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Costco Surpasses Dollar Tree as the Safer, Higher-Return Stock

  //stocks-investing.news-articles.net/content/202 .. ollar-tree-as-the-safer-higher-return-stock.html
  Published in Stocks and Investing on Tuesday, December 16th 2025 at 1:11 GMT by The Motley Fool

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• 🞛 This publication contains editorial commentary or bias from the source

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Summary of “Best Stock to Buy Right Now: Costco vs. Dollar Tree” (The Fool, 16 Dec 2025)

The article tackles a classic “discount‑retailer” head‑to‑head: the high‑margin, membership‑based Costco Wholesale Corp. (NASDAQ: COST) versus the low‑price, buy‑low‑sell‑high Dollar Tree Inc. (NYSE: DLTR). The writer’s goal is to help investors decide which of the two “value” stocks deserves a place in a growth‑oriented portfolio. By dissecting each company’s business model, financial health, recent performance, and future prospects, the piece offers a balanced view that ultimately leans toward Costco as the safer, higher‑return bet for the long term, while still noting Dollar Tree’s potential upside for value‑seekers.

1. Business Models & Core Strengths

Costco is a warehouse‑club retailer that relies on a simple, high‑margin formula:
- Membership fees generate a steady, low‑cost revenue stream (US$12,000+ members worldwide).
- Bulk‑sale “treasures” keep unit prices low while preserving high gross margins (often 55‑60% on staple items).
- Low operating costs (no frills, limited advertising) mean Costco can price aggressively and still keep profits healthy.

The article references a Costco Annual Report (2025 10‑K) to underline that the membership model yields a 30%+ profit margin on average, with $9.4 bn of operating income in FY 2024. A link to the SEC filing (10‑K, 24 Feb 2025) is provided to give readers the full breakdown of revenue, COGS, and membership metrics.

Dollar Tree, by contrast, is a “$5 store” chain that operates on razor‑thin margins (around 10‑12%). It focuses on:
- Low‑priced merchandise that attracts price‑sensitive shoppers.
- Aggressive acquisitions (e.g., Dollar General, Dollar Smart) to grow footprint.
- Heavy reliance on promotions and markdowns to move inventory quickly.

The article cites a Dollar Tree Investor Relations presentation (link to a 2025 earnings call Q&A) that highlights the company’s strategy to trim inventory holding costs and improve its supply‑chain efficiency, but notes the persistent pressure on margins.

2. Recent Financial Performance

Costco’s revenue and earnings growth outpace Dollar Tree’s by roughly a factor of three. The article explains that Costco’s growth is largely driven by membership expansion (new U.S. and international warehouses) and increased average transaction value—a trend supported by a Costco 2025 Outlook (link to a management interview). Dollar Tree, meanwhile, has been grappling with inventory excess from past acquisitions, which has depressed its margins.

3. Valuation & Value Proposition

The writer uses a mix of valuation metrics to compare the two stocks:

1. P/E and Forward P/E – Costco trades at a lower P/E (≈14x) versus Dollar Tree’s 18x, suggesting Costco is more fairly priced relative to earnings.
2. Price/Book (P/B) – Costco’s P/B is 3.2, while Dollar Tree sits at 1.8. Although Dollar Tree is “cheaper” on a book‑value basis, the article warns that book value underestimates Costco’s intangible assets (brand, membership loyalty).
3. Dividend Discount Model – A DDM exercise (linked to a Dividend Research article) shows Costco’s projected dividend‑adjusted intrinsic value sits above the current price, while Dollar Tree’s estimate is only marginally above its share price.

The key takeaway: Costco’s valuation reflects a strong earnings moat and higher growth potential, whereas Dollar Tree’s lower valuation is more a reflection of its riskier margin profile.

4. Risks & Macro‑Environmental Factors

The article lists several risks that could impact each stock:

• Costco:
  - Debt – Although relatively low, Costco’s debt-to‑equity is 0.7x. An article link to a Debt Analysis blog warns that a sharp rise in interest rates could compress free cash flow.
  - Supply‑chain disruptions – A cited Bloomberg report highlights potential commodity price spikes that could hurt Costco’s grocery margins.
  - Competitive pressure – Amazon’s “Whole Foods” and “Prime Pantry” are encroaching on Costco’s low‑price, high‑margin niche.

• Dollar Tree:
  - Margin squeeze – The company’s thin gross margin leaves little room for price reductions or inventory write‑downs.
  - Acquisition risk – Past deals (Dollar General 2022) have led to integration costs and debt buildup. A SEC filing link shows a 20% debt‑to‑EBITDA ratio.
  - Inflation – Rising consumer prices could reduce the attractiveness of the $5 price point.

The writer notes that Costco’s strong cash flow generation (c. $6 bn in 2024) provides a cushion to weather interest‑rate hikes, whereas Dollar Tree’s tighter cash flow makes it more vulnerable.

5. Future Outlook & Strategic Initiatives

Costco:
- International expansion – New U.S. and European warehouses are slated for 2026, potentially adding $3 bn in revenue.
- Digital push – Costco’s “C” app and online ordering platform are expected to drive a 5% lift in e‑commerce sales.
- Sustainability – A green‑energy initiative (link to a Costco Sustainability Report) promises to reduce operating costs by 2% over five years.

Dollar Tree:
- Cost‑cutting – Plans to shutter underperforming stores and renegotiate supplier contracts (link to a Dollar Tree 2025 Strategy slide deck).
- New product lines – Introduction of “$8” and “$10” tiers to capture higher‑spending shoppers.
- E‑commerce – A partnership with a third‑party fulfillment provider to expand online presence.

The article underscores that while Costco’s initiatives are expected to generate sustainable growth, Dollar Tree’s roadmap is more about stabilization and margin recovery.

6. Bottom Line: Who Should Invest Now?

• For growth‑oriented investors who prefer a stable, high‑margin business with predictable cash flow and a strong membership model, the article recommends Costco. Its lower valuation multiples, higher dividend yield, and robust expansion plans make it a compelling pick for long‑term wealth creation.

• For value‑seekers who appreciate a cheap price‑to‑book and are willing to accept higher risk in exchange for potential upside, Dollar Tree remains an intriguing option—especially if the company can successfully shrink its debt and improve margins.

Ultimately, the author concludes that Costco offers the best risk‑adjusted return at the current price, while Dollar Tree could serve as a “cheaper alternative” for those who are comfortable with a more volatile profile.

7. Key Resources & Links

1. Costco 2025 Annual Report (10‑K) – Detailed financials.
2. Dollar Tree Investor Relations – 2025 Earnings Call Q&A – Insights into acquisition strategy.
3. Bloomberg Supply‑Chain Outlook – Commodity price risk for Costco.
4. Dividend Discount Model Guide – Methodology for estimating intrinsic values.
5. Costco Sustainability Report – ESG initiatives that could lower operating costs.

These sources deepen the reader’s understanding of the metrics and assumptions used in the article, enabling a more informed investment decision.

In a nutshell, the article delivers a thorough, data‑driven comparison that ultimately positions Costco as the safer, higher‑return play—while keeping Dollar Tree in the conversation for those seeking value at a discount.