Dell, HP face supply shortages, Peloton lowers price of bike, Gap raises guidance as brand sees a revival

Myles Udland, Brian Sozzi, and Julie Hyman break down Friday’s early morning market movers, which include: Dell and HP’s stock taking a dip due to component shortages causing higher input costs and lengthened backorders, Peloton offering a lower price for its exercise bike as growth sales from the pandemic start to stall, and Gap raising its net sales forecast after experiencing an influx of customers in stores.

Video Transcript

MYLES UDLAND: Let's talk some earnings here as earnings continue to trickle out. I've got to start with Peloton. Company coming out last night, cutting the price of its bike, $400. Also offering some light guidance. You see here, beating on the top line, a miss on the bottom line. A lot in here. We're going to talk to Peloton's CFO in just about 15 minutes or so, but let's kind of go around the horn here. Brian Sozzi, I'll start with you on what stood out from this quarter.

BRIAN SOZZI: Well, what's standing out to me this morning is the analyst's reaction. I've seen several iterations of cells out there on the Street. Some very, I would say, aggressive commentary. I think the Street was largely very much surprised by the company's quarter and the company's outlook. You've seen some slowing in subscriber growth, or we did see some slowing in subscriber growth quarter over quarter. Company also forecast over the next 12 months that they will not be profitable. Investing a lot in manufacturing, of course, also that reflects the impact of cutting the bike-- their entry level bike-- by $400. And still dealing with issues from the tread recall. And in addition to some concerns out there on the Street regarding material weakness in their accounting that they noted in the earnings release last night. So again, guys, a lot to unpack here within Peloton. A lot to digest, but as Julie noted the stock was down about 15% in the premarket-- in the aftermarket yesterday after the results, trying to come back here in the early going. But still, a tough look for Peloton on earnings day.

JULIE HYMAN: Yeah, I mean, when we checked, what, just about 20 minutes ago the stock was down by about 2.5% so it's definitely bouncing around here to the downside. On the tread problems that you mention. This morning, Reuters is reporting that the company is getting subpoenas from the DOJ and other regulators related to the recall of its tread and the number of injuries that the company reported or did not report related to that. So that's one of these sort of overhangs that we have to watch for here. And speaking of the treads, the tread returns the company referenced multiple times on the call-- related to-- whether related to its recall or just returns in general. The returns came in higher than the company estimated and that is responsible for a lower than estimated gross margin. Gross margin of 27.1% last quarter, and the company blamed it on the cost of those returns, which Myles, when you were digging into the numbers there it looks like it was around $100 million related to cost for those return. So looks like potentially that's not going to be recurring, but-- we've talked about it before-- reputationally what that kind of a situation does to a company like Peloton, which I think enjoys-- especially among its adherence-- because adherence is really the word for people who are into Peloton, because as we know people who are into Peloton are really into Peloton. But in terms of attracting new customers to the brand, when you get hits like that does something like a price cut offset it, does something like new product offset it, I think that remains to be seen.

MYLES UDLAND: I mean, look, last year at this time, Peloton shares, you know, at the end of August, they were trading at 80 bucks a share and right now we see the stock is about what, $105 or so, $108 in premarket trading. And ultimately, you know, this is a name that's down considerably. 160 some odd dollars per share at the end of 2020. So we've already seen some decline in the stock, you know, right around 30% or so.

And I think really, you know, we can get bogged down in the margin profile-- and analysts are going to, right? That's their job. We can go through the margin profile of the new cohort versus old cohort, Tread versus Peloton, you know, all this kind of stuff. But, really, what was the company selling when it came public? What were investors buying as we went into the pandemic and through the pandemic and we thought about where the business sits? It's future of fitness.

And I know it's a cliche, but that's what you're buying. You're buying this bet that Peloton is reshaping how we think about fitness, the way we think about using our homes for fitness, the way that people interact with their fitness regimen, right, which we know has been very cyclical through time, mostly because the large majority of people have habits that change over time. They don't really have habits, right? They have fads they go through, a word that the fitness industry does not like to be associated with but one that it is associated with.

