Which Clothing Retailer Should Be in Vogue With Investors?

The Commerce Department reported that August retail sales rose just 0.2% from July, the smallest increase since April and well below analysts' expectations. Disappointing apparel sales were one component of the overall slow growth. Before we get too down on the retail sector, though, it's good to recognize that retail sales have now risen for five straight months. In an economy that is still in recovery mode, that's not bad at all.

No significant gaps in performance
Gap operates more than 3,400 stores primarily in North America but with a growing strategic effort to capture market share in Asia. The company's store brands include Gap, Old Navy, Banana Republic and Athleta. More than 90% of its locations are company-owned.

Gap's second-quarter sales jumped 8% compared to the same quarter last year. What's even more remarkable considering the economy, comparable-store sales were up 5%. I was particularly impressed that the sales gains were achieved with a tiny 0.7% increase in marketing expenses.

Operational efficiency magnified the effect of sales growth on profitability--gross margin improved 0.6% and operating margin rose 1.6%. The result was a $60 million increase in net earnings, up 25% over last year's second quarter.

InformationWeek recently published its annual list of top technology innovators. Gap was ranked the top retailer, and came in third overall. Gap has been effective at introducing omni-channel strategies including its "ship from store" initiative. The concept is to make it easier for customers to shop in stores, online, or through their mobile devices when they are on the go -- and have the same quality of customer experience.

The company's omni-channel platform was working well in the second quarter, as online sales grew 27%.

A CEO earning some humongous frequent-flyer miles
Macy's operates 840 stores under the brands Macy's and Bloomingdale's. In the second quarter, total sales were down 0.8% compared to the same quarter of 2012. In its press release, the company acknowledged that second-quarter results were "softer than anticipated." This shows that consumers are still being cautious about discretionary expenditures.

Operating income dropped 3.6% to $534 million. Earnings per diluted share, however, came in 7.5% higher, at $0.72, versus last year's second quarter.

Cost control is of paramount importance during times of sluggish growth, and Macy's was able to reduce its SG&A expense by $10 million compared to 2012. The company also held its gross margin extremely steady at 41.8%.

To improve sales in this difficult macroeconomic environment, one of the company's strategies is called "My Macy's." It's an initiative to allow local store managers to have more input regarding what is stocked in the store, with the objective of better tailoring the merchandise mix to what local customers want and request.

Macy's CEO Terry Lundgren spends 40 weeks a year visiting Macy's stores around the country, talking to managers and then bringing this fresh-from-the-marketplace information back to the corporate office.

Another of Macy's business-building strategies is to put more inventory dollars into stocking popular brands of active wear in an effort to capture more "millennial" customers, those in their 20's to early 30's.

In its updated guidance, Macy's modified its expectation for full-year comparable-store sales growth to between 2% and 2.9%, down from the previous forecast of 3.5%.

Seeking to be the future of retail
Nordstrom is a fashion specialty retailer that operates 248 stores in 33 states. For the second quarter, the company reported net sales of $3.1 billion, an increase of 6.3% over the same period of 2012, while same-store sales rose 4.4%. The company described these sales trends as showing moderate improvement, but are still "softer than anticipated."

Nordstrom's investments in enhancing its online shopping technology paid off as direct sales rose 37% last quarter. Efforts to build its "fashion rewards" customer-loyalty program were also effective as membership rose 18% to 3.6 million active members.

Bottom-line results were favorable, with net earnings rising to $184 million, an 18% jump over last year's second quarter. Earnings per share were up 24%.

The company has created Nordstrom Innovation Lab, a functional area whose purpose is to chart a course to technological leadership in the retail industry. Nordstrom collects an enormous amount of data including through social networking sites in an effort to know its customers better than other retailers. By knowing what its customers want, it can match the merchandise in the stores and on its website to these preferences.

One problem with predicting what customers want is that when it comes to fashion, many customers don't know what they want until they see it.

What we learned
For each of these retailers, success begins with an in-depth understanding of the target customers' needs. Retailers must match their merchandise offerings to these needs and promote the merchandise to customers through diverse channels, including traditional advertising and mobile applications.

The bottom line is that the most successful retailers today are increasingly putting the consumer in the driver's seat, making them active participants in the process of determining what merchandise will be stocked on store shelves or online.

Right now, Gap looks like the best investment choice, particularly if its international expansion program is successful. The company reported strong second-quarter sales for both its Gap and Old Navy brands.

But of the other two fine companies are worth watching as well, particularly if consumers start spending money more aggressively. It will be interesting to see how customers react to Nordstrom's technological innovations -- whether or not these will foster customer loyalty to the degree the company hopes.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

The article Which Clothing Retailer Should Be in Vogue With Investors? originally appeared on Fool.com.

Brian Hill has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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