The recovery in the retail industry has so far traced a familiar pattern, where both up-market and discount chains benefit at the expense of middle-market players. That's what you get when assets like stocks and bonds rebound sharply but the job and housing markets don't.

Retail stocks tend to be early cyclicals, meaning they rise ahead of other sectors in the early stages of economic recovery. That's part of what's driving some impressive results among luxury retails, like the ones we tackled in our previous Face-Off. This time around we're looking into some names at the other end of the dumbbell.

Warehouse clubs offer an appealing proposition in tough economic times, seeing as they provide deep discounts to cash-strapped consumers. On the other hand, a business model based on low prices leaves little margin for error -- literally. When gross margins are thin by design, price pressure and rising commodity costs can make it all too easy to sell merchandise at a loss.

Costco (COST), a national chain with a more affluent customer base, has greatly outperformed the broader market this year, but whether shares are still attractive at current valuations in a matter of debate. The same goes for shares in BJ's (BJ), a regional club, which have jumped about 30% in 2010. And then there's Sam's Club, owned by Wal-Mart (WMT), the empire of always low prices. Unfortunately the same can be said for the price of Wal-Mart's stock, which has lagged behind even the tepid returns of broader market this year.

For more on the bull and bear cases on Costco, BJ's and Wal-Mart, see the video below.


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