Image: Santa Claus © Corbis

Don't let the huge Thanksgiving holiday shopping results fool you.

Sure, consumers shelled out a record $52.4 billion, up 16% from last year. But don't take that as a sign that the Christmas season will be bountiful for all.

Here's why.

The encouraging numbers disguise a troubling trend in our economy that isn't letting up. There's a relentless hollowing-out of the middle class that's leaving most consumers at one extreme or the other, in terms of spending power.

In short: This will be a Christmas of haves and have-nots.

Wealthy consumers with money to burn will be snapping up pricey gifts at stores like Nordstrom (JWN), Saks (SKS) and Coach (COH), which should all have a great holiday shopping season. They'll buy the fine jewelry highlighted in the famed Tiffany (TIF) Christmas window display in Manhattan, which this year features a merry-go-round theme -- complete with zebras and giraffes.

That's fitting, because the growing number of consumers getting bounced out of the middle class by a merry-go-round of monthly bills will be perusing the bargain aisles for toys and clothes for their kids this year. This means stores like Dollar Tree (DLTR), Dollar General (DG) and Family Dollar Stores (FDO) will also do well.

Those retailers catering to the middle -- say, J.C. Penney (JCP), Kohl's (KSS) and even Wal-Mart Stores (WMT) -- may find the season a struggle.

Blame it on the ongoing slump of the U.S middle class.

"The thinning of the middle class is clearly moving forward," says Marshal Cohen, the chief industry analyst with the NPD Group, a market research firm. That view is supported by income numbers we'll get to in a moment. "The luxury retailers are going to have a decent holiday season. The lower-end shopper is going to run out of money very quickly. The consumer hasn't gotten much help from the economy."

In fact, we've seen this trend in the retail numbers all year, with the high end flourishing and the mass market shifting down. There's no reason to expect any change for Christmas. Let's look at the low end first.

A dollar-store Christmas

Tellingly, not even Wal-Mart is cheap enough anymore for the new budget-conscious consumer. Here's what I mean. Sales at Wal-Mart, once the haven for consumers looking for the lowest prices, were in decline most of this year. They only recently showed any growth at all.

In contrast, sales at low-end stores with "dollar" in their names are booming, with advances of 5% to 6% through most of the year. (That's based on sales at stores open more than a year, the best measure because it strips out the effects of store openings and closings.)

The dollar stores themselves attribute their growth in part to trading down by struggling middle-income consumers. "Our core customer is extremely stressed right now," Family Dollar Stores CEO Howard Levine said in the company's most-recent conference call. "What we've seen is more trade down from that more middle-ish-income customer, which is creating a lot of new customers coming into our stores."

You hear the same story from Dollar Tree. With unemployment stubbornly high, "we have found new customers," CEO Bob Sasser said in his company's most recent conference call. "They are trying to balance their budget. They're looking to us to help them as they search for the things they need every day."

Image: Michael Brush

Michael Brush

The idea of Christmas shopping at a dollar store might sound pretty sad. But these stores are great merchandisers. No, you won't find an iPad. But you'll find consumers shopping for a wide selection of stuff to save up money for a pricier gift like an iPad, says Susan Yashinsky of Sphere Trending, which analyzes consumer trends.

Here are some of the things consumers might be snatching up as they boost the dollar shops' impressive sales growth:

  • Regular gifts. These shops will have plenty to offer gift shoppers. Dollar General has broad array of home electronics, toys, kitchen items, home furnishings and beauty products. Dollar Tree has toys, stuffed animals, art supplies, party supplies and candles. Family Dollar offers apparel, home décor and toys. The sweet spot will likely be toys. "Toys is where they will really compete with the mass merchandisers," says Ali Lipson of Mintel, a consumer research firm.
  • Decorations, wrapping paper and party supplies. One reason dollar stores are so successful is that they are nimble at changing displays to catch seasonal sales trends. Execution is everything in retail, and these stores excel at it, says Howard Davidowitz of Davidowitz & Associates, a retail consulting and investment banking firm. "Decorations is a huge business during the holiday time, and they're in it to win it," agrees Cohen.
  • Stocking stuffers. Dollar stores are counting on budget-conscious consumers to turn to them for inexpensive knickknacks like candies, small toys and other stuff.

Christmas at the high end

Just like stores at the low end, high-end retailers are seeing boom times -- but even more so. That's basically because the rich are getting richer a lot faster than the middle class is getting poorer.

Tiffany reported an impressive 17% gain in sales for the third quarter. As a sign of just how much money the rich have to throw around, just like last quarter sales of anything that cost more than $250 were particularly strong, with "notable increases at the highest price points." (Have a look at Tiffany gifts priced at more than $5,000 here.)

Nordstrom saw sales advance 8% in the third quarter, as designer handbags, shoes and dresses sold briskly. Saks reported sales gains of 10.3% for the first nine months the year with strength in women's shoes, handbags and jewelry, and men's apparel, shoes, and accessories. And Coach, which sells handbags, reported sales gains of 9% in the most recent quarter.

