Target's (NYSE: TGT) and TJX Companies' (NYSE: TJX) stocks have been on different paths in recent years. Investors keeping track will remember that Target shares surged during the early phases of the pandemic but are now trailing the market by a wide margin. TJX Companies, the owner of the TJ Maxx, Marshalls, and HomeGoods brands, underperformed during those high-growth days in 2021 and is now in solidly positive territory for 2023.
Those stock price swings reflect fundamental differences in how the two retailers perform in this volatile economic environment. But they also reflect distinctive expectations on Wall Street for their businesses in the upcoming holiday season and beyond.
With those factors in mind, let's look at which stock looks more attractive as a long-term buy today.
The better growth path
TJX Companies is the clear winner when it comes to growth in 2023. The off-price apparel giant announced surprisingly strong sales growth in the most recent quarter, revealing in mid-November that comparable-store sales were up 6% in Q3. Shoppers are delighted with TJX Companies' selection of name-brand products at a discount, which is an even more compelling value proposition in this economy.
Around the same time, Target posted a 5% drop in its core comps growth metric. Fans of the national retailer aren't finding as many reasons to visit its stores today as they look to stretch their household budgets. Customer traffic was down a painful 4%, while TJX Companies' boosted traffic by roughly 6%. Whatever good reasons there might be to choose Target as a stock buy, a rebound in that customer traffic figure will be a critical part of any bullish growth thesis.
Profits are strong
However, Target's stock price jumped in the immediate wake of its earnings report as Wall Street celebrated its profit margin boost. Operating income jumped 29% to $1.3 billion last quarter, or 5% of sales. This figure sat at 1% of sales a year ago but has rebounded in recent months thanks to management's successful efforts at cutting inventory in those slow-moving consumer discretionary categories. Target aims to get margins back to its pre-pandemic level of around 6% of sales, and this recent report makes that goal look well within reach.
TJX Companies isn't seeing as big of a margin boost these days, but investors will be more impressed with its overall success. Operating income landed at 12% of sales in Q3, up from 11.2% a year ago and far above peers like Target and Walmart.
Pairing this success with rising customer traffic helped convince management to boost its 2023 outlook on both the top and bottom lines. "Our values and exciting, treasure-hunt shopping experience continued to resonate with consumers," CEO Ernie Herrman told investors.
The better buy
As you might expect, you'll have to pay a premium to own TJX Companies today. The retailer is valued at 2 times sales, compared to the roughly 0.6 times sales that investors are paying for Target and Walmart right now. The retailer's price-to-earnings ratio of 25 is also well above Target's valuation of 17.
There's a good chance that Target's valuation will expand over the next few quarters. The retailer is hoping to win back shoppers by stressing low-priced products for this holiday season, having added thousands of gifts priced at under $25.
Yet if you're looking for a less risky investment, consider TJX Companies over Target. It already has a proven growth strategy in place and currently sports double the profit margin that Target is hoping to achieve by late next year. A rebound story is always exciting to follow, but most investors will be happy to enjoy the predictably strong returns that are on the way from TJX Companies over the next several years.
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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool recommends Tjx Companies. The Motley Fool has a disclosure policy.