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Call It Reverse Showrooming: These Companies Are Cashing In on Their Physical Stores

Demitrios Kalogeropoulos, The Motley Fool

It was only a few years ago that investors were worried about national retailers permanently losing ground to digital rivals. The fears led to the coining of a new concept, "showrooming," which described the practice of a shopper picking out products in a store before heading home to make the purchase from an online competitor. Best Buy was the poster child of this threat that was primed to destroy chains burdened with expensive networks of stores to maintain.

Best Buy's business has posted an impressive rebound since then, which has put those fears to rest. And lately, a few retailers are benefiting from what you might call "reverse showrooming," or browsing online before making a trip to the store.

Here's how Ulta Beauty (NASDAQ: ULTA), Home Depot (NYSE: HD), and Target (NYSE: TGT) are using their online sales channels to cash in on this trend.

A woman whispering to another woman, who is smiling and holding shopping bags.

Image source: Getty Images.

Ulta Beauty finds more traffic

Ulta Beauty's fiscal fourth quarter included its best growth of the year, but there was something different about these latest operating trends. The spa and beauty-products retailer got far more benefit from in-store traffic than from online growth. Out of its 9.4% comparable-store sales gain, in fact, seven percentage points, or about three-quarters, came from its physical shops. That ratio had been closer to 50% in prior quarters.

In a conference call with analysts, CEO Mary Dillon described a "reverse channel shift" over the holidays that saw many customers flock to stores to try out the makeup brands Ulta had marketed online and was selling across its network of 1,200 locations. The company appears to expect this trend to continue into 2019, too, as management projected a much smaller growth contribution from the e-commerce channel.

Home Depot drives customers to stores

2018 was a big year for Home Depot's e-commerce segment, which works in tandem with the physical stores. The home improvement giant posted a 24% revenue increase that pushed the division up to 7.9% of the broader business -- compared to 6.7% a year earlier.

These purchases played a key role in Home Depot's rising customer traffic levels since half of the orders involved an in-store pickup by the buyer. "These online shoppers see the relevance of our stores," CEO Craig Menear told investors in late February. It's probably no coincidence, then, that Home Depot is back to steadily expanding its store base in the U.S. after pausing for several years.

Target makes its stores a priority

Target warned investors in early 2018 that its shift toward a multichannel selling environment would hurt profitability in the short term, but that margins likely wouldn't fall too far. Still, management's prediction of "somewhat lower operating margins than we've seen historically" was enough to scare off many would-be buyers of the stock back then.

It's just a year later, and much of that financial fog has lifted. Target's move to turn most of its stores into online fulfillment centers -- in addition to their regular retailing duties -- has paid off in spades. The company recently announced stabilizing profitably following a brutal decline in 2017.

Better yet, Target sees operating margins rising in 2019 to produce the chain's first pre-tax earnings growth since 2015. Like other peers who have successfully navigated the e-commerce demand shift so far, the retailer credits its physical assets for helping deliver big returns. "We kept our stores and our people at the center of our strategy," CEO Brian Cornell said in early March, even when other retailers "were closing stores, not opening" new locations.

These physical-retailing successes all occurred under ideal economic conditions, and so investors likely won't know how stable the gains are until a downturn hits. Yet each of these companies is planning to pour significant resources into modernizing, remodeling, and upgrading its stores in 2019. That suggests management sees physical footprint as a competitive asset rather than a liability while digital ordering continues to capture more of the broader retailing pie.

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Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool recommends Home Depot and Ulta Beauty. The Motley Fool has a disclosure policy.