digital-revolutionThe Internet has quietly become the killer of things.

With a click of the mouse, consumers can get almost anything and everything.

The digital revolution has forced some of the nation’s top companies into bankruptcy. Over the last five years we’ve seen the likes of Borders Group, Blockbuster, Circuit City and Linens n’Things disappear.

Each of these companies had a large brick-and-mortar presence, but failed to recognize the shift toward digital in time.

Today, savvy retailers are focused on “omnichannel,” the latest and greatest buzzword in the retail space. In the omnichannel approach, retailers are trying to create a seamless shopping experience by integrating physical stores with online sites and mobile apps.

But some companies are doing this better than others. These are the companies that won’t fall victim to the digital environment, but embrace it.

Top 3 Digital Revolution Retailers 

No. 1: Target (NYSE: TGT)

Much of the recent negative news surrounding Target —including its missteps on entering the Canadian market and the data breach from last year—have overshadowed the company’s recent efforts to become more digital.

Target is working on a ship-from-store option that allows products bought online and  delivered as soon as the same day. Target is also rolling out CityTarget stores, which are smaller formats that are easier to navigate. These stores also mean that Target can expand into more urban markets.

Target’s branded debit and credit card, called the REDcard, has been successful by all accounts. Cardholders tend to visit stores more often, as well as spend more money than the average customer. Last quarter, over 20% of the company’s sales were completed using a REDcard. Its digital initiatives and credit/debit card is all part of an effort to build loyalty with its customer base, something the company desperately needs after its credit breach debacle.

The retailer is also very shareholder-friendly. In fact, by dividend yield, it’s the most shareholder-friendly of the three retailers discussed here. Its dividend yield is right at 3.4%, dwarfing the department retail industry average of 1.4%.

No. 2: Macy’s (NYSE: M)

Macy’s has been a pioneer in digital adoption. It launched its M.O.M. initiative — short for My Macy’s localization, omnichannel integration and  “magic”  customer engagement training for associates  — back in 2009. This gave Macy’s a leg up when it comes to forming a presence across all sales avenues.

A Barron’s article from 1999 suggested this future for retailing:

The immediacy of shopping in a store — being able to bring home a purchase and have it immediately — can never be duplicated online. Internet buys will always require shipping — and shipping charges.

But Macy’s has done a lot to debunk this projection, including helping blaze a path for buying online and picking up in stores. It has also done a great job with inventory management, which includes offering specific marketing and merchandise depending on the local market.

Macy’s offers a 2% dividend yield and is one of the best shareholder return stories of the last decade or so. It has upped its dividend by 176% since the start of 2006, while also reducing its shares outstanding by 35% via buybacks.

No. 3:Nordstrom (NYSE: JWN)

Nordstrom is the high-end retailer, catering to the more affluent shopper. Thanks to its deep-pocket customers, Nordstrom is able to weather economic downturns quite nicely.  Its customer base is less affected by unemployment and lower wages. Over the last decade, the return on shares of Nordstrom is 3.5 times that of the S&P 500.

Nordstrom, while a little behind Macy’s initiatives to embrace digital, plans on catching up in a hurry. It’s allocating some 30% of its capital spending this year to technology, a big step up from previous years. This includes adding personalization services. Along those lines, the retailer spent $350 million earlier this year to buy the online men’s stylist service provider, Trunk Club.

Nordstrom is also looking to make the in-store experience more digital. It’s rolled out a mobile POS system in its stores, which includes using smartphones and tablets as mobile registers. The retailer is also putting tablets in dressing rooms to allow customers to search store and online inventory for product sizes and colors.

Nordstrom offers the lowest dividend yield of the three at 1.9%, but it has increased its dividend payment by 94% over the last five years. Assuming the push toward digital is successful, investors should expect even more dividend increases going forward.

A hybrid —brick-and-mortar and digital — presence might actually be better than just a sold brick-and-mortar or sole e-commerce model. Still over half the e-commerce sales in the U.S. are  completed by retail stores with a brick-and-mortar presence.

There still appears to be value in having a physical store that can serve as a showroom and make-shift distribution center. Hence the reason that the once pure e-commerce player, Warby Parker, now has 14 physical stores.

The three retailers above are some of the best omnichannel retailers around. They are out in front of the digital trend and are sure to thrive in the digital environment. That bodes well for investors.

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