Prior to 2019, both Target (NYSE:TGT) and Home Depot (NYSE:HD) laid out strategies to bolster growth. With both companies set to report fourth-quarter and full-year earnings in the upcoming weeks, now is a good time to take a look at how the strategies have been working and which may be the better company to invest in today. 

Determining which is the better investment means looking at several factors. Returns on investments, resulting free cash flow, current valuation, and how management allocates capital all play a role. Both companies, though, are looking to increase e-commerce to supplement the brick-and-mortar experience.

online shopping

Image source: Getty Images.

Growth through digital channels

Target averaged more than 25% growth in digital sales for the five years from 2014 to 2018. Its purchase of Shipt, a same-day delivery platform, has accelerated the drive toward digital. It will certainly have cleared the 25% hurdle for this past fiscal year as well, with over 35% average digital year-over-year growth reported in the first three quarters. While we won't know until it reports full-year results, digital sales should now be approaching 10% of total revenue.

Home Depot announced its strategy, called One Home Depot, in December 2017. It is an $11 billion investment program that includes the digital experience for "interconnected retail." This strategy includes not just online sales -- which are growing at over 20% -- but also business-to-business (B2B) improvements for its professional customers, digital labels enabling appliance shoppers to see reviews and ratings, and more efficient delivery and pickup systems. For the Pros business, which represents about 45% of total sales, the company believes it added over 1 million new customers through its B2B website experience in 2019.

Translating into sales

While both companies' digital initiatives are strongly growing sales, it is off a relatively small base. Several years into the start of these investment strategies, a look at total comparable store sales growth offers a better overall comparison.

Store Est. Full Year (%) Q3 2019 (%) Q2 2019 (%) Q1 2019 (%)
Target >3 4.5 3.4 4.8
Home Depot 3.5 3.6 3 2.5

Data source: Home Depot and Target financial filings.

Home Depot has also given guidance of comparable sales growth of 3.5% to 4% for the new fiscal year. Considering these increases are also off higher overall sales -- $110 billion-$115 billion for Home Depot versus $75 billion-$78 billion for Target, if we incorporate fourth-quarter estimates -- Home Depot is showing better revenue growth.

Investing in shareholders

Both companies are shareholder-friendly. Target is close to completing the $5 billion share-repurchase program approved in 2016, and as of September 2019, has implemented a new $5 billion program to continue the buybacks.

Home Depot has repurchased $3.75 billion out of its $15 billion repurchase program through the first three quarters of 2019, including through an accelerated share repurchase, or ASR. This was also after increasing its dividend by 32% in February 2019. 

Both companies currently yield about 2.25% at current stock prices. Home Depot again gets the nod here, as the dividend increases have outpaced those from Target, as seen in this chart: 

HD Chart

HD data by YCharts

Which is the better buy?

Both Home Depot and Target are clearly good companies in the retail space. Both have ongoing strategies that have helped boost sales and should continue to do so. Looking at valuation alone shows Home Depot to be more richly priced. However, as the following chart shows, returns on invested capital (ROIC) are also much stronger for Home Depot. 

HD EV to EBITDA Chart

HD EV to EBITDA data by YCharts

Home Depot expects ROIC to be approximately 45% in the new fiscal year, continuing this trend. So though valued more richly, Home Depot has a growing business and has demonstrated its commitment to shareholders, making it the better stock to own.