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Costco and Ross: 2 Ways to Play the Consumer Divide
Written by Chris Markoch. Published 8/24/2025.
Key Points
- Costco benefits from higher-income shoppers who remain resilient and value bulk buying.
- Ross Stores thrives as consumers trade down and seek off-price deals.
- Investors can hedge consumer uncertainty by owning both COST and ROST.
Retail earnings season is underway, and one recurring theme is the state of the consumer. The Federal Reserve's campaign of rate hikes has widened the gap between low- and middle-income households and their high-income counterparts.
This divide shows up in spending patterns: persistent inflation continues to strain lower-income families, while higher-income consumers remain resilient yet increasingly seek value. Companies like Walmart Inc. (NYSE: WMT) report that higher-income shoppers are trading down for groceries and essentials.
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When it comes to retail earnings, investors need to know which consumer segment a company targets—and what that means for its pricing power now and in the future.
Costco Wholesale Corp. (NASDAQ: COST) and Ross Stores Inc. (NASDAQ: ROST) are two retail stocks that illustrate how different business models deliver pricing power to distinct consumer segments.
Costco Showcases Premium Pricing Power
Costco has outperformed most retailers over the past five years, with COST stock delivering a total return—stock price appreciation plus reinvested dividends—exceeding 220%. A $10,000 investment in August 2020 would today be worth more than $32,000.
Membership fees anchor its business model, providing stable, recurring revenue. In September 2024, Costco raised its annual fee for the first time in seven years, and its global renewal rate remains above 90%.
Once shoppers pay their dues, they're motivated to "trade up" by buying in bulk or selecting premium items, helping the company maintain a robust gross margin of 11.25%.
Looking ahead, Costco is focused on expanding its international footprint, which supports future revenue and earnings growth. This growth outlook underpins its premium valuation at over 54x forward earnings.
Ross Stores Offers Value-Oriented Pricing Power
During economic uncertainty, budget-conscious consumers often "trade down." Ross Stores caters to these shoppers with a "treasure hunt" experience that emphasizes value.
In its first-quarter fiscal 2026 earnings report, Ross warned of tariff-related headwinds—about 50% of its inventory comes from China. Still, analysts favor ROST for its strong fundamentals: healthy store traffic, comparable-store sales growth and expanding margins.
Analysts have a $159.40 consensus price target on ROST, noting that tariffs may limit near-term gains. Even so, the stock has returned over 72% in the past five years.
Should You Own COST, ROST or Both?
Diversification matters, and with distinct business models and customer bases, there is room in a portfolio for both Costco and Ross.
COST is a growth stock that also serves as a defensive play. Higher-income consumers continue spending, supporting its membership-driven model and modest price increases. Shareholders have benefited from strong price appreciation and a 22-year streak of dividend growth, and analysts expect the outperformance to persist.
ROST is a more cyclical, value-oriented play. Off-price chains like Ross attract cost-conscious shoppers, fueling traffic and comp-store sales even if rates fall—these customers still want to stretch their dollars.
Whether you prioritize premium offerings or value strategies, COST and ROST offer distinct ways to tap into shifting consumer trends. Investors seeking a balanced retail allocation may consider both names.
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