Wal-Mart, Amazon, or Macy's: A Glimpse at Holiday Results Reveals 1 Big Winner

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The National Retail Federation expects holiday sales to increase 3.9% year-over-year. We won't know the results until mid-January. However, we can form an educated guess about holiday sales based on retail trends. For instance, retail analytics firm Euclid expects in-store shopping traffic to have increased 8.6% year-over-year. However, this jump in foot traffic is expected to be driven by promotions, as retailers want to clear their inventories. If that's the case, then there's a good chance that sales will increase, but at what cost? 

Picking a winner
According to the IBM Digital Analytics Benchmark, online sales for the fourth quarter improved 10.3% year-over-year. Sticking with the same source, 16.6% of total online sales can be traced back to mobile devices. This represents a 46% increase in sales on mobile devices year-over-year.

Based on these numbers, there's a good chance that (NASDAQ: AMZN  ) has seen increased sales. This is expected. Amazon has been increasing its sales for years, and at a rapid rate. On the other hand, this steady increase on the top line comes at a price.

For instance, if you look at the change in the profit margin for Amazon in comparison with those of other big holiday retailers, such as Wal-Mart Stores (NYSE: WMT  ) , Target (NYSE: TGT  ) , and Macy's (NYSE: M  ) , its profit margin has been declining at a startling pace:

AMZN Profit Margin (TTM) Chart

AMZN Profit Margin (TTM) data by YCharts

Amazon currently trades at approximately 1,400 times earnings. Despite the extremely high valuation, the stock continues to appreciate, as top-line growth stories see high demand in bull markets. The question for Amazon: is this type of stock appreciation sustainable? If the broader market turns south one day, which it eventually will, it's not likely that investors will flock to a company that doesn't perform well on the bottom line. They will instead opt for a consistently profitable company that generates a lot of cash flow and returns capital to its shareholders. However, for now, all seems well for Amazon.   

The most important news for Wal-Mart here is that it has been extremely consistent on the bottom line. Look at the chart above for an example. Therefore, your dividends (currently yielding 2.40%) and stock buybacks should be safe.

As far as Target goes, its profit margin had been declining prior to the data breach, and the data breach will add more pressure since Target will have to increase its spending on data protection as well as hiring due to higher call volumes. There will also be lawsuits. And don't be surprised if Target spends on a short-term marketing campaign aimed at technological improvements that guarantee the financial safety of customers.  

Then there's Macy's. According to IBM Digital Analytics Benchmark, department store online sales skyrocketed 62.8% year-over-year this holiday season. Combine that with Macy's substantial improvements on the bottom line over the past several years and you probably have a winner. Several years ago, in the early stages of The Great Recession, Macy's was struggling in a big way. To improve its bottom line, it reduced its dividend payments, cut its workforce, reduced contributions to employee retirement funds, and streamlined operations. These moves didn't please everyone, but the company needed to make them to get back on its feet. Also consider that J.C. Penney's failures have likely led to market share gains for Macy's.

The Foolish bottom line
Amazon continues its top-line rampage, which leads to high potential that comes with high risk. The increased costs that Target has likely incurred in relation to its data breach sour any enthusiasm for the company from an investment standpoint, at least until the big-box retailer reestablishes its image. Wal-Mart isn't a big winner, but it's not a big loser either, making it an ideal option for any value investor. If you're looking for top-line growth potential to go along with the likelihood of a limited promotional impact on the bottom line, then you might want to dig deeper on Macy's. 

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Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 13, 2014, at 10:35 AM, Bravo6alpha wrote:

    It seems odd that you are fawning over Macy's on improving their bottom line and applauding them for doing it by firing workers, cutting retirement benefits. Not a sustainable path kids, not at all.

    Amazon, for all its focus on growth, has achieved growth and not cut any employee benefits, laid off anyone. In fact they are increasing service levels (mayday, increased offerings on prime video etc...) and not charging any more, in fact often less.

    value, in the future, will be based in part on earnings, but only if those earnings come form a sustainable, well thought out practice of enhancing the customer experience.

    the fool hates amazon, and wants so badly for investors to shun it on a one dimensional earnings analysis so the old ways are preserved. the fool should note that value creation only happens in the long run and as a result, earnings can only be one part of that analysis.

    Can fool see that or are you out standing in a long line waiting for a sales clerk (that was fired) at Macy's :)

  • Report this Comment On January 13, 2014, at 12:08 PM, sadiqpunjani wrote:

    No surprise here. We are comparing Macy's, a high-brand retailer to Wal Mart, which tends to have lower margins on their products. Target though looks like is in trouble.

  • Report this Comment On January 13, 2014, at 1:10 PM, jcmoore2013 wrote:

    I wouldn't worry about macys, most likely a lot of those fired workers will be the 8 hour a week part timers, which is half their workforce, unless they have decided to fire the long term workers, which would be a stupid move as long term and productive workers usually make sales goals while part-timers do not make theirs for the most part. As far as cutting retirement, those individuals who are of age to collect it do not one thing around the stores, they sit up in the executive offices having a latte sitting at the conference desks with laptops...or in their offices swearing they don't have time to update vendor signage that has been there 3 months...go figure...whatever they get in the form of retirement is a gift.

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Dan Moskowitz

Dan Moskowitz spends the majority of his time researching stocks. He believes that fundamentals, and logic pertaining to industry trends, win out over the long haul.

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