Best Stock to Buy Right Now: Costco vs. Home Depot

When it comes to massive retailers, perhaps two of the businesses that immediately come to mind are Costco Wholesale (NASDAQ: COST) and Home Depot (NYSE: HD). The former specializes in selling bulk quantities of general merchandise, while the latter focuses on home improvement goods. Shares of both companies have been monster winners in the past four decades.

The economic picture might look a bit gloomy. But that isn't stopping you from allocating capital to this sector. Which of these top retail stocks is the better buy right now?

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Costco continues to put up solid financial performance

Costco's financial results make you forget that the U.S. is in the middle of an unprecedented trade war, soft consumer confidence, and record levels of credit card debt. During the fiscal 2025 third quarter (ended May 11), total revenue was up 8% year over year. This was supported by a 5.7% gain in same-store sales, which itself was boosted mainly by higher foot traffic.

This points to the clear value proposition that shoppers see. And it makes complete sense why. Costco provides extremely low prices on high-quality goods in a no-frills environment. It has immense buying power that allows it to obtain favorable pricing on merchandise for its warehouses. This directly benefits shoppers.

The customer base keeps growing, with about 5 million net new cardholders joining in the past 12 months. Costco also benefits from loyalty, as the membership renewal rate was 92.7% in the U.S. and Canada. The business should prove resilient should economic conditions deteriorate, given consumers' ability to handle all of their shopping needs in one stop and in a budget-friendly manner.

This is a massive enterprise. However, the growth story isn't over. Costco plans to end fiscal 2025 having opened 24 net new warehouses. The plan is to expand the physical footprint by about 25 to 30 new stores each year going forward, with plenty of opportunity both in the U.S. and internationally.

Home Depot is in the midst of a slowdown

Home Depot hasn't been navigating the economic situation that well. Higher interest rates pressure the housing market. And inflationary pressures, as well as general uncertainty among consumers, don't bode well for expensive renovation projects. This explains why Home Depot's same-store sales declined 3.2% in fiscal 2023 and 1.8% in fiscal 2024. On a bright note, this key metric is expected to rise 1% this fiscal year, according to management.

With this business, it's best to zoom out and pay attention to the bigger picture. For starters, Home Depot remains an extremely profitable enterprise. Its operating margin has averaged 14.4% in the past five years. Consistent earnings mean investors benefit from regular payouts. Home Depot spent $2.3 billion in dividends just in the past fiscal quarter. Management also occasionally repurchases shares.

The home improvement industry is massive, estimated to be worth $1 trillion in annual revenue. Home Depot is the clear leader, but its 16% market share means there is room to continue growing. It has the brand name, omnichannel capabilities, and product availability to outperform smaller rivals.

It helps that there is so much untapped equity in the housing market, thanks to home prices rising substantially in the past five years in the U.S. Homeowners have the wherewithal to tackle upgrades when they feel confident enough about the economy. And this should drive revenue growth for Home Depot.

How important is valuation to you?

Each of these leading retailers possess their own unique investment merits. However, I don't think it's a polarizing view to say that Costco is the better business. Its financial performance speaks for itself.

This doesn't mean you should go out and immediately buy Costco shares. The valuation will give anyone a reason to pause and think twice. Shares trade at a price-to-earnings (P/E) ratio of 59.7, which is extremely expensive. It's totally reasonable to expect that multiple to come down meaningfully over the next five or 10 years, which introduces a notable headwind for shareholders.

Home Depot stock, on the other hand, trades at a more reasonable P/E ratio of 25.3. To be clear, the business isn't humming along quite like Costco is. But things should improve once the economic backdrop is more favorable. And this means Home Depot has greater upside than Costco.

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