Better Buy: J. C. Penney Company, Inc. vs. Macy's

The exterior of a Macy's

Macy's (NYSE: M) and J.C. Penney (NYSE: JCP) have faced similar challenges. Both have lost sales to digital competitors, forcing store closures, and both have needed major course corrections.

Neither company has fully turned the corner. Macy's has arguably stabilized, and shown signs that it now has a model that will work going forward. J.C. Penney flirted with reaching that same point, but took a step backward when CEO Marvin Ellison left for the same job at Lowe's .

Macy's is farther along in its turnaround efforts compared to J.C. Penney. Image source: Macy's.

The case for Macy's

The department store chain has not just gotten smaller in store count, it has also innovated. This has included making changes to its app, in-store shopping improvements, and changes to its merchandise. The chain has moved toward an omnichannel model, and it has taken bolder steps like buying retail start-up STORY , a retail store that changes its look and merchandise every four to eight weeks.

These changes have slowly been paying off. In the first-quarter, the retailer reported earnings per diluted share of $0.45, an improvement from $0.26 in the same period a year ago. Comparable-store sales also rose by 3.9% for owned stores and 4.2% on an owned plus licensed basis.

"The winning formula for Macy's, Inc. is a healthy brick and mortar business, robust e-commerce, and a great mobile experience," said CEO Jeff Gennette in the Q1 earnings release. "While we have more work to do, the continuing improvement in our stores is encouraging and we once again achieved double-digit growth in the digital business."

The case for J.C. Penney

The struggling retailer has made some smart moves: It went into appliances and home services to fill a niche created by Sears ' struggles, and also revamped its female apparel lineup, added stores-within-a-store concepts, improved its salon, and added toy departments to all of its locations.

Results so far have been mixed. In the first quarter, total net sales dropped by 4.3%, mostly due to store closings. Comparable-store sales climbed by 0.2% -- better than a drop, but still pretty weak.

J.C. Penney may have put its worst days behind it, but it's hard to say for certain. The chain also needs a CEO, and while it could be argued that Ellison left for a bigger job in an industry he had worked in for decades, his leaving in the middle of a turnaround does create some doubts.

Which is a better buy?

Macy's has put up stronger results and looks better-positioned for a long-term comeback. J.C. Penney, meanwhile, still faces survival questions. It's also unclear if the chain will benefit from the impending death of Sears as much as you might expect.

While both companies have made progress, Macy's is the stronger chain, and doubts about J.C. Penney's long-term ability to remain in business make it a very risky buy. A strategic bankruptcy to clear debt remains a possibility, and those types of reorganizations tend to be disastrous for shareholders.

Macy's still has a lot of questions to answer, but not whether or not it will be in business in 12 months. That alone makes it a better buy than J.C. Penney. But add in the company's return to innovation, as well as its higher-end customer base, and the answer for investors is clear. Macy's may not be all the way back, but it's gone from sick to healthy, while J.C. Penney isn't there yet.

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Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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