Why Macy’s Is Such a “Good” Retail Play

stocks and the larger retail sectorIn the retail sector, it’s all about vision and execution. The reality is it’s all in the details, especially in the department store sector, where it’s all about product offerings and marketing.

Of the department stores in the retail sector, Macy’s, Inc. (NYSE/M) is probably the best-managed and best-performing company. Simply take a look at rival J. C. Penney Company, Inc. (NYSE/JCP), and you’ll understand why it has been a lot better for Macy’s investors than J. C. Penney’s. (Read more of my thoughts on this in “J. C. Penney, Coach Joining the Losers in the Retail Sector?”)

While Macy’s continues to look for ways to continue its sales growth and profitability, J. C. Penney is just trying to stay afloat in the retail sector and avoid a possible bankruptcy down the road.

The chart below shows the divergence in share price between Macy’s and J. C. Penney since October 2012. Macy’s has steadily climbed, as reflected by the red candlesticks, compared to J. C. Penney, as shown by the dark green line, based on my technical analysis.

Macy's Inc. NYSE Chart

Chart courtesy of www.StockCharts.com

It’s amazing how the wrong strategy could backfire in the retail sector and cost a company like J. C. Penney billions of dollars, while rewarding a company like Macy’s for excellent execution.

Macy’s announced it would cut about 2,500 workers, which is a small fraction of its total headcount of about 175,000. The company will also look at other cost cuts that could shave about $100 million off the expense side beginning this year. (Source: “Macy’s, Inc. Outlines Cost Reduction Initiatives to Support Continued Profitable Sales Growth,” Yahoo! Finance, January 9, 2014.)

While J. C. Penney is showing some encouraging metrics, the likelihood of the company to turn around its sinking ship and try to catch up with the likes of Macy’s is a long shot at best.

The retail sector is ruthless. One wrong move and it could leave you with years of declines and a difficult path to retrace.

In the department store sector, I would stick with Macy’s.

The current difficulty in the retail sector is made even clearer when Family Dollar Stores, Inc. (NYSE/FDO), one of my favorite discount stocks, fails to deliver. When this seller of cheap merchandise is struggling, you really have to take a step back and wonder about the overall retail sector.

In the case of Family Dollar Stores, not only did the company fall short on earnings, but it also made a downward revision of its fiscal second-quarter earnings guidance to below the consensus estimate. The discounter also lowered its sales and earnings guidance for fiscal 2014 to below guidance. Revenue growth was a mere 3.2%, while the key same-store sales fell 2.8%.

The key over the next few months will be to monitor the retail sector and see which companies can deliver like Macy’s does in a tough economic climate.