Editor's note: The following is a recap of a "Mad Money" episode that originally aired on May 15, 2006.
In a shop-till-you-drop episode of "Mad Money," Jim Cramer offered his 10 best-of-breed retailers.
"This is a game you understand. This is a game you want to play," said Cramer, noting that the first instinct of many new investors is to buy a retail stock.
He gave viewers a list of his top 10 companies they can use to orient themselves in the retail jungle, but warned that these are not names to rush out and buy now.
These are stocks to watch, he said. And when they go down, you have a chance to "catch them and ride them back up higher."
He chose these companies for a variety of reasons, including the fact that some of these companies are "very special regional-to-national stories," which are the fast-growth plays.
Some are so well run you can't help but pick them up, some have new concepts and some are so consistent that they must be bought because "consistency matters in the retail game," he said.
These companies are generally more expensive than their peers, but, Cramer said, they should also make you more money. "You pay up for consistency," he said. You pay up so you know it's worth it to buy more when the stock goes down because these are companies you can count on to ultimately win.
The No. 1 Best Buy
His first retail superstar was
, "the best hard-goods retailer in the United States ... make that the world," said Cramer.
He said that the company is the dominant name in big-screen-television sales, that its electronics retail dominance is virtually unchallenged and that it sells more CDs and DVDs than most music and video stores.
The company has a sizeable opportunity to augment its already awesome hold over technology and music, he said, particularly with a new crop of iPod products on the way from
If Best Buy stops being No. 1, he said then it's time to get out because he only likes this stock as long as it's cheap and still at the top of the heap.
Lowe's High Bar
While he likes Best Buy because it's the king of electronics retail, Cramer likes the second-runner-up in hardware stores,
The "undisputed king of hardware stores" is
, he said. But in this case, being No. 2 gives Lowe's a growth advantage.
There is no fast-growing runner-up barking at Best Buy's heels, Cramer said. But Lowe's has more space to grow and "growth is really the way these companies get valued by the institutional guys" who are largely responsible for setting prices.
"Shrug off the tyrannical yoke of the 'Home Despot,'" he said, because Lowe's growth will make it the hardware store to buy.
Low-Costco, High-Talent Management
"I am convinced that
is the cheapest and the best-run of the big warehouse stores," Cramer said, referring to the No. 3 company on his list of "retail royalty."
is the word's largest retailer, but he believes that Costco is better run and will have more opportunities to grow its number of stores and the types of products it sells.
Costco is branching out into electronics, which he said should make it a lot of money because its members never need to worry about warranties. And it already sells baked goods, books and art.
It has a "reverse chic thing going on" that Wal-Mart probably won't have, he added, referring to the fact that the Costco parking lot is filled with luxury cars and the stores have well-heeled customers. It may be a discount warehouse, but wealthy people love it, he said.
Moreover, Costco pays its employees well, which flies in the face of conventional wisdom that retailers must pay workers slave wages to make money.
A Wearhouse Buy
was the No. 4 company on Cramer's list, and he said that it's a company that investors need to take more seriously.
The retailer continues to roll out new, innovative concepts to keep the company growing, he said, referring to its Moores and K&G brands.
Even though it's managed like a mom-and-pop business, Men's Wearhouse "may be the most creative of all the national chains" that Cramer follows.
Federated's High-End Story
Moving on to high-end retail, Cramer said that he would take a look at
Federated Department Stores
, which owns names including Macy's, Bloomingdale's, Filene's and Lord & Taylor.
The company got better-looking after it bought the underperforming May Department Stores, and now it has lots of capacity and the leeway to shut down the stores that are doing poorly and keep the winners.
The May's acquisition gave Federated tons of clout with suppliers, beaten out only by Wal-Mart, and Cramer said that the company's management is good.
"The real story with Federated is high end," he said, noting that consumers want to buy upscale merchandise. Plus, the company has the opportunity to turn the middle-of-the-road stores that it acquired from May into higher-end Macy's or Bloomingdales.
