Macy's, J.C. Penney, and Kohl's: Which Department-Store Stock Should You Buy?

A closer look at Macy's and its peers will reveal the best bet for your portfolio.

May 30, 2014 at 9:00AM

Macy's (NYSE:M) shares have appreciated at a good pace this year, but the company experienced a hiccup after it reported sluggish first-quarter results on account of the cold weather. Although Macy's profits marginally increased, its sales declined year-over-year. However, Macy's reiterated its full-year forecast despite weak sales as the company is confident about performing well going forward.

Macy's seems to be benefiting from the business restructuring of J.C. Penney (NYSE:JCP). In addition, its performance has been way better than that of Kohl's (NYSE:KSS), which is suffering from a drop in traffic. As such, Macy's looks well-positioned in comparison with industry peers. Considering the moves that Macy's is making, it could get even better.

Recovering after a tough time
Macy's faced a tough time in the first half of the first quarter as extreme weather conditions hurt traffic. However, in the second half of the quarter, its sales started to gain momentum as the spring season approached. Management is confident that sales will pick up in the second quarter. Chief Executive Officer Terry Lundgren said, "The fundamentals of our business and our ongoing strategies remain strong. This, combined with the momentum we have built over the past five years, leads us to feel confident about the company's prospects ."

While many departmental stores have struggled to recover from bad weather conditions, Macy's has remained resilient. The company is focused on cost-cutting efforts in order to keep its bottom line strong. It eliminated 1,800 jobs earlier this year and expects to save around $100 million annually as a result of this move. Also, Macy's managed to reduce its selling, general, and administrative expenses by around 2% year-over-year in the first quarter.

The company is making strategic investments in items that are resonating well with customers. Macy's is changing its product mix to make its offerings more customer-centric and offer the widest assortment possible. It will train its employees to satisfy customers' needs, and this should help it deliver better results.

Ahead of peers
Moreover, rival J.C. Penney's business overhaul is turning out to be an advantage for Macy's. Chief Financial Officer Karen Hoguet said:

In markets where we are competing against Penney we have seen an uptick in business. Clearly, we are getting a benefit from what's happening there. We've got strategies to make sure we keep winning. 

Penney made disastrous moves under former CEO Ron Johnson. It alienated its core customers by removing coupons and tried to deliver a "destination" shopping experience. This led its loyal customers to feel that they were no longer the target market of Penney's, according to Time. Macy's has capitalized on this by offering exclusive products and trying to attract younger customers to its stores.

Also, Penney had announced in January that it will close 33 stores and lay off around 2,000 employees this year. Macy's can expect more benefits as a result of Penney's store closures.

On the other hand, rival department store Kohl's is in trouble. In its recently reported first quarter, Kohl's earnings declined 15% year-over-year on the back of weak store traffic, which was down 3.4% from a year earlier. Its revenue dropped 3.1% from the prior-year period. The company missed estimates on both the top and bottom lines and blamed the harsh winter weather for its woes.

However, Kohl's is trying to achieve a turnaround by offering more private brands that generate higher margins. Given that the company has reaffirmed its guidance for the full year, it might be able to improve. But, since Kohl's revenue, earnings, and traffic dropped steeply in the previous quarter, it doesn't look like a good bet at this point.

A solid investment
Macy's looks like a good investment bet. It hiked its dividend by 25% to $1.25 per share on an annual basis, resulting in a yield of 2.20%. Macy's also increased its share repurchase authorization by $1.5 billion, taking the total authorization to $2.5 billion. The company is doing better than its peers and its strategies should ensure better performance. Thus, investors can expect the company to deliver good value going forward.

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Neeta Seth has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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