(FORTUNE Magazine) – Investors have been cool toward most big retail firms since mid-1984, and the standoffish attitude understandably persists. In a disappointing Christmas season, most stores were caught with inventories mounting to the rafters. Sales have since picked up, but the shares of most big department store chains and nationwide mass merchandisers are selling well below their 12-month peaks. One shining exception is a group of fast-growing regional outfits that have caught the eye of Wall Street analysts. Most are discounters, in some cases proudly catering to a down-scale clientele when the vogue among most retailers is to climb the income ladder. All have low overhead, low wage costs, and tight inventory controls. Most have been adding stores at a breathtaking pace --and went on posting steep earnings-per-share increases last year when . many of the national chains had to settle for feeble gains. Regional retailers' stocks rolled ahead through most of 1984 and into 1985, and many analysts expect them to outperform the market for the rest of the year. Family Dollar Stores, a 25-year-old mass merchandiser headquartered in Charlotte, North Carolina, has the most fans on Wall Street. Its stores, in rural and urban areas throughout the Southeast, cater to lowincome blue-collar workers. Most of the merchandise is priced below $16; anything over that must be approved by the company's executive committee. Family Dollar has expanded from 300 outlets in 1978 to around 900 at present, with the growth financed entirely from internally generated funds. Despite the low prices, the chain is immensely profitable. Bernard Sosnick, a security analyst at L.F. Rothschild Unterberg Towbin, considers Family Dollar ''one of the best-managed companies we have encountered.'' Carol Robichaud of Blackstock & Co. in Jacksonville, Florida, notes that Family Dollar's return on shareholders' equity has averaged 24% over the past five years, and earnings per share have advanced at a 25%-a-year tempo. Robichaud expects another 21% rise in the fiscal year ending next August, to $1.50 a share, and strongly recommends the stock. Wal-Mart Stores, a phenomenally successful discount chain based in Bentonville, Arkansas, has been a bonanza for investors over the past decade. Samuel Talbot, president of Growth Stock Services, a Boston investment advisory firm, began buying the stock in 1975, and his initial holding has grown 47-fold in market value. Despite Wal-Mart's lofty price-earnings multiple, Talbot regards the stock as ''cheap, because the company hasn't missed earnings gains in ten years.'' A major reason for the chain's success, he says, is its policy of decentralized decision-making. Michael Smith, who heads the underwriting department at Stephens Inc. in Little Rock, Arkansas, agrees that Wal-Mart deserves its high P/E. Smith estimates that Wal-Mart's earnings per share will increase 31%, to $2.50, in the fiscal year ending January 1986. Walter Loeb, a retail analyst at Morgan Stanley, expects that growth to go right on--at a compound annual rate of 30% over the next five years. Another Arkansas outfit winning Wall Street acclaim is Dillard Department Stores of Little Rock, the only retailer in the group catering to middle- and upper-income consumers. In 1984 it picked up three department store firms through rapid-fire acquisitions: Stix Baer & Fuller of St. Louis; Diamond, with stores in Arizona and Nevada; and John A. Brown of Oklahoma. When Dillard took over, it slashed overhead and stepped up advertising to boost sales. Dillard's earnings jumped 45% in 1984, and its stock has skyrocketed 60% in the past six months to a new high. But Loeb of Morgan Stanley, for one, says it's still a bargain at 11 times the $4.60 he's projecting for 1985 earnings per share. That figure will be up another 28% in 1986, he adds. Rhodes, a moderate-priced furniture chain based in Atlanta, has an important demographic trend going for it: more and more baby-boomers are reaching the furniture-buying age. Kenneth Smith, an analyst at Johnson Lane Space Smith in Atlanta, thinks it's a plus that Rhodes operates in the Southeast, where personal income has been growing far more rapidly than in the rest of the country. The chain had been floundering for a decade when Atlantic American Corp., an Atlanta insurance company, came along in 1982 and snapped up a controlling interest. R. Craig Murray took over as chairman, and after his first year at the helm profits jumped 103%. ''Rhodes has gotten back on the expansion trail,'' says Craig Weichmann of the Memphis brokerage firm Morgan Keegan. Weichmann is forecasting a 20% increase in earnings per share, to $1.75, in the current fiscal year.

Among the analysts' favorite retailers are a few that have lately taken hard knocks. In February the top executives of Rose's Stores, a 197-outlet discount chain operating throughout the Southeast, told members of the investment community to lower their earnings estimates for the fourth quarter of 1984. Reason: the company's ''shrinkage'' numbers--reflecting inventory losses from shoplifting, employee pilfering, and poor record keeping--would be up 40% from the preceding year. The stock dived $2.50 the day of the announcement, and some analysts crossed Rose's off their buy lists. But others remain sanguine. The downturn in earnings is only temporary, says Jack Seibald of Oppenheimer & Co., who foresees annual earnings-per-share increases of 18% to 20% over the next five years.

Heck's, which operates 125 discount department stores in nine Midwestern and Mid-Atlantic states from its base in Nitro, West Virginia, expects to announce a loss for last year. Early in 1984 a new management team launched an ambitious renovation program for all stores, and the heavy costs savaged & profits. Some analysts have pulled their buy recommendations, but others, including Guy Ford of Investment Corp. of Virginia, think Heck's is still a good bet. ''They took the big bite in earnings all at once,'' says Ford. He estimates that earnings per share will shoot up this year to $1.25 and will reach $1.60 to $2 in 1986.

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