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Distressed Denim: Savior of a Distressed Economy? (Updated)

Stocks in this article: WMT ANF AEO PSUN GES BKE GPS

(Gap's new denim line added.)

NEW YORK ( TheStreet) -- Who would have thought that the worn-in jean would be the key to this year's back-to-school spending? Most consumers, after all, have more than a few pairs of jeans hanging around in their closet.

But apparently you can never have too much of a good thing.

Although apparel spending for the important retail holiday is expected to receive a failing grade -- down 12.7% according to the National Retail Federation -- denim has been outperforming almost every other category in the fashion sector.

Jeans sales were up 1% to $16.3 million in June from the year prior, and grew 4% from 2007 levels, according to the NPD Group. In comparison, overall apparel spending in June slumped 5% to $194.2 million from 2008.

Indeed, across the board, retailers are updating their selection with popular styles like distressed denim, super-skinny jeans and the boyfriend fit. And who does denim best could well determine who wins this back-to-school season.

Gap (GPS), which has been struggling to bring back customers after several years of merchandise misses, is relaunching its "1969" denim line.

Denim was once a key category for the specialty retailer, making up 20% to 30% of sales. But the iconic Gap jean no longer has the same cachet among shoppers.

The relaunched jean is said to be better-fitting and of premium quality, but most pairs cost between $54 and $59, significantly lower than the $200 or more for true premium denim.

A glance through store offerings reveals that Abercrombie & Fitch (ANF) is clearly the leader in its selection of destroyed denim. While the retailer has been struggling, posting double-digit same-store sales declines for several months, according to Needham & Co. analyst Christine Chen, its jeans are the best looking in the space.

"Distressed and destroyed denim is popular because right now it's not cool to look like you're spending a lot of money," Chen said. "These styles are not a rich look."

For the price-conscious shopper -- and for a limited time -- Abercrombie is also offering more basic denim styles at $59.50.

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