Wall Street walked away from both Wayfair (W -3.36%) and Target (TGT 1.99%) stocks in 2022. The two retailers were hit hard by a surprise stampede away from consumer spending, and they are suffering for it. Sales trends are down and the prospects for weaker earnings appear to extend well into 2023.
The good news is that these previous Wall Street darlings are now much cheaper thanks to that short-term pessimism. With those low expectations in mind, let's look at which retailer would make the better purchase heading into a rocky 2023 fiscal year.
Target is less risky
Both companies were caught by surprise when consumers abandoned home furnishing and e-commerce spending in 2022 after having embraced those niches in earlier phases of the pandemic. Wayfair and Target shareholders endured several rounds of declining growth forecasts for the year, along with far weaker profitability due to price cuts aimed at clearing excess inventory.
Yet Wayfair is in a much worse position, mainly because of its more focused portfolio. Sales fell 9% in the most recent quarter as its active customer base plunged by 23%.
Target, on the other hand, managed modest growth in the third quarter on top of big gains in the prior year. The retailer achieved higher customer traffic, too.
Target remains profitable as well, even though profitability is well below what investors have come to expect from the company. Operating profit margin was 4% this past quarter, compared to Wayfair's significant losses.
Wayfair's rebound path is cloudier
There's another good reason that Wayfair's stock has fallen so much more from its pandemic high. The e-commerce specialist raced to $14 billion of annual sales with help from soaring demand for home furnishings and digital shopping in 2021. But its 2022 sales are on track to mark a second straight annual decline, likely landing at $12.1 billion, according to Wall Street pros.
Target's fall was more gradual and appears more like a temporary slump. Yes, revenue and profit margins were down in 2022. But the retailer is growing revenue and market share in key areas outside of home furnishings, such as apparel and beauty care. Its modest profitability rebound in Q3 might mark the end of its earnings slide, too, whereas Wayfair investors might have to wait several quarters before seeing concrete evidence of a return to profits.
You get what you pay for
As you might expect, investors are paying a much bigger discount on Wayfair's stock given its worse operating trends and cloudier path back to growth. Wayfair is valued at just 0.3 times annual sales, or about half of Target's valuation. Walmart, for context, is valued at 0.66 times sales. Chewy, a growing and profitable online retailer, is valued at 1.7 times the past year's sales.
Wayfair doesn't look especially tempting at that discounted price. Sure, its retailing niche has a bright long-term future, and earnings will start rebounding once inventory levels calibrate better with demand. But the aggressive pace at which Wayfair has been losing customers, combined with its ballooning net losses, means there might be more bad surprises ahead for shareholders into 2023.
Target, on the other hand, is diversified, profitable, and pays a dividend that has increased for more than 50 consecutive years. Those assets make it an easy stock to own even through what could be a worsening period for consumer spending patterns ahead.
