The Best Retailer For Your Portfolio

The retail business is a fickle one. Most customers these days go from store to store looking for the best deal and the items they want. As investors we must look for the retailer that is doing the best job of growing comparable store sales.

Macy's  (NYSE: M  )  just reported soft sales in its second quarter. Wal-Mart  (NYSE: WMT  )  saw its comparable store sales drop into negative territory for the second quarter as well. However, that wasn't the case with Kohl's  (NYSE: KSS  ) . Kohl's was able to increase comparable store sales in the same quarter that Macy's and Wal-Mart fell behind.

A tale of three retailers
Macy's posted a decrease of 0.8% in comparable store sales in the second quarter. The company blamed the slowdown on consumers purchasing fewer discretionary items. Macy's saw weakness in shoes, particularly in sandals because of inclement weather, as well as cosmetics, fragrances, jewelry and watches. Macy's gross margin dropped 10 basis points to 41.8%. This was because of additional markdowns to clear seasonal merchandise and free shipping for online orders.

Wal-Mart saw U.S. store traffic drop 0.5% in the second quarter. Comparable store sales dropped 0.3% overall. This was another weak quarter for Wal-Mart as U.S. comparable store sales fell 1.2% in the first quarter. Sam's Club was a bright spot for Wal-Mart, with comparable store sales there up 1.7%. I take that as a sign that the weaker consumer was shopping for bargains and stocking up on goods.

Kohl's second quarter comparable store sales rose 0.9%. Total sales increased 2% to $4.3 billion. The gross margin increased two basis points from last year's second quarter to 39.1%. Earnings in the second quarter increased 4% to $1.04 per share. E-commerce sales increased 28% from last year's second quarter. The company's strongest categories were children's, footwear and men's. Private and exclusive brands accounted for 56% of total sales. Its strongest brands were Jennifer Lopez, Marc Anthony, Rock & Republic, and Jumping Beans, all of which posted double-digit gains.

Looking forward
Macy's is looking to change its sales trend heading into the second half of the year. To do so, the retailer is strengthening its marketing to drive customers to its stores and websites. Macy's is forecasting comparable store sales in the range of 2.5% to 4% for the fall. According to CFO Karen Hoguet on the company's earnings call,

Our management team is viewing the second quarter as a speed bump. We do not see this as a change in the momentum that we have accumulated over the past three years.

Macy's should be able to accomplish its goals in the second half of the year. An increase in comparable store sales is likely to come from back-to-school shopping and the creation of licensed stores within Macy's. I talked about Macy's licensing agreement with Finish Line to sell athletic footwear as a shop-within-a-shop in my other article. This will hopefully drive younger consumers into the stores to get a look at Macy's other merchandise.

Wal-Mart continues to return cash to shareholders. In the second quarter, the company paid $1.5 billion in dividends and repurchased approximately 24.2 million shares for $1.9 billion. Wal-Mart still has $13.9 billion remaining on its $15 billion share repurchase authorization. Shareholders know that Wal-Mart will keep buying back its shares as Wal-Mart continues to make plenty of money. The company's consolidated net income in the second quarter grew 1.4% to $6.8 billion.

For Wal-Mart, the growth is in its walmart.com platform. The company has an enormous advantage over its competitors with its geographic footprint. Wal-Mart is focused on being able to process online orders from a store closest to the customer. So far, the program is working. Items are being delivered in two days or less and at a lower cost. A ramp-up in this initiative could usher in the next wave of retailing and give Amazon.com a run for its money.

Kohl's has a number of initiatives in place to keep customers coming into its stores and increasing comparable store sales. The first is remodeling its stores. This year the company will remodel 30 stores and evaluate its cosmetics department. The company is testing the size and location of the area in over 150 stores this fall. Kohl's wants to increase cosmetic sales as well as sales overall.

Kohl's has also increased its marketing budget and it is targeting more TV and digital advertising. According to CEO Kevin Mansell on the company's earnings call,

Our marketing remains focused on the great value that Kohl's offers but also has an increased emphasis on the great brands that we offer.

The company is also rolling out its loyalty program to its California stores after a successful launch in Texas. The program allows the company to get feedback and improve the customer's shopping experience. This allows the company to better market to its customers and have them remain loyal shoppers at Kohl's.

Foolish assessment
The one retailer to go with is Kohl's. The retailer has positive momentum going forward as both sales and gross margin have been improving. Kohl's also has the lowest enterprise value/EBITDA at 5.53. I like both Macy's and Wal-Mart in the long-term, but I want to see comparable store sales pick up before jumping in. Right now, Kohl's is doing a great job in its retail business and the trend looks set to continue.

These aren't the only great retailers you should be watching
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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