Please ensure Javascript is enabled for purposes of website accessibility

Costco Wholesale and Dollar Tree Inc. Soar on a Flat Day for Stocks

By Demitri Kalogeropoulos - May 26, 2016 at 6:48PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Why these stocks jumped as the broader market ran in place on Thursday.

Stocks took a breather on Thursday. After surging higher over the prior two days, the Dow Jones Industrial Average (^DJI -0.72%) ended the trading session down by 25 points, or 0.1%. The S&P 500 (^GSPC -0.58%) was unchanged at 2,090 points:

^DJI Chart

^DJI data by YCharts.

Two new reports suggested that economic growth could be gaining momentum -- which adds to the case for a likely interest rate boost by the Federal Reserve next month. Durable goods orders rose by 3.3%, the government announced, compared to the 1% uptick that economists had forecast. Pending home sales for the month of April also trounced expectations by spiking 5% to reach their strongest pace since February 2006.

As for individual stocks, Costco Wholesale (COST 1.63%) and Dollar Tree (DLTR -0.26%) were two of the biggest movers as investors cheered the retailers' latest quarterly results.

Costco's growing membership fees

Costco shares jumped 4% after it announced steady sales and profit growth for its fiscal third quarter. Revenue ticked higher thanks entirely to a growing warehouse base. Comparable-store sales rose by 3% after accounting for foreign currency swings and gas price deflation. While that's far from the 6% pace that shareholders saw through most of fiscal 2015, Costco's comps still indicate solid customer traffic gains and continued market share improvement. The comparable figure for both Wal-Mart and Target, for example, was 1%.

Image source: Costco.

Costco's membership fees, its real engine of profitability, rose 6% to $620 million. That success, plus slow expense growth helped earnings improve to $545 million, translating into a net profit margin of 2.1% compared to 2% a year ago.

While the results indicate a slower traffic growth pace, Costco has a few initiatives in the works that should drive profits higher over time. It's in the middle of its biggest store footprint expansion yet, with plans to open 30 warehouses this year compared to 23 in fiscal 2015.

It has also been more than four years since Costco raised its annual membership fee, which suggests another increase could be coming as soon as next year.

Dollar Tree's higher profit forecast

Discount retailer Dollar Tree led all S&P 500 stocks higher with its 13% jump today. The catalyst for that pop was a first-quarter earnings result that provided much of the good news that investors were hoping to see.

Image source: Dollar Tree.

Sales growth came in right at management's guidance as comps improved by 3%. Executives noted that the higher comps figure was powered by a mix of improving customer traffic and greater spending per transaction. At the same time, cost cuts helped offset the addition of Family Dollar's low-margin sales into the base and adjusted earnings spiked 25%.

"Through what continues to be a challenging economic environment," CEO Bob Sasser said in a press release, "we delivered sales of $5.09 billion, which was the mid-point of our guidance range, and earnings that exceeded the high end of our guidance range." Dollar Tree's challenge ahead also involves a complex Family Dollar integration that requires the combination of 13,000 stores and 23 distribution centers.

A merger of that size can often spark unwelcome financial surprises, but that doesn't appear to be the case here. In fact, Dollar Tree just raised its full-year profit outlook to $3.69 per share from the $3.50 per share it projected in March.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$30,807.36 (-0.72%) $-221.95
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,796.65 (-0.58%) $-22.18
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$477.51 (1.63%) $7.67
Dollar Tree, Inc. Stock Quote
Dollar Tree, Inc.
$155.84 (-0.26%) $0.41

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.