This year, the retail scene has gone from bad to all-out carnage. The number of retailers either closing stores or going bankrupt have ballooned, thanks in part to the role of private equity. Just this week, Michael Kors joined the ranks of shrinking enterprises.
It leaves you wondering if there are any good companies left worth buying in the industry. Today, we'll look at that question through the lens of a matchup between J.C. Penney (JCPN.Q) and Kohl's (KSS 4.53%).
Image source: Getty Images
Of course, we can never know with 100% certainty which stock will end up doing better over the next five years. But by analyzing the question in three different ways, we get better odds of picking the winner.
Sustainable competitive advantages
There's nothing more important -- and more difficult to objectively measure -- than a company's sustainable competitive advantage, often referred to as a "moat." In its simplest sense, a moat is what keeps customers coming back week after week, while keeping the competition at bay for decades.
Traditionally, both J.C. Penney and Kohl's benefited from the scale of their brick-and-mortar operations. With the rise of e-commerce, however, that advantage has turned into a huge liability. Neither company has a particularly strong brand in this environment, either.
So, to differentiate between the two, I turn toward what might be the most important metric to measure the health of a retail business, comparable-store sales -- or comps. Here's how these two stack up:
Comps Over 5 Years
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While J.C. Penney is heading in the right direction currently -- outpacing Kohl's over the last 12 months -- we need to put this in perspective. Those gains mean little in the face of the massive drop-offs that the company experienced in 2012 and 2013.
To be clear, neither of these two have impressive moats, but I'd give the slight edge to Kohl's.
Winner = Kohl's
Financial fortitude
Because these two companies find themselves in such difficult times, financial fortitude is paramount. Companies with cash coming in, reasonable debt loads, and a cash stash to fall back on have wiggle room.
Those with little to no cash coming in and onerous debt obligations are in the opposite boat, and prime candidates for selling out or going bankrupt. Keeping in mind that Kohl's is valued at over four times the size of J.C. Penney, here's how the two compare:
|
Company |
Cash |
Debt |
Net Income |
Free Cash Flow |
|---|---|---|---|---|
|
J.C. Penney |
$887 million |
$4.6 billion |
$1 million |
($93 million) |
|
Kohl's |
$1.1 billion |
$4.5 billion |
$556 million |
$1.4 billion |
Data source: SEC filings, Yahoo! Finance.
Both companies have similar cash-to-debt loads, but at least Kohl's has money coming in the door. Over the past 12 months, J.C. Penney had negative free cash flow. While the figure is shrinking from years past, it's still not a good sign.
Winner = Kohl's
Valuation
Finally, we have valuation. While we don't have a one-size-fits-all metric to compare any two companies, we can use multiple data points to make an informed analysis.
|
Company |
P/E |
P/FCF |
Dividend Yield |
FCF Payout |
|---|---|---|---|---|
|
J.C. Penney |
11 |
N/A |
N/A |
N/A |
|
Kohl's |
10 |
5 |
5.8% |
26% |
Data source: SEC filings, Yahoo! Finance. P/E calculated using non-GAAP EPS.
Here again it is very easy to declare a winner. Kohl's trades for just five times free cash flow while offering a huge dividend that appears very safe.
Winner = Kohl's
My winner is...
So there you have it: Kohl's is the runaway leader. To be honest, I don't think prospects are all that rosy for either of these two players. But if forced to choose, I'd take Kohl's balance sheet and outsized dividend over J.C. Penney's turnaround story every day of the week.
