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With a resurgent Wal-Mart (NYSE:WMT) and growing faster than ever, Target (NYSE:TGT) is getting squeezed in the middle. Comparable sales turned negative in its most recent quarter, falling 1.1%, reflecting a trend throughout retail as department store chains struggle across the board. 

E-commerce sales growth is also losing steam. Though digital sales grew 16% in the second quarter, that was down from 23% in the previous quarter, and, more importantly, the company lowered its forecast for the rest of the year. It now sees comps from flat to down 2% in the third and fourth quarters, which includes the key holiday season.  

Thinking small

The discount retailer is turning to a familiar strategy to stem sliding sales. It's looking to open smaller-footprint locations in densely packed cities and college towns. Other retailers, including NordstromWhole FoodsMacy's, and Wal-Mart, have looked to smaller stores to expand their footprint and beef up sales.

Target is opening up a slate of smaller stores in big cities and college towns in order to cater to the millennials that make up one of its core constituencies. This week it opened a 45,000 square-foot store in New York's Tribeca neighborhood, about a third of the size of the average Target. Near the University of Minnesota campus, a store 15% the size of a regular Target stocks items intended for college students like mini ironing boards and twin sheets. CEO Brian Cornell told The Wall Street Journal, "We could see hundreds of these. It could be a huge part of future growth outlook over time." 

In many ways, the small-footprint strategy fits well with Cornell's emphasis on signature categories, including health and wellness, baby and kids, stylish apparel and home goods. Those are all categories that millennials care about, and as young people have flocked to cities it makes sense for Target to follow them. Currently, those customers are driving Amazon's growth, as no major brick-and-mortar chain has made a play for them. 

Avoiding Wal-Mart's fate

At the beginning of the year, Wal-Mart announced it would shut down all 102 of its Walmart Express stores, a small-footprint concept scattered across the rural south, just a few years after launching the miniaturized chain. The Express stores faced several challenges. Wal-Mart struggled to get the product mix right, as operating small stores entails more than simply shrinking the Supercenters. It also opened many of them near existing Wal-Marts, obviating much of the need for a smaller version.  

But Target's more upscale brand should give it an advantage, as should its focus on cities and college towns, places where shoppers may not have cars and therefore need convenient options close to home. Many of those cities are also devoid of Wal-Mart, as the retail giant has found it difficult to penetrate many of the nation's largest cities and is still without a store in New York.

Instead of imitating Wal-Mart, Target may be better off following the lead of drugstores chain like Walgreen's and CVS, its new pharmacy partner, as that category has seen steady growth, with sales at health and personal care stores up 7.7% this year according to the Census Bureau. Sales at those stores have not only benefited from their selling more prescriptions, but they have also stocked more groceries, and consumers have turned to them for convenient "fill-in" trips. Target has to do more than just be a drugstore to make the small-store experiment work, but with its "cheap chic" brand it should be able to find the right mix between its signature categories and everyday staples like groceries and household items.

While small stores could provide a valuable new revenue stream, it won't flip Target's sales slide overnight, as the company's most pressing problem is reinvigorating performance at 1,800 big-box stores. Grocery sales have been a problem, as the company has seen more spoilage than its competitors, and accelerating e-commerce growth would also be a promising sign. Still, with comparable sales headed negative for the rest of the year, the retailer could use some good news in the form of successful small stores to tout to investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.