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Better Buy: Costco vs. Target

By Rick Munarriz - Jan 19, 2021 at 9:24AM

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Two brick-and-mortar chains are killing it right now. Let's see which is the better buy.

Two words can silence the argument that brick-and-mortar retail is dead: Target (TGT 1.26%) and Costco (COST -1.54%). The two concepts defied gravity in 2020, posting double-digit sales growth on even more impressive double-digit positive comps. The year ahead doesn't look too shabby, either.

Falling under the umbrella of chains deemed to be essential retailers, Target and Costco didn't close when the early stages of the COVID-19 crisis shuttered many local storefronts. Now that the playing field should seemingly level -- with every viable retailer open for business -- it's clear that the things have tilted in favor of Target and Costco.

Target and Costco are great companies and successful investments. I own both. However, what if you could only buy one? Let's size up the two masters of the new normal to see which stock belongs in your portfolio. 

An empty grocery cart in the middle of a store aisle.

Image source: Getty Images.

Let's talk shop

Target keeps hitting the mark these days. The "cheap chic" mass-market retailer has historically held up well as a steady all-weather performer. It picked up the pace in the face of the pandemic. Target will post double-digit growth for the first time in 14 years for the fiscal year that ends in two weeks. It's been single-digit growth -- including a pair of single-digit declines -- in the 13 years between two fiscal bookends.

This fiscal year has been a feast for Target. Comps soared 21% in its its latest quarter, with adjusted earnings more than doubling. A big driver for the monster report is Target embracing new next-gen growth initiatives. Digital sales skyrocketed 155% in its latest quarter, but we're not just talking about e-commerce. Head out to your local mass-market retailer and you'll see lanes for curbside pickup of orders placed online. A growing number of shoppers are also ordering online for in-store pickup. A whopping 95% of Target shoppers continue to visit the store to complete the transaction despite the obvious convenience of e-commerce in the new normal.

Target has proven its magnetism over the past year. It's not done. It announced last week that sales rose 17% during the holiday shopping period.

Costco is another retailer that's waking up from a slumber. It should post double-digit comps for the fiscal year that ends in August, snapping a string of eight straight years of single-digit top-line growth. It has now rattled off seven consecutive months of double-digit growth in comps. The warehouse club model has served Costco members and investors well.

There are a lot of fundamental reasons to side with Target here. It's been growing faster than Costco in recent quarters. Target also trades at a lower earnings multiple and commands a higher quarterly dividend yield. One strong case for Costco is that analysts right now feel that the warehouse club operator will keep growing in fiscal 2022. Analysts see sales and earnings taking a small step back in the upcoming fiscal year, settling back after the unusual pandemic-fueled spike. Costco bulls will also argue that it deserves a market premium because it is a differentiated concept and the undisputed top dog in its niche.  

I obviously am bullish on both stocks. I wouldn't own Target and Costco if I didn't think that both would beat the market. There are only a handful of retail stocks worth buying, and these two are in that small group. I'll side with Target as the winner given its stronger recent momentum and healthier growth, but it's a pretty close battle for two proven market winners. 

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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
$155.36 (1.26%) $1.93
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$416.43 (-1.54%) $-6.50

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