Welcome to Catalyst. I'm Madison Mills. 30 minutes into the US trading day. Let's get you the three catalysts we're watching this hour. First up, we're going to break down the biggest market action impacting your portfolio. We're going to have full coverage of that ahead. Plus, we bring you the latest insights on the tech trade. Can Wall Street's favorite sector continue to outperform? And we'll sit down with the CEO of Gap to break down the retailer's earnings. Full coverage ahead.
Taking a look at the major averages. 30 minutes into the start of trading. Let's get you a check on the market. Still under pressure this morning. You've got your S&P 500 off about 5/10 of a percent. Your tech-heavy NASDAQ off just about 8/10 of a percent and we're getting the Michigan sentiment data coming in here unchanged at 52.2 after a preliminary reading of 50.8. So the index coming in line with the prior month's reading at 52.2. The current economics index fell to 58.9. Last month it was 59.8. So that is a fall to the downside. The expected change in median prices in the next 5 to 10 years also fell to 4.2 compared to 4.6% as the preliminary number. The expected change in median prices during the next year rose to 6.6. Again, that is a downward number compared to the 7.3% preliminary number there. And again, that headline number unchanged coming in here at 52.2. We've really been monitoring consumer sentiment as an indicator of how consumers are feeling about tariff policy. Tariffs continuing to be mentioned in this consumer sentiment report from the University of Michigan as something that they are concerned about when it comes to personal finance going forward. Here you can see putting some stocks under pressure. But let's look at how the bond market is responding. The bond market has been responding to the economic data, especially at the front end of the curve. And that's exactly what we are seeing this morning. Here you've got your 10-year just about flat, moving up just a touch here on yield. And you've got your 30-year yield up about a basis point as well.
Gap sinking on the expected cost of tariffs despite reporting better than expected first quarter results. Let's toss it over to Yahoo Finance Executive Editor Brian Sozzi for his conversation with Gap CEO Richard Dickson.
Thanks so much, Madison. Richard, always great to see you. Madison mentioned the stock decline down about over 20% on the results. To the average investor out there on our platform right now, does this stock decline reflect the trends you're seeing in the business?
No, Brian. First off, we don't manage our day-to-day business focused on the daily stock price movement. And clearly, it's a dynamic market out there, but what's most important is that our brand reinvigoration is really working and it's showing in our results. I mean, this was a strong quarter. We exceeded expectations across all key financial metrics. The strategic priorities that we've laid out are very clear and despite a dynamic environment, we're staying firmly on course. It's showing up in the results. Comps up 2%. This is the fifth consecutive quarter of positive comps for us. Importantly, we gained market share for the ninth consecutive quarter. We expanded gross margin and operating margin during the quarter. We controlled expenses and most importantly we increased our EPS by 24%. And lastly we continue to strengthen our balance sheet. We've got a strong cash flow, cash balance of 2.2 billion. Honestly, the Q1 performance is yet another proof point that the strategy is working. I remain incredibly optimistic and realistic about the opportunities ahead. And as we navigate a highly dynamic environment, we're really quite pleased with the progress.
Richard, I've talked to you every quarter, I think, since you took over as CEO and every quarter I would say Gap has been like a runner, like getting increasingly faster. Turnaround is gaining steam, but then it's smack. You now we're in a trade war. Has this trade war stalled the progress you've been able to make within your brands?
You know, no. I mean, look, like any business, and we've talked about this before, we're constantly navigating complexity, and there's all sorts of complexities in running a business, and in this case, tariffs is a focus. But it's our responsibility to do so without ever compromising the long-term integrity of our strategy. And as we know, the most important part of this is the consumer. So we're very concentrated on ensuring that the consumer proposition and the value orientation of our brand resonates and it is resonating again. Nine consistent quarters of market share gains. We're breaking through in a competitive landscape. We're reinvigorating our brands and the statistics are showing that our progress is really there.
Richard, I was talking to the CEO of HP this week. Of course they make printers and PCs and he gave me an interesting stat. He said, 'Brian, we're going to be out of China very soon.' Completely out. It shocked the hell out of me. I mean, are you there yet?
