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Most retailers today sell products through an online channel in addition to traditional physical stores. We investigate how such a multichannel or omnichannel retailer should decide the number and size of physical stores. We show that a higher return rate for online purchases can incentivize the retailer to have fewer physical stores that are larger in size. As online shopping becomes more convenient, a retailer may prefer to have more physical stores that are smaller in size. We also study the effect of three popular omnichannel strategies that involve changes of the physical stores’ functions: (i) showrooms only display products for customers to inspect before they purchase online, removing fulfillment from physical stores; (ii) return flexibility expands the functionality of physical stores by allowing customers to return online orders at them; and (iii) fulfillment flexibility expands functionality by allowing customers to pick …