has done a lot of addressing this and making it kind of nationwide. And that whenever you read about the clothes that she's wearing, you could walk into a mall and get those particular clothes. And you're not talking about the high-end of the market.  I was in the Salvation Army the other day--and I live in a college town--and I noticed many of the sorority/fraternity people were in it. And when I talked to the cashier, she told me that for the last year it's become very fashionable to go to the Army-Navy stores, the Salvation Army, or you know, that type of place in order to purchase your clothes.  And I was reading another article about how garage sales and how middle-income people are finding that they can go to certain neighborhoods where they're always guaranteed to find Liz Claiborne ( LIZ - news - people ) names and all that have hardly been worn, and they pick them up for $5. And it's become kind of like a badge of honor.  Forbes: It really seems like Michelle Obama is the most trendsetting First Lady since Jackie Kennedy way back when. I can't think of a First Lady who's had this galvanizing effect on fashion.  Phillips-Gaines: Absolutely, and on women's fitness too.  Forbes: Yeah, and secondly, buying the higher-end clothes for cheap is making a virtue out of necessity. We like to feel good about ourselves for buying these cheaper goods. But also, we need to buy the cheaper goods.  Klingman: Interesting sign of the times too because when Jackie O. was the style leader in the early '60s, it was the French antiques, and the higher society, and kind of the moving up. And it seems like it's the other message now for Michelle Obama.  Forbes: Yes, because Jackie was all about her Chanel suits. And however many thousands of dollars it cost per suit. That might be an article, Gerry. I will credit you should I write it.  Klingman: I'm not sure I should be going anywhere in the fashion direction. I think my comments stop right there.  Phillips-Gaines: I do pay close attention because I've noticed that I used to purchase more expensive clothes where I'd go and have a fashion consultant that met with me by myself, and help me pick and choose and put things together. And one thing I realized is I didn't need the sheer number of clothes.  No. 2, there are good values out there that you can find. And No. 3, I think we have good moderate retailers now that offer a higher product than when I was growing up. The Wal-Marts of the world were not that good.  And I noticed in an article I read about three and a half years ago where Wal-Mart has started requiring their executives to dress in the clothes that they actually sold. And one of the things that came back to them was that the men's clothing didn't fit well. You know, the shirts weren't built for a regular person in today's sizes. And so they were actively modifying that. And they brought in other lines for women's clothing. And I really think that there's no excuse for people not looking good on a budget now. I think there are a lot of really wonderful opportunities.  See More Intelligent Investing Features.
Folks used to believe the low- and high-end retailers could survive anything. Now the high end looks suddenly less invulnerable.