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Lex is a premium daily commentary service from the Financial Times. It helps readers make better investment decisions by highlighting key emerging risks and opportunities.

There is trouble at the mall. Thursday morning, Abercrombie & Fitch reported a 10-per-cent drop in comparable sales. Next door at rival American Eagle Outfitters Inc. they fell 7 per cent. In the background, big anchor stores like J.C. Penney Co. Inc. and Sears Holdings Corp. continue to struggle mightily.

Some stores are going strong (Urban Outfitters reported a 9-per-cent jump in comparable sales), but consumers with cash to spend are being very discriminating. They are spending for sturdy home improvements (comparative stores sales at Home Depot Inc. and Lowe's Cos. Inc. were up 11 per cent and 10 per cent, respectively) rather than flimsy apparel. In addition to weakness at speciality retailers, same-store sales fell at Macy's Inc. department stores. And where they like to buy apparel is changing. Off-price retailers like TJX Cos. Inc. (sales up 4 per last quarter, by the way) and Ross Stores Inc., which sell a number of brands, have been growing fast for years now.

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Might the mall store model be in gradual decline? The companies that are on the upswing (Urban Outfitters, J. Crew, Gap) have vibrant online businesses. And according to ShopperTrak, traffic at enclosed malls in the U.S. this year is running about flat to 2012 levels. In spite of a jump right after the financial crisis, mall traffic has been declining since 2000. That is not to say that mass bulldozing of malls is imminent (there was a staggering 8.5 billion visits in 2012) but that the chasm between winners and losers is set to widen.

Stock valuations reflect these patterns. Shares of American Eagle and Abercrombie (the latter fell 20 per cent Thursday) trade at 14 and 11 times forward earnings versus Urban Outfitters at 21 times and TJX at 18. Yet it is the stocks with the low earnings multiples that look expensive. Shoppers are being picky about what, where and how they buy. Investors should do the same.

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