Costco (COST 0.19%) has a fantastic track record of growing investors’ capital. Over the past five years, the leading wholesale club chain’s share price has increased by 218%, partly due to its excellent financial performance.

It is also a much bigger win than Home Depot (HD 2.80%) booked during the same period, although the home improvement heavyweight rose a remarkable 75%. More recently, Home Depot The company had to reckon with a significant decline in sales.

For investors who want to get involved in retail, which of these Large-cap stocks is the better buy at the moment?

Everyone knows that Costco is an elite company

Costco is widely regarded as one of the best companies in the world. The impressive performance of the stock is a clear indication of the high quality of the company. One obvious reason for this is its strong financial performance. Sales in the stores have been growing steadily every year, which is the dream of every retail company.

Selling a wide variety of goods at low prices isn’t that exciting. But Costco’s membership-based business model is. It offers a predictable and recurring revenue stream with high margins that totaled $1.1 billion in the third quarter of fiscal 2024 (ended May 12), up 7.6% year over year. In addition, the business model encourages repeat store visits.

The company has demonstrated its pricing power in these memberships. Management has announced that it would increase its annual fees for the first time since June 2017. Despite occasional fee increases, Costco’s membership has continued to grow, underscoring the appeal of its value proposition to consumers.

Disruption can be seen throughout the economy, and brick-and-mortar retail has certainly not been spared. Dominant e-commerce player Amazonfor example, has long been a source of fear for retailers. But that hasn’t stopped Costco from continuing to grow its sales and profits while expanding its membership base.

The problem for investors, however, is that everyone is fully aware of Costco’s merits. These are reflected in the current share price, which is near its all-time high. In addition, the valuation is inflated. The shares are being sold at a Price-earnings ratio (P/E) ratio of 54, a level the retailer has rarely reached before. It’s probably safe to assume that returns from this point onwards will be disappointing.

Home Depot’s problems are likely to be temporary

Home Depot focuses exclusively on the home improvement sector, which it has long dominated, and its fiscal 2023 revenue of $152.7 billion was significantly higher than that of its closest competitor. Lowe’s.

After posting strong sales growth during the pandemic, Home Depot has struggled to maintain those gains of late. Store sales fell 3.2% in fiscal 2023 (which ended Jan. 28), and management expects a 3% to 4% decline this fiscal year. Given macroeconomic uncertainty, consumers are cutting back on spending on nonessentials.

These challenges are concerning, but for long-term investors, they should be viewed as temporary blips. Home Depot still has plenty of room to increase its share of this massive market. It benefits from the country’s aging housing stock and shortage of homes for sale. It is in an enviable position given its brand strength, wide reach and unmatched inventory availability.

Another reason to be optimistic about Home Depot is its favorable capital allocation program. Management uses a large portion of its consistently generated free cash flow for dividends and share buybacks. In fiscal year 2023, it distributed a whopping $16.3 billion to shareholders this way.

Shares currently trade at a P/E of 24, which is less than half of Costco’s valuation. To be clear, I believe the wholesale club operator is a better company, but I wouldn’t touch its stock with a pair of tongs right now because of its horrendous valuation. For that reason, I believe Home Depot is the better stock to buy of these two retail giants.