In a recent retail sector note, Bernstein analyst Zhihan Ma highlighted Costco Wholesale Corp (NASDAQ:COST) and Dollar General Corp (NYSE:DG) as top picks for the second half of 2026, with Costco's valuation standing out sharply against its discount rival.
As of late Monday morning, Costco shares were trading at $944.04, down 0.8%, while Dollar General fell 2.5% to $115.23. Costco's price-to-earnings multiple stood at 47.5, nearly three times Dollar General's 16.3. The wide valuation gap underscores divergent investor expectations for the two retailers.
Ma raised her price target for Costco to $1,194 from $1,192, maintaining an outperform rating. She cited Costco's core sales momentum, even after stripping out fuel and foreign exchange impacts. Costco's net sales for May reached $24.01 billion, up 14.5%, with total comparable sales rising 12.5%. Excluding fuel and currency effects, May comparable sales grew 8.0%.
"Costco has held up relatively well year-to-date," Ma told TipRanks, adding that Bernstein expects comparable sales growth of about 6-7% when adjusting for gas and forex. The May figures already exceed that estimate, bolstering expectations. In the fiscal third quarter, Costco's total comparable sales rose 9.8% (6.6% adjusted), while membership fees climbed to $1.37 billion from $1.24 billion a year ago. Diluted earnings per share came in at $4.93, up from $4.28.
Dollar General, meanwhile, reported first-quarter net sales of $10.8 billion, up 3.4%, with same-store sales increasing 2.0%. Store traffic rose 1.4% and average ticket improved 0.5%. Gross margin expanded by 65 basis points to 31.6%, just 20 basis points below Bernstein's fiscal 2028 margin estimate. CEO Todd Vasos noted "positive customer traffic and balanced category growth" and highlighted "strong operating margin expansion" after earnings per share topped expectations.
However, margin expansion may face headwinds. Bernstein sees Dollar General's gross margin reaching 31.8% by fiscal 2028, leaving limited room for further gains from shrink reduction, damage recoveries, or inventory markups. Dollar General's market capitalization stands at $25.5 billion, compared with Costco's $419.6 billion.
Dollarama Inc (TSE:DOL) also made Bernstein's wider list. The Canadian dollar-store chain posted a 21.4% increase in first-quarter sales to C$1.85 billion, driven by 5.6% comparable sales growth in Canada and C$192.8 million from Australian operations. However, operating margin narrowed to 23.4% from 25.6%, partly due to costs from the Australian expansion. CEO Neil Rossy said the company's "strong value proposition" continues to attract shoppers.
Bernstein's basket of retail picks reflects different strategies: Costco relies on membership fees and fuel sales to justify its premium valuation, Dollar General must sustain its 31.6% gross margin, and Dollarama needs to convert overseas growth into profitability. Investors will watch closely as these dynamics unfold in the second half of 2026.
