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Costco slips on mixed earnings, Gap trades higher

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Yahoo Finance’s Julie Hyman, Myles Udland and Brian Sozzi weigh in on Broadcom, Gap and Costco’s latest financial results.

Video Transcript

MYLES UDLAND: Let's talk about some corporate news. We continue to see earnings trickling out here. And we'll start this morning with Costco, a rare miss on the bottom line from the wholesale retailer. A beat on the top line. Revenue there coming in at $44.8 billion, better than the $49-- $43.9-- excuse me-- that the Street was looking for.

But you see here on the earnings line, Brian Sozzi, missing by $0.19-- or rather missing by $0.21, the company continuing to cite those COVID premiums, whether it is personal protective gear for employees, additional cleaning within the stores. And they specifically note wages, which you talked about in a story on Yahoo Finance earlier this week, pressuring the bottom line, the market a little bit of a negative reaction. But Costco has just pretty clearly told the Street that this is the direction that it sees its company going, more investment within its staff, more investment in the stores. Obviously, the top line suggests customers like it, but investors here with a little bit of a different story for Costco.

BRIAN SOZZI: Yeah, Myles, and here's the stat of the morning here. Over the trailing 12 months, Costco has spent $1.6 billion pretax on COVID-related expenses. That-- that comes compliments of Jefferies this morning. Now, Jefferies also noting that about half of that expense will start to unwind over the next 12 months, so that's a good thing. So perhaps you won't see Costco coming out in coming quarters missing on earnings by 13%.

But the real thing I think investors need to be paying attention to on Costco, and really companies of all kinds that played-- that saw strong growth last year during the pandemic, a lot of food companies, certainly tech companies like Zoom, Costco noting February same-store sales up 13.8%. But here's the kicker. In the last week of February, their same-store sales growth ticked down to low-single digits to mid-single digits percentage gains as they start to lap those very strong stock-up sales growth that-- that they saw last year. So it'll be interesting to see as we-- as Costco sees more slowing sales growth in the months ahead because of those tough comparisons, how does the Street react to slowing sales growth for Costco? I think you might be getting a taste of it this morning.

MYLES UDLAND: Yeah, and just, you know, always an interesting stock, because it is such a favorite of so many hedge funds. Charlie Munger, a member of the board there, has often said something to the effect of the problem is I can't buy enough of the stock. So no one who-- no long-term Costco shareholders are really upset about that.

But Sozz, as you know, quarter-to-quarter Street expectations can always be a fickle beast. Let's talk a bit about the chip space, Julie. Broadcom out with its results last night. The stock initially sold off. Last I saw in premarket, it was up about 2%, but continuing to fill out that story we have discussed of continued pressure within the broader semiconductor space.

JULIE HYMAN: Yeah, and Broadcom CEO making some comments about that on the call and saying that more clients are trying to get orders in early to try to get out ahead of the chips shortage and perhaps the anticipated shortages in their own supply lines. So to your point, the shares were down before. Now they have turned higher.

A couple of good, couple of bad in this report. On the one hand, in the last quarter, semiconductor solutions revenue, which is the biggest unit of the company, coming in very slightly below estimates. And that seemed to be initially potentially why those shares were higher. At the same time, the company's forecast for the current quarter is above what analysts had been anticipating overall. So that seems to be offsetting any of the negatives, to some extent.

And like I said, really, to your point, the main issue here has to do with shortages. We heard from Paul Meeks yesterday, longtime tech investor, who said that the pricing gains because of the shortage will outweigh some of the challenges that these companies themselves are undergoing. So we'll see-- we'll see how that ends up continuing to play out as, again, Hock Tan, who is the CEO of the company, said that demand here is real for the company's chips.

MYLES UDLAND: Yeah, there's an analogy. I'm working on it. I'm not sure exactly how to go with it yet, but something about semiconductors being the grocery stores of 2021 and-- there's something there with everyone knows there's going to be a shortage of stuff. We don't know how short. We don't know how much pricing pressure they're going to have.

But everyone seems to be circling this idea that there's not enough chips. We heard that from a number of companies across the space. Let's go back to the retail space, talk a bit, Brian Sozzi, about results out of the Gap coming out last night. You see here a little bit of a miss on the top line. Bottom line, though, far stronger than expected. We'll be talking to Gap's CFO in about 45 minutes.

BRIAN SOZZI: Yeah, Myles, I'm really looking forward to that exclusive chat with Gap's new CFO. She's been there-- I think she just hit her one-year mark, former CFO at Old Navy Katrina O'Connell. But the stock here is up in the premarket close to 5%. And the only reason it is, I would say, Old Navy had-- had a good quarter. I think the Street is a little bit concerned, though, about slowing sales growth at Old Navy, nonetheless.

So the stock here is taking its cue from cost cuts. Gap is on track with its store closure plans, and that is helping to improve their margin structure. Also on the conference call, they announced a strategic review of their intermix business and their European business. European business is about 2% of their sales, about 122 stores overseas. So you're getting a sense that the new management team at Gap is serious about cutting costs. And for now, really, that's all the Street wants to see.

JULIE HYMAN: You know, we also have to talk to her a little bit about inventory, Brian, which is something that she has commented on, as well, in the wake of the reported buildup in inventory at Gap. It could be seen as problematic as well. We'll see how that's going to affect the markdown cadence, which has been a persistent issue for Gap. So we'll take a look at and be asking her about all these issues.