When you think about installing new flooring or painting your dining room red, one retailer that probably comes to mind is Home Depot.

Home Depot has, for many years, been synonymous with home improvements. But that doesn’t mean the company isn’t facing its share of challenges.

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Home Depot’s most recent earnings report sent investors some mixed signals. While comparable U.S. sales increased 1.4% for the quarter, the company’s reported numbers didn’t quite live up to Wall Street’s expectations. Specifically:

• Earnings per share came in at $4.68 versus $4.71 expected
• Revenue came in at $45.28 billion versus $45.36 billion expected

Even more concerning, though, is recent data from Placer.ai, which found that Home Depot’s foot traffic in same-store locations fell 2.6% from the same quarter last year.

Billy Bastek, Executive Vice President of Merchandising at Home Depot, tried to put a positive spin on the company’s most recent numbers.

“We were pleased with the performance we saw in categories such as building materials, lumber, and hardware,” he said during Home Depot’s August earnings call. However, Bastek acknowledged that the company “continued to see softer engagement in larger discretionary projects.”

Costco is becoming a thorn in Home Depot’s side

Home Depot has long faced competition from rivals like Lowe’s. But in recent years, Costco has upped its home improvement game to the point where Home Depot should be worried.

Although Costco is known as the store to go to when you want to buy eggs or toilet paper in bulk, the warehouse club giant actually has an impressive array of products that compete with Home Depot’s inventory.

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For one thing, Costco stocks its share of premium and everyday tools. It also has an impressive range of home appliances, from refrigerators to washers and dryers.

Because Costco gets a lot of its revenue from membership fees, it can operate on lower margins than its competitors that don’t have a membership model. This gives Costco an opportunity to undercut Home Depot on big-ticket items.

At a time when many consumers are spending their money more cautiously due to persistent inflation and general economic uncertainty, that’s a big deal.

Costco’s home installation services give Home Depot a run for its money

In addition to selling some of the same products Home Depot sells, Costco is also increasingly edging its way into the home improvement space.

The warehouse club giant offers a number of home improvement and installation services, including:

• Flooring
• Home and closet organization
• Window treatments
• Water softening
• Garage doors
• Generators
• Windows
• Countertops

Members who book these services through Costco not only get great prices and the peace of mind that comes with the Costco name, but an added incentive – free money toward future Costco purchases.

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Most of Costco’s home improvement and installation services offer the benefit of a 10% Shop Card upon completion of the job. A Shop Card is Costco’s version of a gift card, and it can be used to purchase almost any item in stores or at Costco.com.

Better yet, for a limited time, select home improvement services at Costco are eligible for a 15% Shop Card.

For members who shop at Costco regularly, a Shop Card is basically the equivalent of actual cash back. And if Costco continues to run this generous promotion, it could increasingly take customers away from Home Depot, especially if its base prices prove to be more competitive.

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Of course, some might argue that budget-conscious consumers won’t want to pay the membership fee to get in the door at Costco. 

But as Costco increasingly carves out a name for itself in the home improvement space, a growing number of homeowners will likely come to the realization that savings on a single renovation could more than make up for their annual membership fee.

At a time when Home Depot wants to get more people in the door, that has the potential to be a very serious problem.

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