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Between Costco And Home Depot, What Is The Top Retail Stock To Buy Right Now?
Given its proximity to many consumers, you've most likely shopped at a Costco (NASDAQ: COST) or Home Depot (NYSE: HD) warehouse. With combined annual revenue in the hundreds of billions of dollars, these businesses are two gigantic retailers.
Due to their dominant positions, Costco and Home Depot might be on your investing radar. Of the two, what is the top retail stock to buy right now?
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Taking Costco for granted
Costco continues to hum along, supporting a long-running track record of steady growth. Revenue and diluted earnings per share climbed at compound annual rates of 10.8% and 14.9%, respectively, between fiscal 2019 and fiscal 2024. The top and bottom lines were up in the fiscal 2025 first quarter as well (ended Nov. 24). Consumers will always need the high-quality merchandise Costco sells, which means the business experiences durable growth.
By requiring consumers to pay for an annual membership to shop at Costco locations, the company is able to drive customer loyalty and repeat purchase behavior. With a 92.8% renewal rate in the U.S. and Canada and membership account growth of 7.6% in Q1, memberships are very popular.
It's difficult to see Costco being disrupted anytime soon. It has a tremendous scale advantage that allows it to obtain favorable pricing from suppliers that lead to everyday low prices for consumers. Even in the face of Amazon Prime's e-commerce success, Costco's financials keep improving.
Costco seems to perform well, no matter what is happening with the broader economic backdrop. Members, revenue, and earnings march higher over time, with investors benefiting from share-price appreciation and dividends. With minimal hiccups, it's easy to take Costco for granted.
Zoom out with Home Depot
With trailing-12-month revenue of $155 billion and 2,345 stores in total, Home Depot is the clear leader in the home improvement industry. However, despite this first-place position, which puts it well ahead of Lowe's, the business is dealing with a notable slowdown in demand.
Management expects same-store sales (SSS) to decline 2.5% in fiscal 2024, which ends around the time of this writing (Jan. 28). This would be the second straight year Home Depot reports a dip for this key metric. That's a far cry from the consistent annual gains registered in the years before fiscal 2023.
Home Depot benefits when interest rates are low and inflationary pressures aren't a concern. This is precisely what macro conditions looked like during the worst days of the COVID-19 pandemic. It also helped that households were flush with cash.
But we're in a different reality today. Consumers are hesitant to spend on big discretionary purchases, a category that expensive home renovations might fall under.
All isn't lost, though. The home improvement industry is large and fragmented, giving Home Depot a durable growth runway. Homes in the U.S. are only getting older, leading to more need for upgrades. And households have lots of untapped equity they can use.
Investors can also appreciate management's favorable capital allocation policies. The business has historically returned massive amounts of cash to shareholders with dividends and buybacks. That's the sign of a financially sound enterprise.
Does valuation matter to you?
In my opinion, Costco is the better business, primarily because it has proven to be less cyclical than Home Depot. It's also anyone's guess when the latter can return to SSS growth, something the former has no issues with.
But at a price-to-earnings ratio of 56.7, Costco shares are too rich. Home Depot's valuation multiple is 50% cheaper than Costco's. While I'd like to own Costco if the price is right, it currently looks like a terrible investment opportunity. Therefore, of these two retail juggernauts. Home Depot is the better buy today.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Home Depot. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.