The hole in the middle

Several major trends explain the rich-man, poor-man Christmas that experts foresee.

First, of course, the sluggish economy has made it hard for people to find good jobs. It has also made it easy for companies to cut pay or withhold raises, an effective a pay cut with inflation running at about 2% a year.

Next, the housing-market slump has hammered middle-class families, who typically have most of their wealth in their homes. At the end of March, Americans had $6.1 trillion in home equity, defined as the value of the house minus the mortgage. That's half of what we had in 2006, says the Federal Reserve.

Grandma and Grandpa have a harder time buying gifts, too, with many of the elderly hit by higher prices for out-of-pocket medical expenses and, well, everything else.

All of these negative trends have hit the middle class. Meanwhile, it's clear why the rich are doing better and better. The stock market has rallied big time since the recession, despite recent weakness, and the rich are far more likely to own substantial amounts of stock. Corporate profits are rising sharply, often because of cost-cutting linked to job cuts. This means that pay is soaring for those whose incomes are linked to profits, like executives who get bonuses and stock options.

Here are some numbers that paint the picture:

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  • From 1998 to 2010, an average middle-class family saw its income decline by more than $2,500, or about $200 a month, according to a recent Census Bureau study. At the high end, households in the top 10% saw their annual income rise by an average of $3,600. And the average annual income of households at the bottom fell by $1,500.
  • Between 1993 and 2008, the top 1% of families raked in more than half the overall gains in income, according to economics professor Emmanuel Saez of the University of California, Berkeley.
  • The portion of families that live in middle-income neighborhoods is down sharply since 1970, according to a study by Stanford University. In 2007, the most recent year examined by the study, 44% of families lived in middle-income neighborhoods, down from 65% in 1970. And a third of families lived in either affluent or poor neighborhoods, up from 15% in 1970. In other words, fewer people are in the middle -- a trend that almost certainly has continued.
  • The Gini index gauges income inequality on a scale from zero, when everyone earns the same amount, to one, when one person earns everything. In 2009, the Gini index was 20% higher than 40 years before, at 0.468, according to the U.S. Census Bureau.
  • Anecdotally, stores catering to price-minded consumers confirm all of this. For a lot of those customers, "the recession hasn't ended," says Dollar General CEO Rick Dreiling. "The economy is creating an entirely new customer. It reminds me very much of the 1970s when the warehouse stores came up. I ran a warehouse store in the 1970s. And I would remember people standing in line with a fur coat trying to save a few dollars."

Sound familiar?


Rich man, poor man stocks

The trends I've outlined here have shaped retail stock performance as well.

A recent study by the management consulting company Accenture found that in the three years leading up to September, high-end and low-end retailers rewarded shareholders with total returns (stock gains plus dividends) of 80% to 90%, compared with 5% declines for retailers in the middle.

The big-picture economic trends should continue to bring more of the same. "It's impossible to believe that the American standard of living in the future can ever be what it has been," says Davidowitz. "We all have to pay higher taxes, and we all have to have less government services, and that means living standards can never be the same. If living standards can never be the same, stores like Family Dollar, and Dollar General have a very bright future."

Plus these low-end stores have done a great job of holding on to middle-income customers who have been trading down, says Cohen. They're doing this by remodeling, stocking a broader array of merchandise and offering smaller package sizes that let even budget-constrained consumers feel like they're on a shopping spree, he says.

They're also doing a good job of managing costs despite rising commodity prices, and expanding into food, which brings more customers into their stores, says Keri Spanbauer who follows retailers for Thrivent Asset Management. And all three of the dollar stores are launching new stores at a rapid pace.

These trends are all bullish, but a word of caution for new investors. Unlike the stuff they sell, the dollar-store stocks aren't cheap, and that makes them more vulnerable to risks. "I do like the dollar formats, but you have to be a little careful with valuation," says David Abella, who manages the Rochdale Dividend & Income (RIMHX) fund, which has outperformed competing funds and the S&P 500 nicely over the past five years. "The low-end retailers are pretty fully priced right now," agrees Thomas Vandeventer, portfolio manager of the Tocqueville Opportunity (TOPPX) fund, which also has outperformed during the past five years.

A big risk: increasing competition in the space, especially as Wal-Mart gets back in the extreme bargain game with smaller-format stores, says Deutsche Bank analyst Charles Grom, who has a "hold" rating on Family Dollar Stores for this reason.

The high-end retailers should keep doing well as income disparities continue to widen, but caution is in order for them as well, because these stocks look pricey, too. Nordstrom, though, stands out as perhaps the best potential buy in the space, with a four-star rating at Morningstar. (The highest possible is five stars; Saks and Coach get three.)

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Like bargain shoppers, Morningstar pays close attention to value with stocks, and it doesn't have a problem with where Nordstrom is trading.

Companies mentioned in this article include:  Nordstrom (JWN), Saks (SKS) and Coach (COH).

At the time of publication, Michael Brush did not own or control shares of any stock or fund mentioned in this column.

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.