OK folks, it's time to go department store shopping. Retailers reported April sales last week and for the most part, they did better than analysts expected they would. What's even more encouraging, however, is first quarter results should be healthy despite the economic downturn. Will this glimmer of hope translate into future gains? It should, and department stores just might be the major beneficiary.

For instance, JCPenney (NYSE:JCP) raised its first-quarter EPS guidance to 9-11 cents, far higher than analyst expectations of just 2 cents a share. In addition, Kohl's (NYSE:KSS) expects Q1 earnings per share to beat estimates by 7 cents (42-43 cents versus 35 cents) due to stronger-than-anticipated sales in April. While we're not out of the woods just yet, it does appear that consumers are opening their wallets a little wider - and that's good for everyone.

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Stock Performance Last 10 Months

Company Stock Return (07/18/08 to 05/08/09)
JCPenney (NYSE:JCP) (1.4%)
Kohl\'s (NYSE:KSS) 2.2%
Sears Holdings (Nasdaq:SHLD) (23.8%)
Macy\'s (NYSE:M) (27.1%)
Nordstrom (NYSE:JWN) (20.4%)
S&P 500 (26.3%)

Is Relief in Sight?
Investopedia's Eugene Bukoveczky wrote No Relief In Sight For Battered Department Stores last July, stressing caution for anyone considering investing in department store stocks. His reasoning was that consumers were cutting back discretionary spending in a big way and any positive effect the stimulus checks had on retail sales was long gone. At the time, Kohl's, JCPenney and Nordstrom were all trading at 52-week lows with no relief in sight. Hindsight being what it is, his reservations were warranted. However, against the odds, four of the five department stores listed above outperformed the S&P 500 over the last 10 months. The question now is whether they can keep it up.

April Was a Mixed Bag
There are two sides to every story, and April retail sales are no different. The official tally was 1.2% growth. However, take out Wal-Mart's (NYSE:WMT) sales and they were negative by 2.7%. MasterCard's SpendingPulse report said these were the best numbers in the past three to five months. That may be, but if you compare the combined April/March sales in 2009 to those in 2008, retail sales dropped 0.3%, while they increased 1.3% a year earlier. For every sign business is improving, there seems to be an equally ominous countersign, like Standard & Poor's downgrading of department store debt in April. If department store business is at a bottom, it's not a smooth one.

The Winners
Gap (NYSE:GPS) has shown in recent years that declining same store sales aren't a big deal if you have a clean balance sheet and great cash flow. Kohl's, JCPenney and Nordstrom all have reasonably good cash flow but slightly more debt than is ideal. Despite this shortcoming, all three are reducing sales declines while increasing profits, a sure recipe for increasing stock prices. JCPenney's same store sales dropped just 1.5% in April, way down from its 15% decline in March. Kohl's and Nordstrom's comps were down 6.2% and 10.8% respectively, 130 and 150 basis points better than analyst expectations. Although all three will see EPS drop this year, they all are expected to be in the black.

The Losers
Eddie Lampert of Sears Holdings thinks he can be a retailer and he's showing no signs that this is the case. Lampert is currently experimenting with something called "MyGofer", where customers drive through a warehouse to pick up goods bought online. If that's his best idea, Sears is in a lot of trouble. Macy's same store sales in April were negative 9.1%, 160 basis points worse than expected, and earnings per share will be 19-21 cents in the red in the first quarter, making it easy to pass.

Bottom Line
Kohl's should make $2.35 a share this year and $2.71 a share in 2010. As for the rest, it seems unlikely they will manage to even come anywhere close. (For more on the retail sector, see Analyzing Retail Stocks and Measuring Company Efficiency.)

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