The retail industry is incredibly vast, with a staggering $7.3 trillion being spent in the U.S. just in the year 2024. Within this expansive market, there exist numerous large corporations that could potentially be shrewd investments.
Two notable retail giants that instantly come to mind are Costco (COST, a slight dip of -0.06%) and Home Depot (HD, a modest drop of -0.43%). Over the years since their initial public offerings in the 1980s, they’ve both amassed significant wealth for their shareholders. However, the question remains: which one is the better investment choice at present – Costco or Home Depot?
Low prices, quality merchandise, and no frills are Costco’s not-so-secret recipe
The value proposition at Costco is unquestionably straightforward: it provides top-quality items from various categories at budget-friendly prices. Instead of an upscale shopping experience, its customers opt for the practicality of its warehouse setting which is devoid of frills. What sets Costco apart, however, is its provision of bulk quantities of merchandise and a thrilling treasure hunt-like environment.
It’s evident that customers have a strong affinity for Costco, as demonstrated by its consistent growth over time. In its latest fiscal year (2024, ending September 1), the company reported a 5.3% rise in sales from the same stores, and this increase has been observed in each of the last three fiscal quarters. Even amidst economic uncertainties on a larger scale, it continues to be a popular shopping choice.
In the third quarter of its 2025 financial year (ending May 11th), Costco reported a staggering $62 billion in total sales, positioning it as one of the world’s leading retailers. With a relatively smaller inventory compared to other supermarkets, this high volume of sales gives Costco significant negotiating power with its suppliers, enabling them to maintain competitive prices for their customers.
In simpler terms, retail businesses typically have thin profit margins, but Costco stands out by consistently increasing its profits. This is partly due to its unique business model that requires customers to pay an annual membership fee of around $65. These customers believe they will save more than their membership fee at the checkout throughout the year, making it a worthwhile investment. In fact, in the third quarter alone, 92.7% of Costco’s members in the U.S. and Canada chose to renew their memberships.
As macro headwinds persist, Home Depot pushes harder into the pro market
In the present economic climate, characterized by increased interest rates compared to the usual and rising caution among consumers regarding large purchases, Home Depot is finding it challenging to expand its business.
In the upcoming fiscal year 2025, I anticipate a 1% boost in my same-store sales, marking a positive change from the decrease experienced in the last two fiscal years. The initial post-pandemic period saw a surge in demand for home improvement goods, but lately, that momentum seems to be slowing down.
Indeed, Home Depot stands to benefit from several positive trends within the industry. The current U.S. housing market exhibits a supply shortage compared to demand. Additionally, our existing homes are aging, which could lead to increased renovation needs. Furthermore, homeowners possess trillions of dollars in untapped equity that they might utilize for renovations and upgrades. If economic conditions improve, Home Depot can anticipate stronger customer demand as a result.
Furthermore, the business is taking a proactive approach, making strategic acquisitions to bolster its standing. For instance, Home Depot spent over $18.2 billion last year on acquiring building materials distributor SRS Distribution. Additionally, it was recently disclosed that the SRS subsidiary of Home Depot has itself made an acquisition, purchasing peer GMS for a sum of $4.3 billion.
The actions aim at solidifying Home Depot as a preferred choice for professional clients like contractors, roofers, plumbers, and electricians – a highly valuable market segment due to their substantial spending compared to do-it-yourself customers.
The best stock pick is not the best business
Costco consistently delivers robust financial performances even during varying economic conditions, indicating it as a superior business venture. The investment market reflects this consensus as well. By July 14, the company’s stocks are being traded at an elevated price-to-earnings (P/E) ratio of approximately 55.
Although Home Depot may currently be facing some challenges, it remains uncontested as the top dog within the home improvement sector, poised for renewed growth in the future. Given that its stocks are trading at a Price-to-Earnings ratio of 25, it presents a more attractive investment opportunity at this time.
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2025-07-17 18:26