Is This Retail Stock A "Winner" Or "Loser"?

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If all the holiday shopping had you thinking about investing in retail stocks, you have a variety of risk/reward profiles to choose from. Some are steady growers, others are turnaround plays, and still others are possible short plays from continued erosion. The competitive nature of retail, which is being driven by discount online sellers, will result in this dichotomy of "winners" and "losers." To which camp do Macy's, J.C. Penney, and Sears belong?

Why You Should Buy Macy's (NYSE: M)

Macy's is one of the more solid department stores out there. It has a track record of strong execution, but nevertheless is only up 19% from the 52-week low and still trades at a compelling 11.6x past earnings versus a historical 5-year average of 13.2x. Analysts forecast an impressive 10.8% annual growth rate over the next 5 years, which is backed by a 2.2% dividend yield. I strongly encourage backing these fundamentals, since the downside is already limited by multiples. In addition, the 8% free cash flow yield indicates there is potential for the firm to be a value play.

But there are several reasons why I like the business's presentation. First, it doesn't catch me as being desperate like many other peers. It has not aggressively cut prices in an attempt to win over last minute customers. Instead, it has leveraged its premium brand reputation to drive greater volumes--something that was showcased through the decision to keep stores open for 48 straight hours through December 21 and December 23. Perhaps most excitingly, the company has done terrific in monetizing its online business. In 3Q12, online sales rose an impressive 40% and caused management to raise guidance.

Going forward, a greater percentage of sales will come from online mediums as a result of the rise in smartphones. Mobile activity has increased significantly, as evidenced by a majority of Amazon customers relying on it for purchases. If Macy's is able to secure its position in the mobile front while leveraging its existing brick-and-mortar units and fulfillment centers for earlier delivery (like it has), the upside is strong. And at current multiples, it is also a steal.

J.C. Penney (NYSE: JCP): Sears 2.0?

J.C. Penney has had a bit of a December run with shares now up 32.3% from the 52-week low. The main catalyst has been Oppenheimer, which continues to be relentlessly optimistic on the company's strategy. The analyst is expecting that J.C. Penney's promotional branding will finally pay off in holiday sales and throughout 2013. This optimism has been echoed by The Dallas Morning News, and Citi. The Street's support, however, should not be overstated. It is only rated a 3 out of 5 where "5" is a "sell". 

And I think the company's optimism also has a lot to do with technical factors, like a short squeeze. The shorts will likely be selling (and they have) to realize gains before taxes rise next year. Even still, 32.3% of the float is still being shorted--a sentiment that is backed by the Street as well. Retail Greeks say J.C. Penney's gross margin trends have been weak on a 2- to 3-year frame. The company is nevertheless hopeful that it can execute on its "New JCP" constitute that consists of boutique stores with significantly greater profitability. Certainly, the company has a large room of potential with just half the sales per square footage as peer Gap. The "New JCP" has seen square feet go from nothing to 7 million square feet in one month, and it yield $269 per square foot versus the traditional $134 per square foot. But it's a long road ahead, and there's no sense in getting in now if there are further nearer term downside catalysts.

In particular, I see the 5.6% rise in shares off of news that the company was hiring an ex-Abercrombie & Fitch visionary to help with store layout was exceptionally overblown. They hired Ron Johnson as chief also for his expertise in store layout, and it just comes across as desperate hype at this point. Can a new design really bring back lost customers? The rumor is that J.C. Penney is even planning on introducing mini-coffee shops and juice bars to convince shoppers to enter their stores (I like the idea.)

In many respects, J.C. Penney reminds me of Sears (NASDAQ: SHLD), which is undergoing a restructuring of its own. After bleeding billions upon billions and culminated in a disastrous 4Q11, the company's Chairman presented a turnaround plan that would disperse management throughout its business segments, spin off some assets, sell 1 stores, and clear off $1 billion in debt in the process. While shares have gone up 24% for the year to date, it has been mostly erosion after the quarter-long market excitement. Analysts are still bearish on the stock and rate if a 3.8 out of 5, and Sears is still well into the red. Let's hope J.C. Penney can execute better.

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