3 reasons to buy Costco stock and steer clear of Target

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19-07-2025

Ahead of fresh retail sales data, Tematica Research's chief investment officer, Chris Versace, joins Market Domination with Josh Lipton to compare two top retail plays, Costco (COST) and Target (TGT), on today's Good Buy or Goodbye.
To watch more expert insights and analysis on the latest market action, check out more Market Domination here.
Welcome to Good Buy or Good Buy. Our goal here to help cut through the noise and to navigate the best moves for your portfolio. I'm here with Thematica research chief investment officer, that would be Christopher Sacchi. Chris, let's go through the first one you like. This is a buy, and it is Costco. Now, this stock hasn't done a whole lot so far this year, up like both single digits. Most on the street, the majority do say this one's a buy, so you're in good company. Let's go through the reasons. The first reason you say winning consumer wallet share.
So, Costco is a great company to begin with. But as an investor, they give us a lot of information. One of the things I really like, they're still one of the retailers that actually reports monthly revenue numbers. So what we can do is size this up against other data, like what we'll get tomorrow, for example, the June Retail Sales report. Costco's already reported its June revenue. Uh, US comps sales adjusted up about 5%. We have a nice barometer to measure that against. Then if we do that over the last several months, it's clear Costco is taking consumer wallet share, and it makes sense. Folks are trending down, they're concerned about inflation pressures, they're leaning into what Costco has.
Bullet point number two, another reason you say this one's a buy: differentiated membership business model.
Yes. So when we talk about Costco, we have to remember it's a membership warehouse club. So you pay your fee, and off you go to shop. But when we amass those fees, they're a significant piece of the company's overall pre-tax income, depending on the quarter, 50-60%. Very different than a Walmart, very different than a Target. It gives it an air of predictability that we like. And it also kind of says that when things get a little rough, there's a nice rock-solid base for their earnings.
And a final reason you say this is a smart place to commit capital: expanding warehouse footprint.
Absolutely. So, you know, Costco continues to build out the number of their locations, both in the US and internationally. But it's kind of a great feeder business, because as they expand the warehouse footprint, they get more members, they get more members, they continue to build that high-margin membership fee revenue that they have.
Now you made your case convincingly, Chris. Before folks jump in, though, let's talk about the downside risk you have to think of.
Yeah, so a lot of folks will talk about, you know, consumer spending and stuff, but I continue to think that folks are looking to stretch their disposable spending dollars, they're going to Costco. So that's not as big of a risk for me. For me, given the importance of that membership business model, we have to track renewal rates. They're typically above 90%. If we saw a big drop in that, that would be worrisome to me.
All right. So that's our buy. Let's move to one you're not a strong fan of: Target. Now, this one has already been plenty beat up, Chris. You say it's still worth avoiding here. Let's go through the reasons why that. The first reason you say: avoid Target, consumers trading down.
Yeah, absolutely. You know, when we take a look at, you know, various survey data, consumers are trending down, you know, off-price brands, trying to stretch those spending dollars, the very reason we expect them to go to Costco. So, you know, when you look at Target, it's kind of a, um, disposable income type of place. They're not big in grocery, you can't buy in bulk, hard to arguably stretch those dollars. So I see them kind of losing wallet share while Costco gains it.
Second reason you say this is one to avoid: market share concerns.
Well, exactly. So when we talk about consumer wallet share, we already talked about Costco, they're taking it. But we think about Walmart, we think about Amazon, particularly coming off a prime day and expanding that base, adding more digital shopping holidays throughout the year. How does Target compete? It's poised to lose more market share in my view.
And another reason to avoid it here: margin pressure.
Yeah, so, you know, a lot of retailers, what they're trying to do, whether it's Albertsons, Kroger, or even Target, they're trying to hold the line on prices so people continue to come in. Well, if they continue to hold the line on prices and they're losing market share, it's going to hit their margin dollars. Falling margin dollars, not good for EPS outlook. So I think there's some downside EPS risk there.
All right, so before you avoid, though, as we do avoid it, what are some reasons you could be wrong, Chris? What's the upside risk on this one?
So, so the biggest one is, you know, if we think about Target being tied to discretionary spending, if we see a reacceleration in disposable income, that would be a very, that would be a reason to turn around and revisit Target. But to see that, we're going to want to see a pickup in job growth, we're going to see a pickup in wages. Those would be the flags to look for.
All right. Buy Costco, avoid Target, that's what Chris has to say. Thank you, Chris, and thank you all for watching. Good Buy or Good Buy.