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Better buy: David Jones or Myer?

As Australia’s foremost department store retailers, David Jones (ASX: DJS) and Myer (ASX: MYR) invite comparison. But which department store chain is the better buy for investors? Here’s a look at some key points for each, and which company may be the better bet.

Sales

Both retailers have struggled to grow sales in recent years. As of the half year 2013, Myer sales were growing by about 1.7%, and further 0.5% in the most recent quarter, while David Jones sales grew by 0.7% as of the half year and declined by 2.2% in the most recent quarter. While none of these figures suggests strong growth, Myer looks to be edging out David Jones here.

It’s worth noting that department store retailing is always a tough game, and fears of recession Down Under don’t help. However, with the likelihood of recession in Australia seeming more distant – what with the recovering U.S. economy, rising U.S. import demand, and thus more consistent Chinese demand for Australian resources – local consumers could be feeling more confident in the months and years ahead.

Margins

Though you would expect the opposite to be true, Myer enjoys significantly higher gross and net margins than David Jones. In the last 12 months, Myer’s gross margins have come in around 46.5% and net margins have come in at 5.1%. David Jones’ gross margins, meanwhile, have come in a shade under 40% and net margins have come in at 4.6%. On this basis, Myer wins.

Balance sheet

Myer has more debt than David Jones does, and David Jones carries valuable (and possibly undervalued) real estate equaling a huge percentage of the company’s market cap. On this basis, David Jones is the more attractive company.

Past performance

Judging a prospective investment by its past performance isn’t a good method, but for interest’s sake, over the last 12 months, Myer shares have risen over 50%, while David Jones shares have risen about 7% and the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) has risen about 22% — not counting dividends.

Valuation & dividend

Today, Myer shares trade for about 10 times trailing earnings, and pay a fully franked dividend in the range of 7.6%. David Jones shares trade for a little more 14 times earnings and pay a fully franked dividend with a yield in the 7% range.

Foolish takeaway

While no longer as cheap as they were earlier in the years, Myer shares look to be promising. David Jones’ shares seem less exciting.

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Motley Fool contributor Catherine Baab-Muguira does not own shares in any company mentioned in this article.

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