To hear itfrom Wal-Mart (NYSE:WMT), or from the market pundits, you'd think that the high price of gas killed all the retail stars this year. Not so, dear Fools. For as teeny-bop clothier Deb Shops (NASDAQ:DEBS) proved this morning, a well-run retailer can run circles around its flailing competition, $67-a-barrel oil or no.

But as Deb Shops reported its results for the second quarter and first half of 2005, the crowd went mild. So far, the stock price has risen just under 2%, but Deb Shops' news may well justify that price change. Sales gains rose only modestly in both periods, up just 4.4% year on year for the second quarter and 5.1% year to date. But just as we saw last yearat BJ's (NYSE:BJ), Men's Wearhouse (NYSE:MW), and yes, at Deb Shops itself, retailers are a strange kind of capitalist beast. They sell huge quantities of goods, generally at "Size 2" margins -- so the most minuscule of increases in those margins can translate into enormous gains in earnings. That was once again the case at Deb Shops. By growing its net margins from 6.4% last year to 8.7% in Q2, and 3.8% to 6.1% year to date, the company translated its slim gains in sales into terrific increases in profits -- up 35% and 65% on a diluted-share basis for the respective periods.

Turning to the balance sheet, Deb Shops declared that at quarter's end, it had the equivalent of nearly $188.7 million in cash and securities in its treasure chest. That was up nicely from last year's $168.2 million. And while you should expect to see that cash level fall come Q3 reporting time, never fear: Deb Shops paid out a special $6.125-per-share dividend after the close of Q2. That's where the money went/will go, and so, by the time Q3 2005 results come out, we could well see a $90 million decline in the cash balance, give or take.

And speaking of changes on the balance sheet, when examining the decrease in cash next quarter, potential Deb Shops investors should also spend a moment examining the inventory line. There we found the only real bit of bad news for Deb Shops this quarter: Its inventories rose year over year at roughly twice the speed of sales growth, 9.2%. It's a small quibble, to be sure, but with everything else going so right at Deb Shops, we'd like to see those inventory levels converge closer to sales growth come November.

For more Foolish views on this cash-rich waif of the retail clothing world, read:

Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.