Costco vs. Dollar Tree: Which Best Dollar Stock Offers Real Value for Smart Investors?

Understanding Two Distinct Retail Approaches

The retail landscape has shifted dramatically as consumers hunt for better deals. Dollar Tree (NASDAQ: DLTR) and Costco (NASDAQ: COST) have both capitalized on this trend, yet their strategies couldn’t be more different.

Costco operates on a membership-based club model. Members pay an annual fee—which comprises roughly 50% of the company’s operating profit. This recurring revenue stream flows directly to the bottom line with minimal costs. The membership model allows Costco to operate on razor-thin product margins, enabling the company to offer rock-bottom prices that incentivize continued membership renewals.

Dollar Tree, by contrast, functions as a traditional retailer. It attracts shoppers through low price points and product selection rather than membership. While both retailers compete in the value segment, Dollar Tree faces greater vulnerability to customer defection if shoppers opt for alternative retail concepts.

Spotting the Key Difference: Trade-Down vs. Built-In Loyalty

Recent earnings tell an interesting story. Costco reported fiscal Q2 2026 results with same-store sales growth of 6.4% and traffic up 3.1%. Dollar Tree’s Q3 2025 comparable period showed same-store sales growth of 4.2%—respectable, but with an important nuance.

Dollar Tree is benefiting from what economists call “trade-down behavior.” The company reported that 3 million new households shopped at Dollar Tree locations during the quarter, with 60% earning over $100,000 annually. These affluent shoppers are migrating from premium retailers like Target, which saw same-store sales decline 2.7% in Q3 2025.

Here’s the critical insight: these higher-income shoppers will likely trade back up when economic confidence improves. They’re not loyal to Dollar Tree—they’re temporarily price-conscious. Costco’s membership structure, combined with curated inventory of quality products, creates genuine long-term stickiness that Dollar Tree cannot replicate through its lower-quality, budget-focused assortment.

The Valuation Reality Check

Both stocks command premium valuations. Costco trades at a P/E ratio of 47 times earnings, above its five-year average of 44 times. Dollar Tree sits at 24.5 times, compared to its five-year average of 21 times. By historical standards, both look expensive.

For value-oriented investors, neither presents an obvious opportunity. Target, trading at roughly 12 times earnings (below its five-year average of 16 times), appears more attractively priced. Growth investors eyeing Dollar Tree should recognize the business model risks. Only aggressive growth investors will stomach Costco’s valuation premium, despite the company’s proven execution.

A Track Record That Matters

Costco’s 30-year track record demonstrates consistent execution: quality products at competitive prices, paired with steady store expansion. Dollar Tree’s recent history tells a different story. The company’s acquisition of Family Dollar—intended to fuel growth through product line expansion into higher price tiers—became a costly strategic misstep. Dollar Tree eventually divested Family Dollar in 2025 for billions less than the original purchase price.

This divergence in execution quality is precisely why Costco remains the best dollar stock choice for disciplined investors seeking proven business models. However, Costco’s current valuation warrants caution. The stock recently experienced a 15% drawdown, which could extend further based on historical trading patterns.

The Verdict: Put Costco on Your Radar, Skip Dollar Tree

For most investors, Costco deserves a position on the watchlist rather than immediate portfolio entry. If purchased at current levels, commit to a multi-year holding period—premium valuations for quality businesses have historically rewarded patient shareholders.

Dollar Tree, despite near-term same-store sales gains, carries structural headwinds. The trade-down phenomenon fueling recent growth will likely reverse as consumer confidence stabilizes. Without Dollar Tree’s own compelling competitive moat, the best dollar stock selection ultimately points toward Costco’s proven operational excellence and membership-driven economics, even if you must wait for a more attractive entry point.