They cater to different shopper demographics, but Lululemon Athletica (LULU -1.02%) and Tractor Supply (TSCO -1.65%) have both separated themselves from their retailing peers. While rivals struggle with declining customer traffic and falling margins, these businesses are winning market share and boosting profits.
But which retailing stock is the better buy right now? Let's compare the two high-performing businesses to see which should generate better long-term shareholder returns.
Sales trends
Lululemon's business is enjoying stronger growth trends. Comparable-store sales were up 30% in the most recent quarter thanks to higher traffic online and in stores, along with rising spending. Industry rival Nike, by contrast, grew sales by 19% through a similar period in early 2023.
Lululemon beat management's upgraded 2022 forecast and performed well across all of its main selling channels and geographic regions. In late March, management credited "the enduring strength of the Lululemon brand" for helping power those results.
Tractor Supply is due to report its latest results in late April. Its momentum is also strong. Comps rose 9% through late December, translating into market share growth across all of its major lifestyle retailing niches. Target, by comparison, grew comps by less than 1% in the period.
Earnings and cash
Both companies perform well on earnings and cash flow metrics, but Tractor Supply trails Lululemon in this arena too. Despite warnings about soaring costs in late fiscal 2022, the athletic apparel specialist only saw a tiny drop in profit margin, down to 28% of sales. That's nearly double Nike's rate and well above Tractor Supply's 10% profitability.
TSCO Operating Margin (TTM) data by YCharts
Still, Tractor Supply stands far above its peers, including Target and Walmart, which both convert roughly 3% of sales into operating profit today. These factors suggest excellent earnings potential for both Lululemon and Tractor Supply shareholders, assuming there's no major economic downturn ahead.
Price and value
Several factors make Lululemon a riskier stock, though. It has a smaller sales base, for one, at roughly $8 billion compared to Tractor Supply's $14 billion. Lululemon is more focused on the consumer discretionary niche, too, which is likely to shrink during any recession. In contrast, Tractor Supply sells a high proportion of staple products, like animal feed. As a result, the stock could hold up better during a downturn or when fears of an economic slowdown push markets lower.
Lululemon's valuation also makes it riskier. Investors are paying nearly 6 times annual sales for shares today. Sure, that's down from over 12 in earlier phases of the pandemic, but it's still high for a retailer. Tractor Supply shares trade for less than 2 times sales.
Investors will get more clarity about Tractor Supply's business when the company announces first-quarter results on April 27. Yet the stock still seems like a good buy today thanks to its strong operating performance, its growth prospects, and its valuation.
Investors who don't mind more risk will likely gladly pay the premium for Lululemon, though. And both growth stocks appear set to generate solid long-term returns for patient shareholders.
