Wall Street has rewarded both Tractor Supply (TSCO 0.18%) and Ulta Beauty (ULTA -0.58%) stocks for the outperformance of their businesses lately. While most of the retailing world struggles to find growth and protect margins, these two companies are expanding sales and profitability. Their management teams project further gains ahead for 2023, as well.

So, let's compare these two retailers to see which looks like the better investment right now.

Both companies are positioned for growth

Tractor Supply and Ulta Beauty are both positioned in unusually strong retailing niches, which is helping accelerate growth. Consumer demand for beauty products and rural lifestyle products hasn't fallen at the same rate that it has for niches like home furnishings. You can see the impact in comparable-store sales, which were up by 9% for Tractor Supply last quarter and 16% at Ulta Beauty. Companies like Home Depot and Target are seeing roughly flat results, in contrast.

While it isn't seeing as much customer traffic growth at existing locations, Tractor Supply appears to have a bigger addressable market. Management is aiming to open 70 new stores this year to mark an acceleration over last year's rate. Ulta, meanwhile, is slowing its expansion pace to about 30 new locations from 47 in 2022.

Cashing in

Ulta Beauty wins the matchup on profitability. Operating margin soared to over 16% of sales in 2022, or double the rate that Target had achieved in its record year in 2021. Tractor Supply didn't have trouble passing along higher prices, either, but its margin just held steady at 10% of sales.

ULTA Operating Margin (TTM) Chart

ULTA Operating Margin (TTM) data by YCharts

The 6-percentage-point difference here helps explain why Ulta Beauty shares are trouncing the market over the past year while Tractor Supply stock is just in modestly positive territory. Investors are excited at the prospect of supercharged earnings growth from the spa and beauty products giant, even if its prospects for expanding its store footprint are more muted.

The better deal

Ulta Beauty shares became more expensive this year, while Tractor Supply is getting cheaper. You have to pay nearly 3 times annual sales for the beauty specialist compared to 1.8 times sales for Tractor Supply. Yet both companies project similar growth ahead for 2023. Tractor Supply is targeting comps growth of between 3.5% and 5.5%. Ulta Beauty sees the late 2022 momentum carrying into this year, too, with comps gains of between 4% and 5%.

Tractor Supply will appeal to investors who are less risk-averse. It has a larger sales base of $15 billion compared to Ulta Beauty's $10 billion. And, the beauty retailer's more focused portfolio could become a challenge if its niche takes a turn lower during a recession. Finally, there's the lower valuation, which reduces the risk of a big stock price decline for Tractor Supply shareholders.

Ulta Beauty, on the other hand, has many of the hallmarks of a classic growth stock today, including expanding margins, high customer loyalty, and rising market share. The missing piece is a huge addressable market that would support an accelerating store launch strategy. Yet growth stock investors might still want to take another look at Ulta Beauty as it targets a third consecutive year of profit margin that's at least 15% of sales.