This Holiday Season Looks Rosy for Macy's, but Not for Wal-Mart and Kohl's

Macy's (NYSE: M  ) is heading into the holiday season on a high note after posting a blockbuster third quarter. This stands in contrast with retailers Wal-Mart (NYSE: WMT  ) and Kohl's (NYSE: KSS  ) , which posted disappointing results in their latest quarters. Macy's appears to be firing on all cylinders, and it's shaping up to be a strong holiday season for the company's shareholders. It looks like Santa Claus is coming to Macy's, while the Grinch is going to Wal-Mart and Kohl's.

Still no improvement
Wal-Mart just posted a same-store sales decline of 0.3% for the third quarter. This was the third straight quarter of sales declines for the largest retailer in the U.S. Wal-Mart also cut its annual profit forecast for the second time since August.

Wal-Mart is facing a number of issues that Macy's isn't. A good portion of Wal-Mart's customers have lower incomes, and this segment of the population is still seeing high unemployment rates. Wal-Mart also gets a large part of its business from seniors who have seen a 2% increase in Social Security taxes take a bite out of their wallets. Overall, a large portion of Wal-Mart's customers live paycheck to paycheck. When they have less spending power, they take their business to dollar stores and look for the cheapest prices.

To try and turn things around, Wal-Mart is gearing up for the holiday shopping season with a focus on Black Friday. On Black Friday, Wal-Mart will increase the number of one-hour guaranteed items and offer "Manager Specials." The retailer wants to offer more deals on the season's top gifts.

Not following Macy's lead
Kohl's disappointing quarter surprised many, especially after Macy's posted strong results. This has many questioning what is Macy's doing right that Kohl's isn't. In the third quarter, Kohl's same-store sales dropped 1.6%, and both earnings and revenues came in lower than expected.

A concern going into the holiday season is that inventories rose 2% in the third quarter. Rising inventory levels signal that items are sitting on the shelves. Before the holiday shopping season, a retailer will usually try to get old inventory off of its shelves to make way for in-demand holiday items. Kohl's needs to offer promotions and move this excess inventory to make way for special holiday items.

Kohl's, like Wal-Mart, is hoping for a strong holiday season and is gearing up for Black Friday. Kohl's plans to open at 8 p.m. on Thanksgiving Day, which is earlier than ever before. The company plans to offer more than 500 Black Friday deals at its stores and online. Kohl's will also offer $15 Kohl's Cash for every $50 spent online or in its stores.

The star performer
Macy's had a great third quarter, with same-store sales rising 3.5%. If you include sales at its licensed departments within its stores, same-store sales rose 4.6%. Earnings per share came in $0.08 higher than expected, and revenues rose 3.3% year-over-year. Earnings were 31% higher than in last year's third quarter and marked the 15th consecutive quarter of increased earnings per share.

The company noted that sales were particularly strong in October, and that gives the company confidence that the holiday shopping season will be strong for the department store chain. Macy's is hiring an additional 83,000 seasonal employees for the busy holiday shopping season. Macy's Herald Square flagship store in New York City just had the entire first and second floors remodeled and will feature the company's top-selling items.

Going forward, Macy's has started in-store fulfillment of online orders. Macy's strategy is to see that each store has plenty of inventory on hand to fulfill all of its customers' needs. Starting next year, customers will have the ability to make purchases online and then pick up their purchases at their nearest Macy's or Bloomingdale's location.

Foolish assessment
Last month, I was a big fan of Kohl's in "The Best Retailer for Your Portfolio." Well, now it looks like that title belongs to Macy's. Wal-Mart still hasn't been able to turn things around and Kohl's is no longer posting strong sales gains, but instead is heading backwards.

Macy's expects same-store sales for the second half of this year to rise between 2.5% and 4%. So far this year, Macy's has repurchased 27.6 million shares for approximately $1.25 billion. The retailer still has $1.75 billion remaining in its current repurchase program, and I see the company continuing to repurchase shares over the next 12 to 18 months.

Shares of Macy's are still attractive. In the past year, the S&P 500 Index has risen 31%, while Macy's has risen only 26%. Shares have a P/E of only 14 and trade at 0.6 times sales. The retailer also has a nice dividend yield of 2.2%, which is hard to beat. I think that Macy's is going to have a strong holiday season, and that will boost earnings in the next quarter.

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