Avoid These Shrinking Retail Stocks

The U.S. economic landscape is still experiencing the negative effects of a massive bubble's ugly hemorrhage. Consumers' shut wallets are yielding shuttered storefronts; retailers that are vacating the premises go far beyond the empty storefronts Borders' bankruptcy has left behind.

Take perennial struggler Gap (NYS: GPS) . It's closing 34% of its U.S. stores (and 21% of its namesake Gap stores) by the end of 2013, planning to end that time frame with 700 locations. The company's touting aggressive expansion in China, but the long-overdue plan to reduce its U.S. presence is good news only because it finally reflects its competitive reality.

Another primarily mall-based retailer, Abercrombie & Fitch (NYS: ANF) , has been forced into a reality check after bubble-fueled overexpansion. It plans to close 60 to 65 U.S. stores during fiscal 2011. In 2009, Abercrombie & Fitch discontinued its ancillary RUEHL concept.

Home-improvement retailer Lowe's (NYS: LOW) recently announced plans to close 20 of its stores, reflecting both the negative economic outlook for this retail segment in the post-bubble economy and steep competition from rival Home Depot (NYS: HD) .

Investors need to choose their retail stocks carefully, and think long and hard before putting their hard-earned money into companies that are closing stores, marking their over-zealous expansion in the artificially inflated pre-2008 economy.

Although these store closures could improve these companies' short-term profitability, long-term investors must think twice. Is true long-term business growth still achievable for companies that are cutting back on their physical presences?

Investors should focus on retail stocks that are holding strong in the current tough consumer environment, and even better investments are the retailers that can grow their store counts for continued shopper demand. Take Whole Foods Market (NAS: WFM) , which still has growth on the agenda and recently indicated the possibility that it could increase its store base from approximately 300 today to 1,000. That's a heck of a lot of potential growth.

Don't forget that stronger and up-and-coming retailers may also be able to achieve more profitable growth by negotiating cheaper rent.

Store-closing retail stocks like Gap, Abercrombie, and Lowe's simply don't look like appealing investments right now. Focus on strong retail stocks with future growth ahead, or steer clear of the retail universe.

At the time thisarticle was published Alyce Lomaxowns shares of Whole Foods Market in her personal portfolio. The Motley Fool owns shares of Whole Foods Market and Gap.Motley Fool newsletter serviceshave recommended buying shares of Whole Foods Market, Home Depot, and Lowe's, as well as writing covered calls in Lowe's. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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