Well, China, as an example, in our last conversation, I think I shared with you that China was about less than 10% of our sourcing, which we've been diversifying our sourcing footprint for several years. I'm really pleased with the team's progress, quite frankly, and continuing that diversification. We shared yesterday that we now expect China to be less than 3% by the end of this year. So a real diversification in place and by the end of 2026 we're planning for no country to account for more than 25%. Also, one of the important notes is we're investing in the US as we plan to double our vendor sourcing of American grown cotton in 2026 as part of our diversification strategy.
Are you able to, let's call them capsule collections. Will there ever be a time when Gap is making clothes in the US?
We do have some manufacturing in the US. We do denim, we do some t-shirts, we do knits. We also run all of our design development, all of our retail operations. We're an iconic portfolio of American brands. We have about 90% of our sales in the quarter in the US. We have an American workforce of over 65,000 in the US. It's an incredibly important market for us. We've got great vendor sourcing partners domestically and we already use a significant amount of US cotton and as I said we plan to double our sourcing of US cotton in 2026. We're increasing our design investment. We're working with very exciting design houses in the US. So we continue to constantly evaluate opportunities and also concentrate on where we can invest domestically.
Just given the globalization push for retail the past 10, 20 years, Richard, has that ship just sailed in terms of making clothing at scale in this country?
Look, I think that it's a big question with answers that are well known in our category. To the extent that we have a very diversified sourcing footprint, it is important. You know, we are the number one e-commerce apparel business in the US. We are the number one specialty apparel chain in the US. We've got a very large business across all categories of apparel. So, it is important that we have agility in our manufacturing and sourcing footprint. And we're really pleased with the progress that we've made and it does create a resiliency to the company that we're enjoying right now.
If there are no trade deals, if there isn't a trade deal with China this year, Richard, does that bring the lower end of your guidance into play for the year?
Look, I think our outlook, first off, as we shared yesterday, first and foremost, is transparent. We were very purposeful in separating the outlook from the estimated tariff impact. And we believe that the outlook that we provided gives a real perspective of the underlying health of the business which is working as evidenced by the exceeding expectations in the quarter and both Gap and Old Navy being obviously a strong performer in the quarter as well as consistent. So the estimated impact of the tariffs could still change. You know, a couple days ago we had new news in relation to the tariffs. So, the first half of 2025 should be largely unimpacted by current tariffs. There's nothing in Q1, minimal impact to our Q2 outlook. And the estimated tariff impact that we provided today and that we've shared with our investors is primarily weighted to the second half. And as we also know, there's going to be more information to come. It's a constantly moving target. There's another milestone day in terms of information on July 9th. So, what we wanted to make sure is that we stay true to the long-term integrity of our strategy, that we monitor our business associated with tariffs. We're very realistic about it. As we've shared, we mitigated over half of the challenge on tariffs. We're determined to drive the other half as well and continue to do what we do with executional excellence.
Richard, I think I've told you this before, but I think the turnaround at Old Navy is not being talked about enough. Now you have Lindsay Lohan out there doing commercials. Good to see her back in the fold. I dig me some Lindsay Lohan. But you also talked about on the earnings call about a lot of new income demographics that are coming into the Old Navy chain. Bigger picture right now given where the consumer is financially, tariffs, you name it. Is this just a perfect environment for a chain like Old Navy?
First off, thank you for talking about Old Navy. We love our performance. We love our Old Navy brand. We delivered a really strong comp performance up 3%. It is the ninth consecutive quarter of market share gains. As you know we've been concentrating on strategically intending to drive categories like active and denim. You mentioned Lindsay Lohan. We've got Dylan Efron in that spot. Quinnland Blackwell. We've even got Charo in there. It's our latest campaign really focusing on active. Old Navy is the number five player in the category and we continued to gain share in the quarter. We launched our studio smooth collection which outperformed our expectations. And it's another step forward in the largest category in the industry. Denim was another standout category. Share gains throughout the portfolio but particularly on Old Navy. It secured Old Navy's position as the fourth largest adult denim brand in the US. We also launched occasion dresses which did incredibly well with strong full price sell-through. So there is real intent from a design development and marketing on certain categories that we believe we have a right to win in and it's a good example of not only pricing power but when you really take big ideas with great product and great marketing consumers find you and these are foundational elements that we've established with Old Navy that underpin the brand's Q1 performance and is giving us great confidence as we move further into 2025.
