It's no secret that brick-and-mortar retailers are struggling lately. Perhaps the greatest example is electronics giant Best Buy (NYSE: BBY ) . In the past six months, the big-box store ousted its longtime CEO Brian Dunn, dramatically shifted its retail strategy to include standalone Best Buy Mobile stores, and appear to be toying with the idea of being taken private. Let's take a look at what the future holds for troubled stores like Best Buy, and where investors should put their money in the retail space today.
The new shopping experience
I don't think a turnaround is in the stars for Best Buy. The world's largest electronics retailer by revenue will either be taken private by founder Richard Schulze or suffer a slow death at the hand of e-commerce sites like Amazon.com (Nasdaq: AMZN ) .
By now we've all heard of the buzzword "showrooming" and hear how comparison-shopping threatens big-box retailers from Best Buy to Staples (Nasdaq: SPLS ) . In fact, both of these companies are downsizing stores, which helps reduce overhead costs and puts them in better proximity to an increasingly urbanizing demographic.
But shrinking stores may not be enough for some retailers. Look at RadioShack (NYSE: RSH ) , for example. The company's average shop measures 2,500 square feet, compared with a Best Buy 13,000-square-foot-warehouse. Still, shares of the Shack are down more than 65% this year and trade under $4 apiece. In addition to testing smaller stores, Best Buy is growing its IT team to provide better customer support. According to The Wall Street Journal, the electronics giant is experimenting with an Apple-like retail strategy in hopes of pulling more customers through its doors.
While Best Buy is one of the losers in the big-box space, there are some notable winners as well. On the other side of the fence, discount retailer Target (NYSE: TGT ) is finding creative ways to better connect with customers.
With more consumers using sites like Amazon and eBay to comparison-shop online, Target is experimenting with in-store incentives like exclusive merchandise and off-price designer lines. This strategy is working well for the retailer. It's not surprising, then, that the stock is on a tear this year, with shares up more than 13% in 2012. Still, it's not too late for investors to grab a piece of the action.
Management's decision to expand stores to include grocery items started to pay off in the first quarter, with same-store sales hitting their highest level in more than six years in the quarter. Differentiated merchandise is another factor that should continue contributing to Target's bottom line in upcoming quarters.
Shop it to me
Other retailers, take note: "The Shops at Target" are a runaway success. The initiative, along with limited-edition apparel lines, are helping Target win its battle with showrooming by offering customers a boutique shopping experience at its big-box stores. What started as limited-edition collections from world-renowned designers has transformed into a winning growth strategy.
In one way, Target provides customers with affordable one-of-a-kind pieces by collaborating with high-end fashion moguls such as Missoni and Jason Wu. In another way, the retailer stocks its shelves with products you can't find elsewhere. In addition to these exclusive designer lines, Target's new mini-store strategy is also boosting traffic at its stores.
Here's how the discounter's new design platform works. Target scopes out trendy boutiques around the country and partners with them to bring unique collections to its stores. The Webster is a shop from my hometown of Miami and is one of five inaugural boutiques chosen to participate. Ultimately, I think this retail strategy widens the competitive moat between Target and industry rivals.
Target's push into the Great White North next year will probably boost earnings in 2013. In total, the company plans to open between 125 and 135 Canadian locations by 2014. Clearly, there's plenty of growth left in the name.
As far as the stock is concerned, Target has raised its dividend for more than 25 straight years. On top of being a dividend aristocrat, it's also one of the fastest-growing dividends to make the cut. The stock boasts a yield of 2.51% and rewards shareholders with an annual dividend of $1.44 per share.
Customers looking for the best value are flocking to Target stores, while investors looking for value will find it in Target stock. At just 11 times forward earnings, shares of Target are a steal for buy-and-hold investors.
In January, I made the case of why Target should be a core holding for your portfolio. The stock has grown in value by more than 13% since then. I'm reconfirming my outperform CAPScall on the stock today, despite its year-to-date gains, because I'm confident shares will continue to climb higher from where the stock currently trades at $57 a share.
The current economy is playing to Target's strengths. Consumers want the most bang for their buck, and Target delivers. I suspect the success will continue for this discount retailer, even as others in the industry flounder. Don't miss this opportunity to get in on the action -- add the stock to My Watchlist now to take advantage of The Motley Fool's free tool that lets you track and monitor your favorite stocks.
More Expert Advice from The Motley Fool
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock in our brand-new free report: "The Motley Fool's Top Stock for 2013
." I invite you to take a copy, free for a limited time. Just click here
to access the report and find out the name of this under-the-radar company.