Between Costco and Home Depot, What Is the Top Retail Stock to Buy Right Now?

Costco (NASDAQ: COST) and Home Depot (NYSE: HD) are two leading retailers that investors are surely familiar with. They have strong industry positions within their specific verticals, whether it's general merchandise or home improvement. Over the decades, they've done a great job rewarding shareholders.

Of these two retail stocks, which is the better one to buy right now?

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Costco is a consumer favorite

It really doesn't matter what type of economic environment we're in. Costco's financial performance shows that it can succeed regardless of external factors. This is evident when looking at one key performance metric.

The business reported 5.9% same-store sales (SSS) growth in fiscal 2024 (ended Sept. 1, 2024). This was at least the 10th straight year that Costco posted a positive figure. Top rivals, like Walmart's Sam's Club and BJ's Wholesale Club, don't have this type of stellar track record. It points to the durable demand that Costco faces, which supports higher foot traffic and ticket sizes.

During the first quarter of fiscal 2025 (ended Nov. 24, 2024), the company raked in $61 billion in net sales. This massive sum makes Costco the world's third-biggest retailer, and gives it a powerful scale advantage.

The typical Costco warehouse carries 4,000 stock-keeping units, far fewer than other supermarkets. It buys huge quantities of merchandise from its suppliers, which results in bargaining power. Favorable input costs lead to lower prices for customers. It's a positive feedback loop that's hard to slow down.

High-quality goods and lower prices should be enough to delight customers. However, Costco has figured out a way to drive repeat purchase behavior and loyalty. Its shoppers must pay annual fees to be members and have the right to visit its warehouses. Membership fee income totaled $4.8 billion in fiscal 2024.

Home Depot leads the home improvement industry

Home Depot isn't on as strong a footing as Costco. In the fiscal 2024 fourth quarter (ended Feb. 2, 2024), the business reported just a 0.8% rise in SSS. On the positive, this was the first increase after Home Depot posted eight straight quarterly declines. CEO Ted Decker continues to point to "uncertain macroeconomic conditions in a higher interest rate environment that impacted home improvement demand."

Hopefully, the situation will improve soon, as the outlook calls for 1% SSS growth in fiscal 2025. However, the strategy of improving the customer experience, driving greater spending from professionals, and opening new stores hasn't changed.

Despite its struggles to boost growth, Home Depot benefits from a favorable industry backdrop. Management says there are trillions of dollars in untapped home equity in the U.S., particularly as home prices have risen considerably in the past five years. That means there's a lot of liquidity to take on renovation projects once consumer demand improves.

The median age of a home in the U.S. was 40 years in 2022, a figure that continues to increase. Older houses require more upkeep, supporting demand for what Home Depot sells.

There's also a large housing shortage in the U.S. In other words, homeowners are incentivized to invest in upgrading their current dwellings rather than moving. Again, this supports Home Depot's success.

Valuation matters

As of this writing (March 3), shares of Home Depot trade at a price-to-earnings (P/E) ratio of 26.3. That's 16% higher than its 10-year average. At first glance, this doesn't look like an appealing proposition.

Costco, on the other hand, trades at a P/E multiple of 62. The stock has never been more expensive in its entire public history, which spans almost four decades.

Costco is the better business. But the better investment opportunity is strikingly clear. Of these two dominant retailers, Home Depot is more deserving of your capital right now.

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Home Depot, and Walmart. The Motley Fool has a disclosure policy.