Who’s the King of Retail and Who’s the Pretender? – Wal-Mart Stores, Inc. (WMT), J.C. Penney Company, Inc. (JCP)

1. Gross Profit margin: J.C. Penney Company, Inc. (NYSE:JCP) is losing money and has a negative gross profit margin of 7%. But not so long ago, the company used to have a gross profit margin of around 8%. That’s a very high (and unsustainable) rate for a mass retailer. Wal-Mart Stores, Inc. (NYSE:WMT), on the other hand, has always displayed a consistent operating margin of 6% and a gross profit margin of 3%. That’s all it takes to win.

2. Retail strategy: J.C. Penney Company, Inc. (NYSE:JCP) is very confused. It used to be a coupon chain but then it changed. Johnson, its new CEO, eliminated promotions and discounts (a J.C. Penney trademark) in favor of a “fair and square” pricing model. He also made the stores more upscale by creating a “store within a store” shopping experience with brands like Levi’s and Izod. Wal-Mart Stores, Inc. (NYSE:WMT), on the other hand, doesn’t need to do all that. It’s globally known as a low- cost retailer which profits from scale and size.

3. Cash management: J.C. Penney Company, Inc. (NYSE:JCP) only has $525 million of cash on its balance sheet. That’s down 41% from last quarter. The company burned through $380 million in free cash flow last quarter. That will amount to a roughly $1.3 billion burn rate for the year. If the company continues reporting 20%-plus sales declines, it will burn through its cash within nine months. That’s an extraordinary rate. Wal-Mart Stores, Inc. (NYSE:WMT), in contrast, has raked in more than $4.3 billion of cash flow in its last quarter alone.

The Fool thinks retail

It’s usually a sound investment advice to pick the stock of the dominant company in the sector. But in retail, more than anything, it’s a must. Wal-Mart, due to its scale, strategy and cash gushing capabilities will outperform any other retailer. J.C. Penney Company, Inc. (NYSE:JCP), on the other hand, is likely to become another “Wal-Mart Stores, Inc. (NYSE:WMT) victim” before 2013 comes to an end.

The article Who’s the King of Retail and Who’s the Pretender? originally appeared on Fool.com and is written by Shmulik Karpf.

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