Retail stocks can get overlooked by investors due to their seemingly limited growth prospects compared to tech companies. And even quickly expanding retailers often struggle to generate double-digit profit margins due to high costs and fierce competition.
Yet, not all retailers are cut from this cloth. Let's take a closer look at two companies that are soaking up market share in growing industries and generating impressive profits along the way. Read on for some good reasons to buy Tractor Supply (TSCO 1.37%) and Ulta Beauty (ULTA 0.49%) stocks now.
Tractor Supply is on track
Investors weren't thrilled with some aspects of Tractor Supply's fiscal first quarter, which ended April 1. The rural lifestyle retail chain revealed in late April that comparable-store sales rose just 2%, marking a slowdown from the prior quarter's 9% spike.
That deceleration isn't a sign of weakening market share, though. Cooler weather in March simply pushed sales into the start of the fiscal second quarter, executives said. They backed up those comments by affirming their wider growth outlook that calls for sales to rise above $15 billion compared to $14 billion last year and $12.7 billion in 2021.
Meanwhile, the operating profit margin is on track to land above 10% of sales for a third consecutive year. Given that bright outlook, investors should see the stock's pullback in recent weeks as an opportunity to accumulate shares of this high-performing business at a discount.
Ulta Beauty looks attractive
Uta Beauty just wrapped up a lovely fiscal 2022. Sales for the 12-month period that ran through late January were up 16% -- on top of the prior year's 28% surge. The company has now crossed $10 billion of annual sales, in fact, compared to $7.4 billion in 2019.
ULTA Operating Margin (TTM) data by YCharts
Profitability is meaningfully higher, too, at 16% of sales this past year. For context, investors were thrilled to see Target achieve nearly 10% margins during the pandemic and the retailer is hoping to get operating margin back up toward 8% of sales right now. Meanwhile, Ulta Beauty sees a clear path toward roughly 15% margins in a slower-growth fiscal 2023.
This retailer is exposed to slowing consumer spending patterns, which helps explain why management is remaining conservative in its expansion strategy. Ulta will only open between 20 and 30 new locations in 2023 compared to about 45 in each of the last two fiscal years. But its healthy e-commerce channel, plus rising traffic at existing locations, reflects strong demand and rising market share in key beauty niches like skincare and makeup.
Ulta Beauty is the more expensive stock, with a price-to-sales (P/S) ratio of 2.7 compared to Tractor Supply's 1.9. Yet, investors are paying far more for more traditional growth stocks like Meta Platforms and Netflix.
Yes, these retailers aren't as profitable as many tech giants are. But their outperformance compared to peers implies a type of competitive advantage that leads to excellent shareholder returns over time. That's why investors should consider both Tractor Supply and Ulta Beauty as good growth stock candidates today.