Pretty soon Richard, it'll be mid to end of July, back to school shopping. I have started to see a lot of new, well, I guess '90s trends have come back into the fold. Giant wide-leg jeans. I remember these when I was in high school. You're a pretty cool guy. What's going to be the hot back to school styles?
Well, I think you're calling it out. You know, we've seen baggy continue. We've also seen embroidered denim, horseshoe, all the fits that we've introduced in denim are resonating really well. I mean the category is being driven by the assortment and we've taken a very strong position in identifying as the trend destination for denim across all the different fits. We've also saw soft essentials really start to take hold. Fleece has just been incredible and you're right, the '90s trend, this sort of look back and retro perspective, it really does play very well into our portfolio, but it's most important how we execute against that trend. And I think what you're seeing is as part of our reinvigoration playbook, it identifies great creative, great trend-right products that are amplified by terrific storytelling and that's translating to greater cultural relevance which is driving revenue. And each one of our brands is at a different point in the process. But I have to say, Brian, I'm incredibly encouraged by the team's commitment in their execution and the improvements that we're continuing to make across the portfolio.
You know who's right for the next Gap ad, Richard? The American Pie crew. All about the '90s stuff right there. Why you like jeans? You name it, you got it.
You know, could be next up. You never know. We do have a lot of exciting collaborations coming and I know Brian, you're going to be interested in a few of them.
All right, Richard Dickson, Gap CEO, always good to see you. See you at the next one. Madison, back to you.
Sozzi, thank you so much for bringing us that conversation. Really appreciate it. Well, Gap is just the latest retailer sounding the alarm on the effects of increased tariffs. Now, trade uncertainty is at a high with an appeals court pausing the block on President Trump's global tariffs. President Trump lashing out against China, saying they violated their trade agreement. For more on this, I want to bring in my co-host for the hour, we've got Lou Basenese, the executive vice president of market strategy at Prairie Operating Company and also the founder of The Big Skinny. Lou, great to have you back with us on Friday. Appreciate it. Talk to me about how you are thinking about this tariff policy and how it interacts with your investments.
It's the karate kid market, like tariff on, tariff off. I think you have to see the forest through the trees of this and see what has happened historically. There's been market overreactions every time. Certain sectors selling off much more than others and then we get a change in the tariff wind and now everything's rallying back. And I think the Gap interview was very instructive because it proves a data point. There's NBER research that said most companies absorb about 50% of tariffs and if you heard in that he said we've mitigated about 50% of that. So I think a lot of people don't understand that most companies will try and absorb the shock of the tariff and keep it from the consumer as much as they can and you're seeing that in the results if we look at earnings. So as much as there's been volatility in the headlines and some of the prices, it hasn't happened in the businesses yet. So for me that's the tell. What's the underlying fundamentals of the business? Have they been impacted by prices? I give credit to companies like Gap and a few others that have been giving guidance that is transparent. Here's our guidance with tariffs, here's our guidance without tariffs because that gives you as an investor clarity of is it really a risk that I have to worry about with this company? Low margin businesses obviously it's much more of a concern, high margin businesses I think it's less so. I mean look at Nvidia this week, huge hit because of the ban on China and they're like yeah it was a bump in the road we think we can overcome it because the demand is so strong. So yeah, I think you got to stay the course and look for pockets of opportunity to buy on the volatility is the short answer to that really long one that I just gave.
No, that's perfect. And when you're looking for those opportunities, like what's the right investing framework? This week, the TACO trade gained a lot of popularity standing for Trump Always Chickens Out according to an FT columnist here. Is that the framework to apply when you are picking stocks to pick up?
