Is Bon-Ton Stores Likely to Offer More Potential than Dillard’s and Macy’s?

It is possible that you have never heard of Bon-Ton Stores (NASDAQ: BONT  ) before. This shouldn't discourage you, however. This small retailer is not to be underestimated as it has been making major strides to improve its prospects as of late.  Can it be that this obscure specialty retailer might be worth a closer look by Foolish investors? Let's take a look at Bon-Ton Stores' recent results and future expectations, and compare it to Dillard's (NYSE: DDS  ) and Macy's (NYSE: M  ) . Dillard's and Macy's are much larger companies and sometimes going with well-established and consistently profitable names is the best route. That being said for investors looking for a retailer with a great deal of room to grow, Bon-Ton Stores might be just what the doctor ordered.   

Recent results 
Prior to getting to results, it should first be established that Bon-Ton Stores is a department store company with 273 locations in 25 states. National and private brand fashion apparel and accessories are sold under the company's namesake brand, as well as Bergner's, Boston Store, Carson's, Elder-Beerman, Herberger's, and Younkers.

In the third quarter, total sales slid 2.8% to $651.2 million, with comps dropping 2.8%. The good news is that net loss came in at $0.9 million versus a net loss of $10.1 million in the year-ago quarter. This was primarily due to a $9.6 million reduction in SG&A expenses to $215.2 million. Interest expense also declined to $16.5 million versus $20 million in the year-ago quarter.

In regards to the comps performance -- often seen as the most important number in retail because it excludes new store openings and indicates continuous demand and a loyal customer base -- Bon-Ton Stores' President and CEO Brendan Hoffman stated that the company saw meaningful comps improvements late in the quarter. 

Bon-Ton Stores also reported strong performances in key merchandising categories as well as healthy e-commerce growth. The company attributes the latter to traffic initiatives and a broader merchandise assortment.

The big picture
While near-term rewards are possible, it's often best to focus on the big picture. Year-to-date, Bon-Ton Stores has seen comps decline 2.6% year over year. However, net loss has been reduced to $64.9 million from $96.0 million during the same year-ago period. Clearly, Bon-Ton Stores is attempting to make up for subpar top-line performance with cost-cutting and efficiency measures.

Foolish investors don't like to invest in a company that's losing money, unless that company is showing significant improvements on both the top and bottom lines, and the potential rewards greatly outweigh the downside risks. Unfortunately, that's not the case here. While potential exists, you might want to take a look at consistently profitable department store companies such as Dillard's and Macy's.

Bon-Ton Stores vs. Dillard's vs. Macy's
The first and most important comparison is top-line growth. Macy's has been the clear winner of the three in this area over the past five years:

BONT Revenue (TTM) Chart

BONT Revenue (TTM) data by YCharts

What's most impressive here is that Macy's is by far the largest company of the three with a market cap of $19.30 billion versus market caps of $3.99 billion and $374 million for Dillard's and Bon-Ton Stores, respectively. It's rare to see the largest company showing the most top-line growth when comparing three companies in the same industry.

Sticking with Macy's, it saw comps improve 3.5% in the third quarter which it attributes to intensified marketing with a focus on value at its Macy's and Bloomingdale's stores. Macy's reports seeing strength for both retail brands as well as strength in every region of the country, with October being especially strong.

Dillard's has been showing top-line improvements over the past three years. In the third quarter, comps increased 1% and a $250 million share buyback was approved. However, this still isn't quite as impressive as Macy's.

Despite growing the fastest on the top line, Macy's is trading at just 15 times earnings whereas Bon-Ton Stores is trading at 36 times earnings. Dillard's is also trading at an appealing valuation of 12 times earnings. Macy's offers the most generous yield at 2%, Bon-Ton Stores yields 1.20%, and Dillard's yields 0.30%.

The bottom line
Bon-Ton Stores has potential, especially given that comps are improving and it is continuing to improve cost management. Dillard's is a solid company, showing top-line improvements and slight comps gains. Macy's is growing the fastest while seeing growth in every area, and it offers the most generous yield. In my opinion, Macy's offers the most long-term potential, but please do your own due diligence prior to making any investment decisions. 

Another way to play retail 
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.


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