While they compete in different retail niches, Chewy (CHWY 5.91%) and Tractor Supply (TSCO -1.65%) share some similarities as investment options. Both companies are profitable and managed to maintain their positive momentum as the pandemic wanes. And each sees room to dramatically expand its sales footprint over the next several years.
Against that upbeat backdrop, let's compare the two stocks to see which one might be a better fit for your portfolio in 2023.
Tractor Supply wins on growth
Both companies enjoy strong sales growth, but Tractor Supply is doing better on this metric. In late January, the rural lifestyle retailer reported a 9% comparable-store sales increase for Q4, thanks to gains in both customer traffic and average spending. A growing base of stores pushed its overall revenue growth to 21% year over year. "Tractor Supply had another remarkable year in 2022," CEO Hal Lawton said in the earnings press release.
Chewy, by contrast, posted a 14% year-over-year sales increase for the same period, which reflected its continuing market share gains in the pet supply industry. However, the e-commerce specialist's customer base shrank by 1% in Q4 and for the full year, indicating some relative demand weakness in the wake of the pandemic's demand spikes.
The profit matchup
Tractor Supply is also more profitable, even though the in-person retail business is more capital-intensive. Its operating profit in 2022 landed at $1.4 billion, growing about the same 10% rate that the company managed in the prior year.
Chewy is earlier on in its growth story, and it demonstrated some encouraging pricing power in late 2022. Yet there are still some valid investor concerns around profitability.
CHWY Operating Margin (TTM) data by YCharts.
The company barely broke even on a net income basis last year. And even its adjusted earnings metric was underwhelming, having risen from 1% of sales in 2021 to 3% of sales in 2022. On the bright side, Chewy is cash flow positive and can reasonably target much better results here over time.
Growth outlook and valuation
Wall Street is excited about Tractor Supply's expansion plans, as there appears to be plenty of room for it to add to its current store base of roughly 2,100 locations. Chewy has big ambitions, too, including a push into international markets that will start later this year. Most Wall Street pros anticipate Chewy's sales will rise by 11% this year to just over $11 billion, while Tractor Supply is expected to grow by about 7% to more than $15.2 billion. The rural supply retailer is likely to generate around $1.5 billion of operating income, though, compared to more modest profits for Chewy.
As you might expect, investors are paying a premium for Tractor Supply's sturdier earnings profile. The stock is valued at 1.8 times annual sales compared to Chewy's price-to-sales ratio of 1.5. Sure, Chewy's valuation today represents a huge discount versus what it traded for during the hotter phases of the pandemic. But its last few quarterly reports left investors with some big questions about its growth path and its ultimate earnings potential.
The international push might accelerate the business and push Chewy's valuation higher again. But for now, Tractor Supply looks like the more attractive retailing stock. Strong customer loyalty points to more steady growth ahead, and its profit margin beats out its peers. The growth stock isn't especially expensive, either, at less than 2 times sales today.
