Retail sales and discounts are finally tapering off as consumers make their final returns and exchanges from the holiday season. Once again, retailers fought to the bitter end this holiday season by staying open later and heavily discounting items as they feared for the worst in terms of sales and profitability. According to the Commerce Department, retailers' efforts proved worthwhile as retail sales rose 0.4% in November and 0.2% in December, or 0.7% excluding automobile sales – the highest increase in retail sales for the year.  

Colder weather conditions pushed shoppers toward purchasing more apparel, accessories, food, and online shopping, causing a decline in electronic and appliance sales. To those following the latest retail trends, it's no surprise that Macy's (NYSE:M) performed well throughout the season while J.C. Penney (NYSE:JCP) continued to struggle. While sales are important and one wants to see them going up, sales performance as an absolute number isn't the most important measure for Foolish investors looking to own great businesses for the long haul. Instead, they should look at a given company's return on equity (ROE.) 

All retailers are not created equal
The most important measure for prospective investors looking at any company is its return on equity. This is because a company with consistently high ROE will not only grow but reward shareholders over the long term as shareholder's equity is compounded over time. A business with a consistently high ROE will, over time, find itself light years ahead of the competition. Competition in the retail sphere is as fierce as ever, and any retailer that can create an advantage over its peers and consistently reward shareholders with a high return on equity is most likely the best place to start looking for profitable and Foolish investments. Not only will shareholders benefit from the inherent growth of a high return on equity, but such a retailer will find itself in an increasingly stronger position as time goes on. 

Providing the best ROE
Judging from the table below, Macy's, J.C. Penney, Dillard's (NYSE:DDS) and Kohl's (NYSE:KSS) are all quite different in terms of corporate profitability.

The first point that sticks out is the fact that Macy's appears to be the best business of the four retailers. In fact, Macy's shareholders have earned an average of 22.73% in returns over the past three years. Shareholders of Dillard's and Kohl's have received less of a return on their investment when compared to Macy's owners. On the brighter side, at least these shareholders received a portion of some kind for their investment. Owners of J.C. Penney aren't so lucky, as they received a net loss on their invested capital.

J.C. Penney's shareholders must also expect minimal to no growth for the company going forward as its current P/E ratio is non-existent. The other three retailers and their investors must anticipate strong growth in terms of sales volume, net profit, and companywide expansion as their current P/E's are much higher. Macy's investors are the most confident about the company's future earnings growth, and will likely continue investing their money in Macy's operations, certain that the company's superior business model will be worth the additional investment.

Company Name

3 Year Average

Return on Equity

Current P/E










J.C. Penney



Foolish takeaway
Foolish investors looking to be part of the retail industry action should consider Macy's as a prospective investment. Not only is Macy's a great business in terms of increasing its EPS along with growing its net sales and profits, but it has managed to consistently generate above average returns on money invested in the retailer's operations. Macy's strong ROE is a reflection of the company's strength as a business and efficient use of shareholders' investments to grow earnings and expand operations.

Foolish investors would be wise to look further into Macy's as a truly Foolish investment since its high return on equity is a strong sign of a durable brand. For now, investors looking for exceptional businesses with great returns on equity should stay clear of J.C. Penney. 

Is Macy's one of two companies winning the war in 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.

Fool contributor Natalie O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of Dillard's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.