While people are pulling back spending in many areas, they are spending freely in others. Target (TGT -0.32%) and Kroger (KR -0.44%) found ways to service this demand in recent months, helping the retailers close out fiscal 2022 on a positive note.

But which stock is more attractive for investors seeking market-busting returns? Let's compare these retailing giants to try to answer that question.

Growth trends

Kroger was in a stronger growth position at the start of 2023. In early March, the supermarket chain announced impressive gains as comparable-store sales rose 6.2% through late January. Kroger is seeing a lift similar to the one affecting Costco Wholesale as people become more focused on essentials in this inflationary environment.

Target's more consumer discretionary focus is making it harder for it to achieve growth. Comps were up less than 1% in the fourth quarter, thanks to pressure in categories like home furnishings. Sales grew by just 2% for the full year compared to Kroger's 6% increase. And Target executives projected slightly weaker sales gains ahead in 2023, as compared to Kroger's expected 2% uptick.

Margin comparison

Target is normally a far more profitable business, but that performance gap has closed in recent quarters. In the past year, Kroger generated $4.1 billion of operating income, translating into a 2.8% profit margin. This metric improved slightly in the past year.

In contrast, Target's core profit margin fell hard in 2022, declining to below 4% from 8% a year ago. Much of this slump can be explained by the shift in consumer demand away from some merchandise categories that were popular in earlier phases of the pandemic. Target, along with peers like Walmart, had to cut prices to clear out this slow-moving inventory.

Chart showing Target's operating margin higher than Kroger's and Walmart's since 2014, but falling recently.

WMT Operating Margin (TTM) data by YCharts

The good news for Target investors is that the company is likely to see a profit margin rebound over the next few quarters as operating margin moves back toward its pre-pandemic level of around 6% of sales. Inventory fell in Q4, meaning executives made more progress at aligning inventory with demand trends. Kroger has less opportunity to improve meaningfully on its core profitability.

Price and value

Many investors will prefer Target's stock right now, given its opportunity to accelerate earnings growth in 2024 and beyond. Kroger shares will appeal to more value-focused investors. The consumer staple stock is valued at just 0.2 times annual sales. Walmart and Target are valued at closer to 0.7 times annual sales.

That gap is mostly powered by expectations that Target's business will start recovering the financial ground it lost in 2022. The retailer's rising customer traffic suggests this rebound is simply a matter of time.

Yet, if you're looking for a more stable investment in the retailing industry, take a closer look at Kroger. Its shares are yielding over 2% right now, or a bit more than income investors can get by holding Walmart stock. But Kroger also delivers more focused exposure to the supermarket niche, which tends to perform well even through inflation and recessions.