Department stores have been under pressure lately as mall traffic has faded and Amazon.com has thrown its weight into the apparel business. But falling stocks can create opportunities for investors. While department store stocks have mostly declined this year, the sector experienced a rebound as several chains posted better quarterly results than expected.
Today, as part of our better buy series, we explore two of the most venerable names in department stores: Macy's (NYSE:M) and J.C. Penney (OTC:JCPN.Q). Let's take a look at what each retailer has to offer.
Does Macy's still have the magic?
For years after the recession, Macy's was one of the best-performing stocks on the market, with shares gaining more than 1,000% from their recession-era bottom to their peak last year. The company delivered consistent growth during that time thanks to a resurgence in tourist traffic, a savvy omnichannel strategy, and miscues by rivals including J.C. Penney and Sears.
Today, Macy's finds itself in a much different predicament. The stock has lost nearly 50% of its value from a year ago as comparable sales have suddenly turned negative, and have now fallen for six quarters in a row. Through the first half of the year, adjusted earnings per share dropped from $1.19 to $0.94 as the company has confronted the challenges facing the broader industry. Comp sales fell 2% in the most recent quarter though management said results improved in each quarter.
Still, after closing 41 stores last year, the company announced it would shutter another 100 full-line stores, or 14% of its total store base, in an attempt to return to profitable growth. Investors cheered that decision, but it could portend further store closures. The company acknowledged that those stores were cash flow positive, but said that volume and profitability had been declining in recent years, prompting the decision to close them.
Perhaps the most intriguing argument for investing in Macy's is its real estate portfolio. The company is sitting on several prime downtown properties, including its flagship Herald Square location in Manhattan, and investment advisor Starboard Value has estimated that its real estate holdings could be worth $21 billion, nearly double its market cap today. The company has already begun unlocking some of that value, selling the top floors of its Downtown Brooklyn store to a developer for $170 million. If profits continue to flag, expect more such deals.
J.C. Penney is back from the dead
Macy's rival has taken a nearly opposite trajectory since the recession. In 2011, the board, at the behest of hedge fund tycoon Bill Ackman, brought on CEO Ron Johnson to lift the company's stagnant sales. Instead, Johnson's tenure was one of the most disastrous in retail history as comparable sales fell 25% in 2012 under his overhaul plan. Johnson was shown the door shortly after, but four years later the company is still recovering from the mess he made. Penney has nearly $5 billion in debt, requiring $400 million in annual interest payments, and after years of losses it is finally expected to turn a profit this year.
Despite that hole, Penney's performance has been on a promising upswing. Under new CEO Marvin Ellison, the company is on track to grow comparable sales by 3-4% this year, and has found growth by bringing private brands, launching appliances, expanding its partnership with Sephora and other similar brands, and improving the e-commerce experience.
Ellison expects such moves to lead to a per-share profit of $1.40-$1.55, near where the company was in the pre-Johnson years, making the stock a bargain at today's price of less than $10. Just as Macy's benefited from Sears' and Penney's previous weakness, it seems that Penney is taking advantage of its two rivals' struggles. Penney co-anchors hundreds of malls with Sears and Macy's, and Ellison called it a net positive when one of them closes. With Macy's set to shut 100 stores, J.C. Penney should get a boost.
And the winner is...
With J.C. Penney emerging from a dark period and Macy's stuck in a same-store sales swoon, it seems like Penney is the better bet of the two, especially if management can come through on its goals for 2019. While Macy's real estate portfolio could provide some lift if sales continue to fall, based on the market's recent reaction, those holdings don't seem to providing much of a floor for the stock.
J.C. Penney is growing and making moves to build long-term profits, and that makes it the better buy of the two.