Consumers Bite Retail's Top Dogs

Stocks of retail discounters have seemed like good defensive investments in troubled economic times. But even for the strongest names, the current recession is no walk in the park. Both Wal-Mart Stores (NYSE:WMT) and Target (NYSE:TGT) recently announced plans to scale back and restrategize as they batten down the hatches.

Last week, Target said it would drastically slow its new store openings in the U.S. It intends to open less than 10 stores in 2010, compared to 60 last year, and a previous average of roughly 100 per year. Instead, Target will spend $1 billion to remodel some existing stores for a greater emphasis on groceries. The cheap chic that once drew shoppers to Target seems to be giving way to more bare-bones necessities.

Though Target stores may have temporarily popped up for the holidays, on the whole, the retailer's standing down for the time being. However, it is planning on some international expansion, and trying out smaller stores in urban locales, in the next five to 10 years. In the U.S., the retailer thinks it can still expand its 1,700-odd store footprint to nearly 5,000 over the long term.

Meanwhile, Wal-Mart's cutting more than 11,000 jobs at its Sam's Club locations, representing about 10% of the unit's workforce. Among other plans, it's hiring an outside firm, Shopper Events, to run its product demonstrations. According to Reuters, the company's positioning this move as an "investment in the in-club experience," not cost-cutting. The company also said that former workers could apply for the positions with Shopper Events. Still, the outsourcing is a sign of the retail world's very difficult competitive environment. (It's also not the first inkling that Sam's Club needs some tweaks.)

Big-box discounters like Wal-Mart, Target, Costco (NASDAQ:COST), and Best Buy (NYSE:BBY) must not only compete against one another, but also craft effective strategies to combat sclerotic consumer spending. Prior to the economic crisis, breakneck expansion seemed to make sense for retailers, as consumers spent hand over fist, often using their homes as ATMs or paying on credit. Now, many retailers may have to face the difficult reality that they overexpanded in an artificially robust economic environment.

Stocks in the discounters named above still strike me as safer investments than retail stocks such as middle-of-the-road Macy's (NYSE:M) or beleaguered Borders (NYSE:BGP). But we can't gloss over the retail sector's current challenges. Investors need to keep an eye on how well their retail companies are strategizing in these troubled times; not all will survive, and even the likelier winners should expect a trying year ahead.