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Wal-Mart Stores, Inc. (WMT), Target Corporation (TGT): What Department Stores Should Investors Buy?

Wal-Mart Stores, Inc. (NYSE:WMT) has increased only 11.3% since the beginning of the year, lagging the S&P 500’s return of 14.4%.

However, its peers including Macy’s, Inc.(NYSE:M) and Target Corporation (NYSE:TGT) have outperformed the general market, delivering gains of 24% and nearly 21%, respectively. Is Macy’s the best pick after its out-performance in the stock market? Let’s find out.

Wal-Mart Stores, Inc. (NYSE:WMT)

Impressive first quarter earnings growth

In the first quarter of 2013, Macy’s, Inc.(NYSE:M) experienced decent growth in both sales and net income. While revenue increased to $6.39 billion from $6.14 billion in the first quarter last year, its net income rose by nearly 20%, from $181 million in Q1 2012 to $217 million in the same quarter this year. Because of the lower number of total shares outstanding, its Earnings Per Share, or EPS, growth was much higher, at 30.23%, from $0.43 per share to $0.56 per share. The year-over-year comparable sales in the first quarter reached 3.8%.

Terry Lundgren, the company’s chairman, president and CEO felt great about the first quarter results, despite several challenges including unexpectedly cool spring weather in northern climate zones and weakness among budget-conscious consumers. He said the company will keep pursuing “myriad new growth opportunities” within its M.O.M strategies (My Macy’s, Inc.(NYSE:M), Omnichannel and Magic Selling).

Macy’s, Inc.(NYSE:M) has been a great cannibal. Since the third quarter 2011, the company had spent around $2.2 billion to retire about 60.3 million Macy’s, Inc.(NYSE:M) outstanding shares. After the first quarter 2013, Macy’s, Inc.(NYSE:M) board had raised the share buyback authorization by $1.5 billion to $2.6 billion. Macy’s is trading at $48.40 per share, with the total market cap of nearly $18.60 billion. The market values Macy’s at only 6.32 times Enterprise Value over Earnings Before Interest, Taxes Depreciation and Amortization, or EV/EBITDA, an important metric in evaluating these kinds of companies.

Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT)’s earnings are not as impressive

While Macy’s enjoyed great growth, Wal-Mart Stores, Inc. (NYSE:WMT)’ did not have good year-over-year growth in first quarter earnings.

Revenue increased by only 1% to $114.19 billion, while net income moved up only 1.1% to $3.78 billion. EPS came in at $1.15, 4.5% higher than the EPS of $1.10 in the first quarter last year.

The higher growth in EPS was due to the share buybacks. During the quarter, Wal-Mart Stores, Inc. (NYSE:WMT) spent around $2.2 billion to buy back around 30 million shares. Total cash returned to shareholders was around $3.8 billion including $1.6 billion in dividends. CFO Charles Holley, commented that the company estimated Wal-Mart Stores, Inc. (NYSE:WMT) would generate around $1.22 to $1.27 EPS in the second quarter of fiscal 2013.

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