Making Sears of Nonbelievers
Action Alerts PLUS charitable trust portfolio, and it is his No. 6 pick for best-of-breed retailers.
"You can't treat Sears just like any other retailer," he said, and it's because the company is in the hands of chief executive Eddie Lampert," a man who began working on Wall Street at the age of 14.
Forget anything you've heard about his lack of merchandising talent, Cramer said, because all Lampert cares about is making the most money possible.
Sears is more of a real estate story than a retail story, but he believes this will change and that the same-store-sales growth will take Wall Street by surprise.
In the meantime, Sears is over-stored in the United States by roughly 1,000 locations, Cramer said, and it can get rid of several of these locations as it does more business in Canada. Plus, he believes that Lampert has stabilized the recently acquired Kmart.
Wagering With Penney's
Even though it's been ages since he's set foot into one of its stores, Cramer said that he likes
because it does the only thing that matters for a mature retail company. Its stock consistently moves higher.
The company just added Sephora cosmetics counters to its stores, providing customers with a one-stop shop for all of their beauty and makeup needs, more evidence that management knows what it's doing, Cramer said.
The stores have the brands most consumers want and consistently delivers. If the company drops the ball, it's very likely that it's a one-off incident and that could be a buying opportunity.
Coldwater Creek Runs Hot
Cramer's his No. 8 pick,
, however, is not about consistency, he said.
"It's a regional-to-national story with a ton of momentum," he said, and that growth is what makes it so attractive.
Coldwater began as a direct-sales company, but now it has 175 stores, most of which are concentrated in the Northeast.
was Cramer's No. 9 retailer because, he said, it has managed to do the impossible.
"This is a company that, simply put, can do the impossible. It can charge $5 for a cup of coffee and get away with it," he said.
But he wouldn't "pay Starbucks prices for this stock," suggesting to viewers that they only buy it on weakness.
The company succeeds where others fail because it creates ambience, Cramer said, a feat that he believes could be attributable to its relatively happy workforce. Starbucks pays its employees a decent wage, and their better attitude encourages people to come back to its stores, he said.
The company also aspires to be a big CD retailer, which he said it can pull off because "this place be yuppie heaven."
And even though it is basically done growing in America, he said, this is not cause for worry. Usually when a retailer stops growing in the U.S., Wall Street turns its back because it doesn't care about international growth, he said. That is, unless the growth happens to be in China. And this is where Starbucks is growing like mad.
Retail Bank Shot
Cramer's final top retailer wasn't a traditional retail company at all, but rather a bank -- Commerce Bancorp, which he owns for
Action Alerts PLUS.
CEO Vernon Hill runs the bank like a retailer, going so far as to call the branches "stores," Cramer said. Plus, he measures the performance of each store on a same-store-sales basis, just like a traditional retail play.
Commerce has survived the good and bad times, as well as really high interest rates, Cramer said, and he believes that the company is "ready to rock with earnings."
Moreover, he said that Commerce is a coiled spring that will explode the minute the
eases up on its latest monetary-tightening campaign.
Want more Cramer? Check out Jim's rules and commandments for investing from his popular book by
At the time of publication, Cramer was long Sears Holdings.
Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for TheStreet.com, Inc., and CNBC, and a director and co-founder of TheStreet.com. All opinions expressed by Mr. Cramer on Mad Money are his own and do not reflect the opinions of TheStreet.com or its affiliates, or CNBC, NBC UNIVERSAL or their parent company or affiliates. Mr. Cramer's opinions are based upon information he considers to be reliable, but neither TheStreet.com, nor CNBC, nor either of their affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Mr. Cramer's statements are based on his opinions at the time statements are made, and are subject to change without notice. No part of Mr. Cramer's compensation from CNBC or TheStreet.com is related to the specific opinions expressed by him on "Mad Money."
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