Yes. So, I look at it a little bit differently. I don't want to get caught in the meme of the day. I want to look at where is their value and where is their growth and I'm willing to pay up for some growth. So, for instance, when semiconductors sell off very sharply, I'm always a buyer there, whether it's Nvidia or the index itself because you look at the underlying growth trend. We're not getting away from chips anywhere. I mean, we look on this table, these cameras everywhere. They're in everything now. Wearables, the long-term growth trend is up and to the right undeniably. So I think there, but then I think you look for pockets of value. Right now, the energy sector is the most undervalued sector in the S&P 500 at about 14 times earnings versus the next closest is at 16 and a half. So, I think you want to be opportunistic in those places where you know that you're getting a good price and a good value at the same time. It may take a little bit longer to work out, but you know, when buying low, you build in a margin of safety that you don't get when you're trying to chase Nvidia at 20 plus times earnings or the Mag 7 at 25 plus times earnings, right?
So, when you're thinking about growth versus value, your answer would be both. Find opportunities in both.
Oh, and look, I came up classically trained at Morgan Stanley private client group. Every asset class, every style and value and you figure out the places where you can have an edge and I think that's in small caps, in these dislocations in the market like we're seeing with data, right? Soft data has been really bad but the hard data has been pretty good. I mean we're just now seeing a turnaround in consumer sentiment but consumer spending has been solid. So I think you got to look for those pockets and be allocated and diversified but be tactical on volatility to find new opportunities.
Lou, always appreciate it. Thank you. You're going to stick with us for the hour for more of that insight. We're going to have all your markets action ahead here on Yahoo Finance. Stick around. You're watching Catalysts.
It's now time for some of today's trending tickers. This morning, we're watching Marvell, Netflix, and Zscaler. First up, Marvell's earnings were not strong enough to impress the street. The chipmaker delivering earnings and guidance in line with expectations. Marvell reporting 76% revenue growth in its data center segment. Really mirroring this idea that we have heard throughout this earning cycle of data center revenue being a lift to these companies. Lou, I want to bring you in on Marvell. We were just talking about how you approach some of the chip sector names. Would you be a buyer of Marvell on this dip?
Marvell is really interesting because they do have good exposure to the AI growth trend in the data center, right? They also have a segment that's growing fast in interconnects. We think about AI as just compute power, but it's also moving that data around. So, Marvell's got exposure there. The drag is the automotive sector. They have about 15, 16% exposure there and it was down 12% in the quarter. That's where I look at chips now. There's a company that I love that's undervalued, NXPI, but they have really big exposure to automotive as well. So if you're a buyer here, it's got to be on valuation and hope that the automotive sector picks back up at the end of the year. So I think the fundamentals are there if we can get through the trade wars maybe, but that's on Friday. We don't know what happens by Wednesday.
Exactly. Very well said as always. Let's also talk about Netflix getting a pair of price target bumps from BofA and Evercore ISI. Evercore citing the company's live events as a key growth catalyst. The stock rocketing higher this year up over 30% trading near all-time highs still above 1100 approaching $1,200 a share for Netflix which is just crazy. And Lou, I just wonder how you're thinking about Netflix. I get mixed opinions when I talk to people.
I've never chased Netflix. For me, the great unbundling to these streaming services has now gotten more expensive because the average person has a household with four subscriptions and they're paying more than traditional cable used to be. Netflix has been a huge consumer of capital, too, to produce content. So, for me, it's a hamster wheel to nowhere. It's subscriber growth. For me, there's better opportunities in the market. That being said, Netflix is the undeniable leader here. I think the move into live events is very smart. It's a way to differentiate. Outside of that, because everyone's generated really good, compelling content on their own platforms, whether it's Hulu, Netflix, HBO, it doesn't matter. Everyone's gotten really good at that. So, this is something that is giving them the next leg of growth. But I have a hard time trying to chase it up here at $1,200 a share almost.
