Growth has become much harder to find in the retailing industry. In their recent fourth-quarter earnings updates, both Target (TGT +2.33%) and Lowe's (LOW 2.42%) forecast roughly zero sales gains in fiscal 2023.
Yet this outlook still reflects strong growth since the start of the pandemic, and the retailers are also predicting a profitability rebound ahead that implies an end to some of the pressures that hurt earnings in recent quarters.
Against that backdrop, let's look at which stock seems like the better buy for investors today.
Growing through challenges
While they compete in different niches, Target and Lowe's are facing the same type of growth hangover compared with earlier phases of the pandemic. Consumers are less interested in spending money on home improvement and home furnishings, and comparable-store sales growth slowed to below 1% for Target in the fourth quarter and a 1% decline for Lowe's .
NYSE: LOW
Key Data Points
These don't reflect market share losses, though, as rivals such as Walmart and Home Depot are posting similar results. It's notable that Target has a slight edge over Lowe's in customer traffic, as it saw 2% higher traffic in 2022 on top of a 13% spike in the prior year.
Outlook and margins
Lowe's business could see more volatility over the next year, making it a bit riskier today. Rising interest rates have slowed the home improvement market dramatically, and Lowe's doesn't enjoy as large or as diverse a business as Target.
Target, meanwhile, sells consumer staples in addition to things like apparel and home furnishings. This diversity should position it well to navigate through a potentially tough selling environment in 2023.
Target also seems less risky because of its progress at reducing inventory. Markdowns hurt earnings in 2022, causing operating margin to fall to 4% from over 8%. But the retailer is entering the new fiscal year in a much better inventory position, making it less likely to see further nasty surprises here. Lowe's higher margin today leaves it a bit more exposed to a slowdown.
The better value
Both companies are projecting roughly flat sales this year and improving margins. But Lowe's looks like the better value today. It is valued at about twice Target's price-to-sales ratio of 0.7 times annual sales. But Lowe's has a clear path toward improving its operating margin to nearly 14% of sales, or closer to industry leader Home Depot.
Target's management team, on the other hand, is hoping to potentially return the company to its pre-pandemic margin of around 6% of sales, but that rebound might not occur until late 2024 -- if at all.
Given the uncertainty around Target's earnings power, Lowe's seems more attractive for long-term investors. That's true despite the extra risk associated with its focus in the home improvement industry.
Both retailers are performing well through a difficult selling environment in late 2022 and early 2023. But its stellar earnings profile, cash flow, and long history of rising dividend payments make Lowe's a better choice to add to your portfolio right now.
