Which Department Stores Are Worth Your Money?

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This is a challenging time for the American consumer. The economy in the United States is slowly digging itself out of the massive hole caused by the Great Recession, the worst recession in decades. The labor and housing markets continue to heal, providing a boost for cash-strapped consumers, but at frustratingly slow rates, meaning Americans are still holding on to their purse strings.

Nowhere can this be felt more closely than in the publicly-traded department stores. In an era of heightened spending consciousness, there’s only so many dollars to go around at shopping malls. As a result, investors need to carefully separate the winners from the losers among the department stores.

Not all are created equal

One department standing out in this challenging climate is Kohl’s (NYSE: KSS), which rallied sharply on a day in which the Dow fell nearly 200 points intra-day.

This is because Kohl’s announced a solid second quarter, in which total sales rose 2% and same-store sales, which measures only sales at locations open one year, climbed 0.9%.

Kohl’s management was proud of its company’s performance, noting strength in sales improvements as well as gross margin expansion over the past year.

At the same time, it’s clear that management acknowledges the pressures facing the American consumer. The company pared back its earnings guidance for the full-year, lowering the top end of its range by ten cents. In all, the company expects at least $4.15 per share this year.

Growth, in part, will be helped by the company’s recent expansion across the United States. Kohl’s opened 21 new stores in the U.S. over the past year, and will continue to look for opportunities to grow organically.

Competing department store Macy’s (NYSE: M) seemingly had a strong quarter of its own, but the market's reaction was quite different.

Investors apparently did not take kindly to 7.5% growth in diluted earnings per share in the second quarter and 16.5% growth over the fiscal first half.

After trading above $50 per share as recently as a few weeks ago, Macy’s has retreated to $46 per share, despite posting relatively strong results and an encouraging outlook for the remainder of the year.

Macy’s expects between 2.5% to 4% growth in same-store sales in the second half of the year, preparing to fully take advantage of the all-important back to school and holiday shopping seasons. Investors should be encouraged by this progress, despite shares falling after posting results.

Of course, not all retailers are created equal. One that continues to decline is J.C. Penney (NYSE: JCP), which has seen its executives (and customers) rush for the exits.

J.C. Penney has been in a nearly uninterrupted free-fall, from $40 per share at the beginning of 2012 to its current level. This has come on the heels of the well-documented exit of former CEO Ron Johnson.

Clearly Wall Street is not convinced that the company can right the ship, likely because J.C. Penney’s fundamentals are still deteriorating. Consider that the company lost nearly $1 billion in fiscal 2012.

And, things aren’t getting better to start 2013. Total sales at J.C. Penney dropped 16.4% in the first quarter. With that kind of decline, it’s no surprise that shares of J.C. Penney have lost 42% of their value over the past year.

Focus on the department store winners

To say that Americans remain under pressure would be an understatement, and nowhere is this more evident than the restrained growth and cautious outlooks for many of the county’s biggest department store chains.

At the same time, Kohl’s and Macy’s are running their businesses very well in this challenging climate. These two companies in particular are still growing, even with the headwinds facing the U.S. consumer.

And, even better, these two stocks are still cheap and they offer competitive dividends. Both Macy’s and Kohl’s trade for less than 13 times trailing earnings, markedly cheaper valuations than the market multiple.

Plus, both stocks yield in excess of 2%, which beats the yield on the S&P 500.

For investors interested in growth and dividends within the department store stocks, Kohl’s and Macy’s stand out as winners.

On the flip side, J.C. Penney continues to struggle mightily, dour economic environment or not. Its customers and executives are fleeing, and investors aren’t far behind. Follow the trend and stay out of J.C. Penney, and favor Kohl’s and Macy’s instead.

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Robert Ciura 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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