The retail industry can be extremely competitive. It’s easy for rivals to swoop in and copy the strategies of a successful retailer — just think of what Wal-Mart (NYSE: WMT) did to K-Mart by copying its low-cost approach and adding sophisticated information technology and logistics savvy to lower its costs beyond what many rivals could even imagine. Yet despite the cut-throat competition, a number of companies have managed to foster sustainable strategies to keep loyal customers and fend off competitors, regardless of whether they operate stores or have online presences.

Below are three such firms. They are worth a close look right now, because negative near-term stock market sentiment has pushed their share prices and valuations to very appealing levels. If the unemployment rate begins to decrease even slightly and consumer confidence increases in the coming months, then expect to see improving numbers in coming quarters, giving share prices a boost.   

1. Best Buy
Retail Focus: Big-box electronics
Market Cap.: $9 billion
P/E: 7
Dividend Yield: 2.7%

Too say electronics retailing giant Best Buy (NYSE: BBY) is unloved by investors these days is a serious understatement. The stock has been bouncing off its low point during the past year and its price-to-earnings (P/E) ratio is less than half its five-year average of nearly 17. Currently, fears abound that consumers have grown weary of buying the latest technological gadgets, and when they do so, they are increasingly heading online to make their purchases.

#-ad_banner-#Some of these fears may be warranted, but they are also fully priced into Best Buy’s share price right now. It is true that past drivers of Best Buy’s sales growth have stalled out. This includes a huge wave of flat-panel television demand, and DVD players and discs to watch on these new TVs. However, Best Buy sells a huge array of merchandise and can easily stock popular items, including tablet computers and smartphones. And while some consumers prefer to buy these goods through the Internet, many — especially older consumers — will need to have a store clerk explain how to use the latest gadgets.

Best Buy is also ada online world. The company recently began listing its own goods along with those sold at competing retailers on its website. It is also focused on faster-growing international growth, which accounted for almost 30% of total first quarter sales of $11.3 billion , an increase if 8% from last year’s first quarter.

Despite near-term headwinds in the United States, Best Buy is extremely profitable and should be able to leverage single-digit future sales growth into double-digit profit growth.  I see this through a combination of harvesting stable U.S. profits into faster-growing overseas markets. I estimate the stock can reach $40 within a few years, which equates to a very reasonable price to earnings (P/E) of 11.5 and 65% potential upside. It also sports a decent dividend yield of close to 3%. 

2. Kohl’s
Retail Focus: Department Stores
Market Cap: $12 billion
P/E: 9.7
Dividend Yield: 2.3%

A decade ago, Kohl’s (NYSE: KSS) reported $7.5 billion in sales. This year, they are projected to reach nearly $20 billion, a nearly three-fold increase over a 10-year period. This impressive historical track record is far from over — this year, Kohl’s plans to open 31 new stores and remodel 15 of its 1,100 existing stores.

Kohl’s specializes in opening stores in off-mall locations in newly developed strip malls. This keeps it away from the clutches of mall-based rivals, such as Macy’s (NYSE: M). Additionally, it focuses on codeveloping clothing lines with sought-after fashion designers. An agreement announced on Sept. 8 rolled out a line developed by singer-actress Jennifer Lopez and another deal is on the way to sell higher-end Rock and Republic Jeans. This private-label merchandise accounts for nearly half of Kohl’s overall sales which is a good thing because, besides being more profitable, it helps the retailer further differentiate its products from the competition.

Kohl’s boasts net profit margins of nearly 6%, which is well ahead of the retailing industry average of about 1.5%. This leaves room to support a solid 2.3% dividend yield (also ahead of the industry average of 1.4%) and stock buybacks. Last year, management repurchased more than $1 billion of its own stock, which was more than 8% of its current market capitalization.

Over the long haul, Kohl’s is likely to continue delivering double-digit profit growth. I believe it can achieve these profit goals by growing new stores between 2% and 3%, improving sales in existing stores by a similar amount, and improving profitability through selling higher-margin private label goods and keeping a close eye on costs.

Kohl’s forward P/E of about 10 is well below its five-year average of 22. I don’t expect it to return to these highs, but a multiple of 13 or 14 is easily justified and means the stock can rise at least 50% from current levels within a year. This potential upside also factors in expected earnings growth, which is currently pegged at 23% for projected profits of $4.52 per share for fiscal 2011. 

3. Staples
Retail Focus: Office Supplies
Market Cap: $10 billion
P/E: 10
Dividend Yield: 2.9%

Staples (Nasdaq: SPLS) took a major stock hit after it the market deemed its first quarter earnings results disappointing in May. It reported $0.28 per diluted share in earnings, which were dead flat from last year. Analysts still expect full-year sales growth of 3%, from $24.5 billion to more than $25 billion, and earnings of $1.40 per share, or almost 14% ahead of last year’s $1.23 per share.

Most investors remain focused on Staples’ retail stores in the United States. They are the most visible part of the company’s operations, but only accounted for 35% of the $6.2 billion in first quarter sales. About 42% of sales stem from delivering office supplies directly to businesses, while international sales, which consists of both stores and delivery, made up 23% of sales. These are much more stable businesses. The delivery unit is very profitable, in particular. During the quarter, it made up 63% of the company’s $237 million in total profits.

At a current forward P/E of 10, Staples is also trading well below its five-year average of nearly 23. A low-earnings multiple, decent profit growth and above-average dividend yield of 2.9% make the stock a good potential buy. I see the stock eventually gaining more than 40% and reaching nearly $20 per share as the P/E expands closer to 14 and earnings grow in the double digits for the next couple of years.  This should be easily achievable, because management has grown sales close to 9% annually for a decade, with cost efficiencies pushing annual potential profit growth above 10%.    

Risk to Consider: Competition is always intense in the retailing industry, so it will be important to keep an eye on how archrivals are performing. A dip back into a severe recession could also dampen the prospects for these firms, though I believe they will still remain leaders even in a challenging environment.

Action to Take –> These three retailers are leaders in their respective retailing niches and have stable, solid growth outlooks. From an investment standpoint, these firms have remained firmly profitable through what has been a tough economic environment and trade at earnings valuations that I think largely ignores their operating consistency and ability to expand profits at double-digit levels over the long haul. Any one of these stocks is a good candidate to consider for your portfolio.