Costco Wholesale (COST 1.56%) and Target (TGT 2.05%) are two of the best-known retailers in the U.S. And while both companies are popular for offering a variety of goods at low prices, Costco relies on a lower operating margin and higher volumes, while Target usually has a higher operating margin because it sells a larger mix of discretionary products.

Therefore, it’s no surprise that Target has been hit harder than Costco by supply chain disruptions and inflation. And Costco’s recurring revenue stream from memberships, paired with its customer loyalty, adds another layer of protection amid economic uncertainty.

Here’s the case for why both Costco and Target could be worth buying now.

A happy store clerk hands a shopping bag to a smiling customer.

Image source: Getty Images.

Sometimes, history does repeat itself

Howard Smith (Costco): Costco and Target are both proven, successful retailers. But they have different business models, with Target being more of a typical retailer while Costco relies more on a loyal and growing membership base and less on operating margin.

COST Operating Margin (Quarterly) Chart

COST Operating Margin (Quarterly) data by YCharts.

While Costco is less profitable by that financial metric, it is more consistent, and that has rewarded shareholders in other ways. Costco’s total returns — including dividends — have significantly outpaced those of the S&P 500 index as well as Target over the past decade. That primarily comes from excellent management and a culture that takes care of both its shareholders and its employees.

Recent quarterly performance provides a good example. Many retailers, including Costco, have been forced to navigate a difficult economic environment with inflated input costs and fears of a slowdown in consumer spending. For its fiscal 2023 first quarter (ended November 20), net sales rose 8.1% versus the year-ago period. However, net income only grew 3% as expenses increased.

But even in a challenging environment, on

Read the rest