Sometimes, it's hard to choose between two good options. That's the case with stocks, too. While no one can predict the future with 100% certainty, you can increase your chances of investing success by looking at each company's fundamentals.
Lowe's Companies (NYSE: LOW) and Target (NYSE: TGT) have long been successful retailers -- albeit in different segments. Both also have had some short-term hiccups recently. So which stock offers a better opportunity?
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Lowe's
Lowe's holds a dominant share of the home-improvement retail market. It has over 1,700 stores and generated over $86 billion of sales in the latest fiscal year, which ended on Feb. 2. That trails only Home Depot (NYSE: HD), which has over 2,300 stores and about $153 billion in sales.
Both companies have experienced a sales slump, reinforcing a cyclical rather than a company-specific issue. Lowe's fourth-quarter same-store sales (comps) dropped 6.2%, with management blaming lower demand from do-it-yourself customers.
However, while customers might hold off on projects right now, particularly since homeowners did major renovations during the pandemic, that won't last. Demand should increase when more people put their houses up for sale and buyers move in. While the timing might be uncertain, it will happen at some point. And Lowe's remains poised to take advantage of the opportunity.
The stock price has soared since the end of October. Shares have gained over 23%, besting the S&P 500's 21.7%. That's translated into a richer valuation for Lowe's stock. The price-to-earnings (P/E) ratio rose from about 15 to 18 during this time, although that's lower than the S&P 500's 28 P/E.
Target
Target offers a variety of goods, such as apparel, food, beauty products, household essentials, and home furnishings. It separates itself from other retailers through its private label and exclusive offerings with various brands.
A couple of years ago, management made a misstep by carrying too much inventory of discretionary, higher-priced items and too little of the everyday essentials. But it has worked hard to bring things back in line, including discounting items to clear the shelves.
And there's evidence that things have been moving in the right direction. In the fiscal fourth quarter (ended Feb. 3), Target's gross margin was 25.6%, a 2.9 percentage point improvement from last year, with lower markdowns playing a role.
However, it's noteworthy that while the margin isn't dragged down by too much inventory, which was about 12% lower than a year ago, sales remain sluggish. Fourth-quarter comps fell 5.4%. Management expects comps to drop 3% to 5% in the first quarter.
Target's stock price has rebounded sharply this year. After losing 4.4% in 2023, it has risen 22% this year. The shares sell at a P/E multiple of 19, up from about 18 at the start of the year, albeit still lower than the overall market.
The decision
For dividend investors, both companies have raised their payouts for more than a half-century, making them Dividend Kings. Lowe's has a 1.8% dividend yield, and Target yields 2.5%, both higher than the S&P 500's 1.4%. These payouts can help during difficult times.
Nonetheless, I'd choose Lowe's. Even with the stock price run-up, it has a better valuation and a firmer path to sales growth despite a cyclical slowdown.
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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot and Target. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.