And I think really, you know-- they were asked a question on the call, and they didn't, you know, have such a great answer for it because they haven't thought about it exactly this way. But, you know, what's the TAM, right? I mean, I remember talking to an analyst one time about new issues and new startups, and his view was, well, just pick the companies with the biggest TAM and then buy those, and they're going to probably work out.

I think in the fitness space Peloton still clearly has, in my view, the biggest TAM of any major publicly traded fitness player out there. But does what's happening now-- price cut with the bike, recalls of the Tread, does that reset what the market opportunity is for Peloton or does it not? Since those highs last year, the market has said maybe it does, and I think maybe that's sort of what the wrestling around the stock price has been over the last 18 hours or so.

There we go. Live pictures on the floor of the New York Stock Exchange. Cazoo ringing the bell. Great name.

BRIAN SOZZI: Great name.

MYLES UDLAND: I feel like I know what this company does, and we may have even talked to them. Do either of you have something on this?

BRIAN SOZZI: Maybe something with a car. Look at how that A is drawn.

MYLES UDLAND: Is this a SPAC?

JULIE HYMAN: I think that's the clue, although all I can think about is--

MYLES UDLAND: Look this up.

JULIE HYMAN: --is an actual kazoo.

MYLES UDLAND: Right.

BRIAN SOZZI: Bless you.

MYLES UDLAND: Right.

BRIAN SOZZI: Kazoo. Kazoo.

MYLES UDLAND: Kazoo.

JULIE HYMAN: Unfortunately I don't have one to hand or else I would be playing it right now.

MYLES UDLAND: Do we need to have-- I don't know if you should have a kazoo handy, right? It's not New Year's Eve.

[LAUGHTER]

Anyway, all right. Again, we're going to be-- we're going to be talking to Peloton CFO Jill Woodworth in about 15, 20 minutes or so. So let's kind of table our conversation for that, and a lot to get through there.

Let's move on to another name that I know, Brian Sozzi, you care deeply about. That, of course, is the Gap out with their latest quarter last night. We see here beat on the top and the bottom line. Stock up 4%. Your takeaway?

BRIAN SOZZI: My takeaway-- I don't even want to get in the results yet because maybe I'm missing something here. So the Gap CEO Sonia Syngal said on the call last night the Gap hoodie is having a moment and that customers are again proud to be displaying the Gap logo and Gap brand on our chests.

Full disclosure-- I have not bought a Gap hoodie or anything that has said Gap on it going on 15 years. So I don't know if I remain in the minority, but apparently demand for Gap hoodies is helping to drive some form of turnaround at Gap.

Now I will say this. Everybody looks like a hero when we're all trying to rebuild our closets, and I think that's what you're seeing at the likes of a Gap and Old Navy. Old Navy comparable sales up 18% versus 2019. Gap sales actually down 3% versus 2019. Banana Republic still struggling. Same-store sales or comparable sales down 5% versus 2019.

But again, Gap is pitching a recovery story on its earnings call. They've closed a lot of stores. The profit-margin dynamics are starting to improve for them, and they struck a somewhat bullish outlook for the balance of this year. But again, that Gap hoodie, apparently it's in high demand again.

JULIE HYMAN: Well, what's interesting is, to be fair, like for a few years there, logo everything was in, and then it was out, right? Consumers sort of migrated away from logos. So I don't know if this is an indication that there's a move back towards logos more broadly or if it's just a Gap resurgence thing. I don't know.

Listen, when it comes to Banana Republic in particular, I think actually Gap needs to take a cue from Express. You know, we just talked to CEO Tim Baxter there. He's shrinking those Express stores. He's shrinking assortment. To me, I mean, just from my own single market research, but going into Banana Republic, the stores are still big, and they still have a lot of stuff in there. Edit. They need to edit, I think, is my feeling--

BRIAN SOZZI: Stuff that doesn't fit, Julie.

JULIE HYMAN: --when it comes--

BRIAN SOZZI: It doesn't fit.

JULIE HYMAN: That's the other issue. Yes, that is the other issue as well. So the company also just bought another company called Drapr. Of course it's missing the E, this being the internet age where people don't like vowels. Drapr, which helps-- I know I sound like a Boomer, Myles. I'm sorry.

