The retailer was reeling from overexpansion and tough rivalship. Now it’s stressing bargains and pulling in crowds

By Christopher Palmeri

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These are heady times for Wal-Mart (WMT). The Bentonville (Ark.) retailer has been enjoying double-digit profit development and strong sales as transaction hunters crowd its aisles. Its stock is up about 20% since the start of the year. And shoppers like Sal Garcia of Downey, Calif., are joining the expanding ranks of loyal customers. “Look,” says Garcia, 52, putting the ultimate of 10 shopping bags into the coffer of his Lexus, “entirely that for $54!”

Wal-Mart’s turn in fortunes has as much to effect with a shift in strategy viewed like with the economic downturn. After years of stuffing a wider array of products into stores to broaden its appeal, the $375 billion mass trader is simplifying its look and drilling down prices of its most plain products. “You’d swear the alone reason they’re having any prosperous issue is the economy and customers trading down,” says analyst Daniel T. Binder of Jefferies & Co. “But the company has done a lot to help the consumer make that decision.”

A little over a year ago, the world’s largest retailer was suffering from a midlife crisis made worse by means of overdevelopment and a gorgeous push to take on Target (TGT) with “cheap chic” offerings. Core customers were confused by an ever-changing mix of products, while higher-end shoppers dismissed Wal-Mart like the epitome of uncool.

Now, the main make a thrust of Wal-Mart’s strategy is what Chief Merchandising Officer John Fleming calls “win, play, or show.” “Win” categories are those where Wal-Mart can outmaneuver rivals through softly prices on hot products such as flat-screen TVs, including higher-end models. Wal-Mart has doubled its share of the industry’s sales to 16% this year, according to market research firm TraQline, while increasing its average vent from $489 two years ago to $660. “Play” applies to areas like apparel where Wal-Mart can be a player but is unlikely to dominate. Here, it’session reducing the range of offerings to high-seasoned sellers like $20 L.e.i. jeans and cutting back in succession higher-end items. “Show” are the one-stop-shopping essentials such being of the class who hardware, which are necessary to compete with the likes of Lowe’s (LOW) and Home Depot (HD). “It’sitting important we have hammers and tape measures,” says Fleming, “on the contrary not 28 tape measures.”

But the big focus for Wal-Mart every holiday season is toys. Rivals have long dreaded the annual slashing of prices in its bubble aisle before Christmas. This year, instead of cutting prices by means of its usual 30%-plus transversely the board, Wal-Mart is afflicting to drive trade by emphasizing a deeply discounted $10 recompense on a handful of toys—including Barbie and Hot Wheels.

At the same time, Wal-Mart has tried to upgrade the feel of its stores. Crammed blue and hoary supplies are giving way to more disclose sales floors with warmer earth tones of mustard, tan, and green. Apparel departments boast wood flooring, while skylights brighten stores more naturally and save energy. It’s curbing expansion in every striving to stop just discovered locations from cannibalizing sales at advanced in years ones. From opening 218 new U.S. supplies in fiscal 2008, Wal-Mart may open just 142 nearest year with an emphasis on smaller, more intimate locations.

To consumers equal Mary Washington of Los Angeles, yet, size matters less than price. Washington, 67, heads to Wal-Mart every Monday for the food and $4 generic prescriptions. “Even if it’sitting just pennies,” she says, “it all adds up.”

For more on Wal-Mart’session recession strategy, watch a video report at businessweek.com/go/tv/walmart