September’s retail sales were better than expected, as consumers took advantage of back-to-school discounts. The 24 national retailers that RetailSails.com tracks saw September same-store sales increase 5.7%, the 25th consecutive monthly gain. Last September, the same-store sales increase was 2.7%, so retail appears to be moving in the right direction.
One company that didn’t have a good month, however, is J.C. Penney (NYSE:JCP), whose same-store sales declined 0.6% — weaker than expected, and much worse than the 5.1% increase in the same month last year. Incoming CEO Ron Johnson, the former head of Apple‘s (NASDAQ:AAPL) retail stores, is going to have his hands full. My advice is to sell your JCP stock and buy Wal-Mart (NYSE:WMT) instead. Here’s why:
Liz Claiborne
J.C. Penney is betting its future success on a brand whose best days are behind it. Designer Liz Claiborne died at the age of 78 in June 2007 and hadn’t been an active part of the company that bears her name for 17 years prior to her death. By the time Liz Claiborne, Inc. (NYSE:LIZ) CEO Bill McComb took over the company in 2006, the brand was in desperate shape.
J.C. Penney worked a deal in 2007 to launch Liz & Co. in its stores, and so began a relationship that culminated Oct. 12 with the news that J.C. Penney is acquiring the worldwide rights to the Liz Claiborne family of brands, as well as the U.S. and Puerto Rico rights for the Monet brand, at a cost of $288 million. Anyone who follows retail knew this day was coming given the agreement they signed in 2009, which gave J.C. Penney the option to acquire the brands in 2014 or a second option in 2019. Liz Claiborne’s financial difficulties moved up the timetable several years.
Wendy Liebmann of WSL Strategic Retail believes the Liz Claiborne brand helps differentiate J.C. Penney from other mid-tier stores like Kohl’s (NYSE:KSS) and Macy’s (NYSE:M). I don’t buy it. Paying almost $300 million for a brand no one else wanted seems like a complete waste of shareholder cash.
Same-Store Sales
Kohl’s and Macy’s September same-store sales were 4.1% and 4.9%, respectively. Both produced increases over September 2010. Of the three, Macy’s is having the best year, up 5.5% year to date — a 50-basis-point improvement over 2010 year to date.
In the first half of the year, Macy’s increased operating profits 46% year over year to $836 million, while J.C. Penney’s operating income decreased 3.2% to $242 million. Macy’s operating margin was 400 basis points higher at 7.1%. Macy’s online sales, which every good retailer should do well, grew by 40.2% in the second quarter, compared to 2.8% for J.C. Penney. In 2010, Macy’s online sales were $1.6 billion, compared with $1.5 million for J.C. Penney.
With Macy’s resounding edge in online sales growth, it can’t help but continue to be more profitable. If Macy’s doesn’t pull you away from owning J.C. Penney’s stock, perhaps Wal-Mart (NYSE:WMT) will.
It Can Do Better
As big as Wal-Mart is, it always can do better. Take online sales. WMT generated $4.1 billion in 2010 from the Internet. That’s 1% of its $422 billion in worldwide revenue. This compares with 6.4% for Macy’s and 8.4% for J.C. Penney. Granted, both department stores sell products that lend themselves to online sales, but all Wal-Mart needs is a couple percentage points of improvement, and it would add approximately $1 billion in operating profits. I know it’s not much, but every little bit helps when you are competing against Target (NYSE:TGT), Costco (NASDAQ:COST) and a slew of dollar-store chains.
Wal-Mart’s U.S. stores delivered their third consecutive month of positive same-store sales growth in September, erasing investor fears that its U.S. operating segment is beyond repair. While the same-store sales improvement is welcome news, management continues to tinker with its smaller-store format. Until Wal-Mart can come up with a successful balance between its larger stores and its smaller ones, it will continue to leave sales on the table. It can do better in the U.S., and when it does, WMT stock will rise, too.
Bottom Line
If you’re looking to invest in a department store, Macy’s is a good bet. However, if you’re looking to invest in arguably the world’s best retailer, you must go with Wal-Mart. Either way, J.C. Penney is to be avoided.
As of this writing, Will Ashworth did not own a position in any of the aforementioned stocks.