MYLES UDLAND: No, I agree. I think it's-- I don't care for the trend.

JULIE HYMAN: So Drapr is sort of a 3D fit app, and so that's something they've just bought to try to help with that whole fit situation. But it doesn't help you if none of this stuff fits properly to have the app that tells you what is going to fit you the best, I guess.

MYLES UDLAND: Yeah. I mean, remember, the reason that startups-- the reason they leave vowels out of these words is because the SEO's too expensive to buy the top listing on the actual word draper or the actual word swivel. So if you type in S-W-V-L, Swvl gets to be the top result. But if you type in swivel, it costs too much money. You don't want to burn your cash on the Google result.

JULIE HYMAN: Got you.

MYLES UDLAND: It's a little-- you can notice when companies raise a lot of money, they do things like they get to buy the top Google result. They get to have the proper name in the website instead of it being some, you know, half version of what they wanted.

Anyway, but when Sozzi Enterprises opens, I think he's got-- I think you've got that one, Sozz.

BRIAN SOZZI: And, well, yeah, maybe I do. And I'll just add this too on Gap. For those expecting this steady stream of--

MYLES UDLAND: He's unflappable.

BRIAN SOZZI: --of Kanye West clothes, my takeaway from the earnings call, don't expect to walk into a Gap store and see thousands of pieces of Kanye West clothing. That's just not going to happen as part of this deal. I still think you're going to see drips and drabs, as we have seen from Kanye West in his collaboration with Gap, releasing, I believe, two different types of colored coats, winter coats with no zipper on it. Should be very helpful when it snows outside.

Nonetheless, I don't think you're going to see a big assortment collection. It might just be one or two pieces here and there, and hopefully you find it in the store or online. If not, too bad.

JULIE HYMAN: I think you mean Ye.

BRIAN SOZZI: Kanye.

JULIE HYMAN: No, I mean, isn't he changing his name so that it's just Ye?

MYLES UDLAND: Yeah, he is Yeah.

BRIAN SOZZI: Yeah

JULIE HYMAN: Anyway.

BRIAN SOZZI: Who knew?

MYLES UDLAND: It's like, yeah, the Prince thing. I mean, he still hasn't put the album out. "Donda"-- we're still waiting for "Donda," which we discussed on this program however long ago. It was three weeks, four weeks ago.

JULIE HYMAN: Is he still sleeping at the stadium?

MYLES UDLAND: Well, he did a listen show-- I guess it was last night in Chicago, I think. So, I mean, presumably he didn't sleep in Atlanta and then went to Chicago. I mean, I don't know. Maybe he's still sleeping.

The problem is football season's starting too. Like, I think there's probably games at Mercedes-Benz Stadium this Saturday, certainly a week from Saturday. Like, I mean, can he still have a room there? I don't know. We'll leave that.

I just think it's hilarious we started talking about, you know, startup names and stuff, and Sozzi just-- he's ready to talk Gap. He was not taking the bait on that topic change. Cannot shake him. I'm watching to see if your facial expression will change, and I can't get you to do it.

BRIAN SOZZI: It won't.

MYLES UDLAND: All right, let's finally touch quickly on earnings out of HP. Last night, the company here missing on the top line. A little bit of a beat on the bottom line. Stock is down though in the premarket.

Free cash flow down from a year ago. Brian Sozzi, what do you make here of the quarter?

BRIAN SOZZI: Yeah, I had a chance to talk to HP's CEO, Enrique Lores. I think what you're seeing, the sales pressure here, they missed by a couple hundred million dollars on sales versus expectation. So I asked Lores-- and we'll have more from my interview with him later on in the show. But it's more a reflection, he says, of just not being able to get components, chips, other components to make computers more so than demand being delayed because return to offices have been delayed. So that's his takeaway.

Also too, I have another-- I have a piece right now on Yahoo Finance discussing their return-to-work plan for HP employees. They are mandating vaccines for workers to go back to offices November 1. HP workers were supposed to return sometime in early September. They pushed that back. So by November 1, if you want to go back to the office for HP, you have to have a COVID-19 vaccine.