It's hard out there for a retailer these days.
Department store chains are seeing sales flee amid competition from the e-commerce channel, declining mall traffic, and fast fashion retailers like H&M and Zara. Many, including Macy's and J.C. Penney (JCPN.Q) are closing stores, which could put even more pressure on mall retailers as hundreds of malls are set to lose their anchors.
Today, as part of our "better buy" series, we'll take a look at two of the biggest department store chains in the country: J.C. Penney and Kohl's (KSS 4.53%). Here's what each one has to offer investors.
Image source: Motley Fool.
The transformation continues
J.C. Penney is still digging itself out of the hole Ron Johnson left it in 2012, when he attempted to overhaul the brand and ended up alienating the customer base instead, sending comparable sales down 25% that year.
The venerable department store chain finally reported a full-year adjusted profit last year of $0.08 per share, its first annual profit since 2010. However, plenty of challenges remain for the company. Management predicted comparable sales growth of 3-4% last year, but comps instead finished flat and declined in the second half of the year. The company also announced last week that it would close 130-140 stores later this year, a reversal from CEO Marvin Ellison's claim a year ago that the company wouldn't close more stores. The move should help the company free up capital to invest in higher-performing stores, but it still raises questions about the long-term health of the business.
For the current year, the company expects comparable sales to be flat again, but sees full-year adjusted earnings per share to improve to $0.40-$0.65 as it sees SG&A expenses falling and gross margin improving modestly.
Over the last year, the company has taken a number of steps to improve stores and drive traffic, such as partnering with Nike to sell its products in 600 stores, rolling out appliances in stores, expanding home goods offering, and expanding its partnership with Sephora. It's unclear what plans Penney may have for 2017.
Image source: Motley Fool.
The struggle is real
While Kohl's is in a stronger position than J.C. Penney as the company has been consistently profitable, Kohl's is still facing the same headwinds. In the fourth quarter, comparable sales fell 2.2%, in line with a 2.4% drop for the full year. Adjusted earnings per share also shrunk 6% to $3.76 for 2016. That roughly continues a pattern, as Kohl's revenue and earnings per share have been essentially flat for the last five years. The stock has been flat as well.
Like J.C. Penney, CEO Kevin Mansell noted a decline in traffic at brick-and-mortar locations. Also of note, the company closed 19 full-line stores last year, but also raised its dividend 10% in its recent report and now offers a handsome 5% dividend yield.
Mansell also touted the company's upcoming partnership with Under Armour as an opportunity to increase its sales of activewear and wellness. Still, the company's guidance for the current year was modest, as it calls for a decline in comparable sales of -2% to 0% and earnings per share of $3.50-$3.80, which represents a decrease of 3% at its midpoint.
What's the better pick today?
The challenges for both companies are clear. Retail shopping habits are shifting online, and department store chains have to manage their store fleets effectively while continuing to build their e-commerce businesses.
Ultimately, the better buy between these two stocks may come down to your individual investing style. J.C. Penney is the riskier of the two, but the stock is trading near an all-time low after its recent store-closing announcement, which presents a promising buying opportunity -- especially when combined with the upward trajectory in profits, which looks set to continue this year.
Kohl's, meanwhile, offers more security, and the 5% dividend yield is hard to beat. The company has also been committed to share buybacks, but Kohl's shares are less likely to pop, especially when profits are expected to slump.
Investors in both stocks should keep an eye on general retail trends, especially comparable sales. If those continue to fall, both stocks may be in trouble.
