It isn't easy to make it as a retailing business. Competition is fierce and consumer preferences are constantly changing. That's why few companies reach sufficient size to generate strong-enough profits, let alone maintain and extend their market share lead.
Costco Wholesale (COST 1.01%) has proven it has what it takes to succeed in the industry, and it has a lot going for it as an investment. Ulta Beauty (ULTA -0.40%), meanwhile, has a far different selling approach that still delivers excellent returns.
Let's contrast these two successful retailers to see which one is a better fit for your portfolio today.
Ulta Beauty delivers earnings
Ulta Beauty's operating metrics show why growth investors love this stock. Customer traffic was up 11% this past quarter, for example, while consumer discretionary peers like Target are seeing roughly 1% upticks. Costco's traffic was up 4% in the most recent quarter, for context.
The beauty and spa products retailer also dominates when it comes to profit margin. Operating income slipped this past quarter due to increasing levels of promotions in the makeup and skin care industries, but its 17% margin still trounces peers.
Costco, on the other hand, aims to lead with low prices, and so it maintains one of the lowest profit margins around. Operating margin has held at roughly 3% of sales for many years, even following periodic increases to the retailer's membership fees.
As a result, growth-focused investors will be attracted to Ulta Beauty for its strong market share in an expanding industry and its powerful customer loyalty.
Costco is a stable business
If stable, predictable growth is more your style, then Costco will likely be your choice today. As one of the world's biggest retailers -- in both discretionary and consumer staples products -- its sales tend to perform well through any selling environment. Revenue jumped in the early phases of the pandemic, for example, and then boomed even more once economic growth sped higher.
Ulta Beauty, on the other hand, is far more exposed to a downturn in the U.S. economy or even the makeup niche.
Costco's membership approach is another positive for investors who prefer lower risk. Most of its annual earnings come from these fees, which are highly predictable. A full 92% of subscribers renewed their memberships in the past year, a record high for the business. Costco also pays a steady dividend, although its payout isn't as generous as what peers like Walmart offer.
COST net income (TTM) data by YCharts; TTM = trailing 12 months.
The better price
Costco is also the cheaper stock, giving it another notch in the "low risk" column. While its price-to-sales (P/S) ratio of 1 is higher than peers like Walmart, it's far lower than Ulta Beauty's P/S multiple of 2.2.
Both stocks deserve premiums, given their impressive market share, solid earnings, and attractive growth prospects. Yet Costco will be the better choice for most investors seeking a balance between risk and reward.
But for a more-targeted (and volatile) investment focused on the makeup industry, consider adding Ulta Beauty to your watch list as well.
