Toshiba Excite
Source: HSN

Home shopping was once all the rage before e-commerce became the latest shopping trend. HSN (NASDAQ:HSNI) has stepped up significantly from its roots as a home-shopping television network started in 1982. Today, it is a multi-channel retailer that also sells its products through e-commerce websites, mobile applications, and a limited number of retail stores. HSN's multi-channel sales strategy gives it an edge over pure brick-and-mortar players in fending off online competition.

Crossing the digital divide
HSN now generates about 40% of its sales from the digital channel (including e-commerce and mobile). In addition, mobile sales grew 64% year over year in FY 2013 and now account for about 14% of total revenue. More importantly, HSN's sales data shows that a multi-channel strategy is superior to a pure online one. Customers, who bought items through both television and digital channels, spent significantly more (at least 50%) than those who purchased goods through only one of them.   

Source: HSN

Merchandising matters
It's not just where you sell but also what you sell. HSN boasts 80,000 unique SKUs (stock keeping units) across various product categories such as beauty and health, apparel and accessories, and jewelry, which together comprise about 70% of its entire product portfolio. In addition, HSN ensures that its merchandise assortment remains relevant and "fresh" for its customers. It launched more than 15,000 new products in the past year.

Another company which attracts customers based on product uniqueness is Pier 1 Imports (NYSE:PIR), a specialty retailer of imported decorative home furnishings. Only 5% of Pier 1's merchandise overlaps with that offered by other retailers. In Pier 1's case, replicating Pier 1's offerings is made difficult by the fact most of these are handmade, involving creative input and artistic impressions unique to the creators.

The threat from online competitors is only real if they can offer lower prices or greater convenience for similar products that other retailers are also selling. As long as retailers can boast unique offerings that are attractive to customers, they aren't at a disadvantage compared with their online peers.

Mitigating customer price sensitivity
Based on 2007 numbers from HSN, its average customer earns in excess of $60,000. Using this statistic as a benchmark, HSN's core customers belong to the middle-class income bracket. Given that middle-income earners aren't as rich as high-net-worth individuals, their purchasing power and price sensitivity are much higher. HSN has introduced a credit/debit card payment option called FlexPay, which allows customers to spread their purchase cost of selected items across as many as five equal monthly payments to mitigate customer price sensitivity. There are several benefits associated with FlexPay.

Firstly, FlexPlay enables HSN customers to receive their purchased items and pay for them over time. In contrast, traditional payment options such as layaway stipulate that customers must complete their installment payments before collecting their goods. Secondly, HSN charges neither interest nor fees for FlexPay. The only potential penalty is late interest charges if customers don't pay their credit card bills on time.

Thirdly, any form of deferred payment or credit plans tend to simulate either higher purchase volumes or bigger ticket items, something that Conn's (NASDAQ:CONN), a specialty retailer of branded consumer home durables, also experiences.

Conn's in-house consumer-credit program typically receives applications from customers who earn an average of about $40,000 per year. Furthermore, FICO credit scores range between 300 and 850, and two-thirds of Conn's customers are concentrated within the lower end of the score spectrum, between 551 and 650.

Based on internal estimates and industry statistics from NPD Group, Conn's found that its customers, despite their below-average incomes and credit scores, actually tend to buy premium or branded television sets that cost more than twice that of the average television set sold in the market.

Deferred payment plans are usually more appealing to consumers than free shipping when it comes to large ticket items. As a result, both HSN and Conn's benefit from increased gross profit margins as customers shift toward higher-priced items.

In recent quarters, HSN's average selling price points have been negatively affected by its strategy of lowering price points to draw in new customers and a shift in sales mix for consumer electronics from computers and televisions to mobile and accessories. Despite these challenges, HSN has consistently maintained its gross margin at around 36% since 2011.

More importantly, HSN has seen its average selling prices increase for the first time in more than two years in the fourth quarter of 2013, as price points increased in every category except electronics. Going forward, FlexPay should boost HSN's gross margin further as customers trade up with the option of deferring payments. In the case of Conn's, the gross margin has even expanded significantly from 33.8% in fiscal 2009 to 46.7% in fiscal 2013.

Foolish final thoughts
In my opinion, the success of a retailer shouldn't be determined by its sales channel. In fact, as indicated by HSN, a multi-channel approach helps in developing multiple customer touchpoints and increasing overall spend. Aside from distribution mode, HSN's exclusive products and deferred-payment plan will help the company grow revenue and earnings in spite of stiff competition from cyberspace.

Does that make HSN the Fool's favorite stock?
Multi-channel retailer HSN is my pick to survive and thrive in the competitive retail space. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.