Better Buy: JC Penney vs. Kohl's

Department store chains JC Penney (NYSE: JCP) and Kohl's (NYSE: KSS) both face similar challenges -- slumping brick-and-mortar traffic, the rise of "fast fashion" apparel retailers, and tough competition from e-tailers and superstores.

JC Penney shares declined nearly 60% this year, while Kohl's shares fell roughly 25%. Despite the poor performance of both stocks, contrarian investors might notice that one of these department stores is a better value play than the other.

How are JC Penney and Kohl's different?

At first glance, JC Penney and Kohl's look similar. Both companies run low- to middle-range department stores that offer a wide range of apparel, housewares, cosmetics, and other products.

However, Kohl's sells more private label brands than JC Penney, and its stores are arranged in a "racetrack" aisle that circles the entire store -- a strategy borrowed from discount stores. Both companies are using popular brands to lure customers back to their stores -- JC Penney recently added Nike shops to hundreds of its stores, while Kohl's inked a similar deal with its rival Under Armour.

Kohl's had 1,154 namesake stores in 49 states at the end of its last quarter, along with 12 FILA Outlets and four Off/Aisle clearance centers. JCPenney finished last quarter with 875 stores in the U.S. and Puerto Rico.

Kohl's generated an average of $157 per square foot over the past 12 months, according to eMarketer. JCPenney generated an average of just $105 per square foot during that same period.

How fast are JC Penney and Kohl's growing?

JC Penney's revenue fell 0.6% to $12.55 billion in 2016, and analysts expect a 1.5% decline this year. Kohl's revenue fell 2.7% to $18.7 billion last year, and analysts expect a 0.6% decline this year.

Overall revenue growth can be distorted by store closings and openings. But JC Penney and Kohl's comparable store sales growth -- which tracks the year-over-year performance of stores opened for more than a year -- tells a similar, gloomy story:

JC Penney and Kohl's top line numbers look similar, but their bottom line numbers are very different. JC Penney's non-GAAP profit of $0.08 per share in 2016 represented its first annual profit in six years, and Wall Street expects that figure to jump to $0.42 this year. However, much of JC Penney's newfound profitability depends on asset sales. Excluding those gains, the company remains unprofitable on a GAAP basis.

Kohl's is consistently profitable and only reports GAAP numbers. Its earnings fell 6.2% last year, and analysts anticipate a 0.5% decline this year. That growth looks anemic, but it looks more reliable than JCPenney's volatile non-GAAP numbers. A comparison of the two companies' operating margins over the past five years also indicates that Kohl's has better bottom line growth.

Valuations and dividends

JC Penney doesn't have a trailing P/E, due to its inconsistent profitability. However, its P/S ratio of 0.1 is extremely low compared to the industry average of 0.3 for department stores. Assuming that its bottom line growth improves, it trades at 12 times next year's non-GAAP earnings.

Kohl's trades at 11 times trailing earnings, 10 times forward earnings, and 0.4 times sales. Those figures make it a more fundamentally stable play than JC Penney.

Moreover, Kohl's pays a forward dividend yield of 5.9%, and it's hiked that dividend annually for six straight years. Its payout ratio of 60% also leaves plenty of room for future hikes. JC Penney stopped paying its dividend in early 2012.

The winner: Kohl's

I personally don't like either JC Penney or Kohl's, since both companies will likely struggle against significant headwinds for the foreseeable future. But if I had to choose one, I would pick Kohl's -- which offers higher margins, better profitability, and a generous dividend.

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Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.