The retail industry is a dangerous place in which to invest. Changing consumer shopping habits are decimating once venerable businesses, and new upstarts are emerging to replace the old guard.

Yet in this dynamic arena, opportunities exist for intrepid investors -- if you know where to look. In this regard, let's evaluate J.C. Penney (JCPN.Q) and Kohl's (KSS -1.96%) to see which is the stronger investment opportunity today.

Two men in suits arm wrestling

Image source: Getty Images.

Financial strength

As e-commerce continues to disrupt a large swath of the traditional retail industry, only the strongest retailers are likely to survive over the long term. Financial fortitude is therefore of the utmost importance. Let's look at how J.C. Penney and Kohl's stack up in this regard.

Metric (in Millions)

J.C. Penney





Operating income



Net income



Operating cash flow



Free cash flow









Data source: Morningstar.

On every metric, Kohl's has the advantage over J.C. Penney. Kohl's is profitable on a GAAP basis, while J.C. Penney is not. Kohl's has 35% less debt and four times more cash on its balance sheet. Perhaps most importantly, Kohl's generates more than eight times as much free cash flow as its smaller rival. Thus, Kohl's has a decided edge when it comes to financial fortitude.

Advantage: Kohl's.


Revenue growth has been hard to come by for Kohl's and J.C. Penney in recent years. Like many other retailers, they've been forced to close hundreds of stores in response to declining traffic.

JCP Revenue (TTM) Chart

JCP Revenue (TTM) data by YCharts

However, both Kohl's and J.C. Penney recently enjoyed strong same-store-sales growth during the crucial holiday shopping season. In the case of Kohl's, Wall Street believes this could be a sign of things to come; analysts expect the company to grow its earnings per share at nearly 9% annually over the next half-decade. For J.C. Penney, simply generating a GAAP profit will be a victory after years of losses. So in terms of earnings growth, Kohl's has a clear edge.

Advantage: Kohl's.


No better-buy discussion should take place without a look at valuation. Let's check out some key value metrics for J.C. Penney and Kohl's, including price-to-sales and price-to-earnings ratios.


J.C. Penney





Trailing P/E



Forward P/E



Data sources: Yahoo! Finance, Morningstar.

J.C. Penney's shares are less expensive in terms of price-to-sales, while Kohl's is cheaper on a forward P/E basis. That's to be expected, as Kohl's is the far more profitable business, with $644 million in net income over the past year, compared with a $178 million loss for J.C. Penney. Ultimately, profits are what we're seeking as investors, so I'll give the edge to Kohl's in this valuation category.

Advantage: Kohl's.

The better buy is...

It's a clean sweep for Kohl's over J.C. Penney. With its greater financial strength, superior growth prospects, and more attractively priced stock, Kohl's is the better buy today.