Target's Online Sales Strategy Worth Watching

With the holiday shopping season behind us, it'd be natural to fast-forward past the retail industry in your search for investment alternatives. Once calendar Q4 passes, where's the fun in retail? For investors, strategic moves made by Target (NYSE: TGT  ) CEO Gregg Steinhafel and team will make for an enjoyable 2013, and beyond.

The recently completed fourth quarter was a bit ho-hum for most retailers. Target was able to eke out sales gains over the holidays, but at a mere 0.8% improvement in December sales compared to 2011, year-end results didn't exactly inspire investor confidence heading into 2013. But there's a reason that Target is a leader in the retail industry. Rather than bemoan its flat revenues, Steinhafel and team actively pursue strategic growth alternatives, and for Target, that means becoming a force in online sales.

Amazon, here we come!
The projected market for online retail sales volumes in the next few years is absolutely staggering. According to an analyst with Morgan Stanley, by 2016, the market for online sales could reach as high as $1 trillion around the world. And more and more of consumer's online shopping, which hit record numbers on both Black Friday and Cyber Monday this past holiday season, is done via mobile computing. According to one report, 25% of all online sales over the holidays was completed using a mobile device.

There's a reason Amazon.com (NASDAQ: AMZN  ) stock trades at such incredible multiples -- its current share price is over 3,600 times trailing earnings -- because as big as online retailing is, it's not slowing down anytime soon. So, how do traditional retailers like Target, and longtime competitor Wal-Mart (NYSE: WMT  ) , compete with an Amazon? By doing what they've always done: lead.

Target gets aggressive
When Target announced last week it was extending its online price-match guarantee beyond the holiday season, the news was met with a collective yawn from investors. Why should it inspire action? It wasn't a big deal after all, just another "salesy" press release to drum up some P.R. Actually, there's a little more to it than that.

Target's decision to match prices with the likes of Amazon, Wal-Mart online, and Best Buy's Internet specials is important because it clearly demonstrates Target's commitment to aggressively go after market share in the e-tail space.

Now, here we are a week later, and Target is once again making it clear to investors that it intends to do more than simply survive online; it sees the opportunity for what it is: a game changer. Target recently introduced Online Obsessions, its collection of six online-only product lines only offered at Target.com.

The exclusive online products, which range from furnishings to fashion, help Target differentiate itself from traditional retailers, and is another indication Steinhafel sees the online business as more than simply an extension of its physical stores.

Target is hardly the only retailer that recognizes the necessity of growing online sales. Wal-Mart is one of many retailers offering mobile customers an app to make the shopping experience easier and less expensive. Wal-Mart's app, when in "store mode," automatically generates coupons specific to location and customer's shopping habits.

Though Best Buy made the concept famous, Target has also been the victim of showrooming, forced to sit back and watch as consumers scope out a product in a brick-and-mortar store prior to purchasing it online. Toward that end, several Target stores will include displays so customers can look and touch the new online-only products, and then buy online if they like what they see.

Target in 2013
The potential of the online market is undeniable, even for an industry behemoth like Target, which generates about $70 billion in annual sales. What's impressive about Target is its taking a leadership position to compete against the Amazons of the world, rather than simply settling for doing the same things and getting the same results.

Target remains an outstanding value relative to its peers. At 13.6 times trailing earnings, and 12.7 times future earnings, Target is a better value than Wal-Mart, and it's undervalued. There's no discernible reason for Target's relatively low valuation compared to its peers, nor has there been for the past year. Management continues to perform, as Target's solid margins will attest, and its 2.3% dividend yield is also near the top compared to its brethren.

All those folks screaming, "Big-box retail is dead!" are only part right. Retail isn't dead; it's just being reinvented by Target.

Also worth watching...
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