Macy's Trading At a Discount, Ralph Lauren's Premium Priced

The U.S. economy is limping along at 2.5%, the unemployment rate is 9%, 16 million are looking for full-time work. So retailers must be suffering terribly, right? Not at all. With the wealthy enjoying a great decade, upscale American retailers are booming -- not solely in the U.S. but in Asia and Europe as well. Among those are Ralph Lauren (NYSE: RL) that reports earnings Wednesday and Macy's (NYSE: M). But should you stock up your portfolio with their shares?

Wall Street is expecting some earnings and revenue growth for RL. Specifically, the consensus EPS estimate for its second quarter of $2.24 is expected to be 7.2% higher than in 2010. But revenue is expected to grow much faster -- up 20.1% to $1.84 billion in the quarter.

And RL blew through first quarter 2012 expectations. In August 2011, it reported EPS of $1.90 that were $0.44 higher than analysts polled by Capital IQ.

And a contributing factor was growth in its international revenues. They rose 60% in the first quarter and accouted for 36% of RL's consolidated sales. RL's international growth included expansion in Europe where the company added "new wholesale and retail distribution, [expanded] existing and highly productive locations and [generated sales from] new merchandized categories such as Lauren and accessories," according to RL's Q1 2012 earnings transcript.

But RL is hardly the only upscale retailer that's doing well. Macy's is expected to report higher sales and EPS when it reports Wednesday. FactSet-surveyed analysts expected Macy's to report sales up 4.8% to $5.87 billion and EPS of 16 cents -- double the 2010 figure.

Underyling Macy's financial performance are three key strategic choices regarding pricing, merchandising, and product selection. Specifically, investors will seek details on how consumers are reacting to Macy's higher prices -- to preserve margins as production costs rise; its merchandising strategy of tailoring stores to local markets; and its efforts to "lock up exclusive brands," according to the Associated Press.

So here's what the investment choice between RL and M boils down to:

• Ralph Lauren: Steady growth, decent margins; expensive stock. Ralph Lauren's sales have increased 13.7% in the past 12 months to $6 billion while net income rose 18.4% to $631 million – yielding a 10.46% net profit margin. Its PEG of 1.62 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 24.7 and expected earnings growth of 15.22% to $7.89 in fiscal 2013.
• Macy's: Decent growth, thin margins; cheap stock. Macy's sales have increased 6.4% in the past 12 months to $25.7 billion while net income jumped 157% to $1.1 billion – yielding a slim 4.08% net profit margin. Its PEG of 0.93 is cheap on a P/E of 13.18 and expected earnings growth of 14.15% to $3.04 in 2012.

Both stocks have been performing well -- near their 52 week highs -- but Macy's gets the nod due to its far more reasonable valuation.