Why Target and Costco's Apparently Good Reports Didn't Satisfy the Street

In this segment of the Motley Fool Money podcast, host Chris Hill is joined by Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Total Income's Ron Gross, to talk about a couple of retail earnings reports. Costco (NASDAQ: COST) and Target (NYSE: TGT) are pushing revenues higher, but in the era of e-commerce and Amazon.com (NASDAQ: AMZN), gaining sales can mean spending heavily, and losing margin. And that's just not what Mr. Market wants to see. In other retail news, the Nordstrom (NYSE: JWN) family got spurned in its offer to take its old department store chain private -- and as reasons for a board to reject a bid go, this one was pretty solid.

A full transcript follows the video.

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This video was recorded on March 9, 2017.

Chris Hill: Costco and Target both out with their latest reports. Costco's second quarter profits rose 36%, while Target's fourth quarter revenue was up 10%. Ron, you look at both of these reports, there are positives there, but shares of both Costco and Target falling a bit this week.

Ron Gross: What's interesting is, I think both of these reports were actually pretty decent. Costco's shares perhaps held up a little bit better than Target's, and I think the differentiating factor here is that both companies needed to spend rather heavily in order to compete. And who's the big dog in the fight -- is that the saying? It is now.

Hill: It is one of the sayings.

Gross: It's Amazon. And they had to spend on things to bolster their e-commerce, and they needed to lower prices. The big difference here is that Costco was able to maintain their margins even in the face of lower prices as a result of the power they have with suppliers. Target was not able to do that. So, Costco was able to grow earnings. Target took a hit on earnings, and therein lies the difference.

Jason Moser: Yeah, I think we have to wonder when we're going to hit the ceiling as far as Costco's memberships go, though. I think they reported 49.9 million member households this quarter. That was versus 49.4 million just a quarter ago. That slowdown is happening. That's what we've been talking about for a while. So, while they have that over 90% retention rate, which is very admirable, the market is obviously looking forward, and I don't know that the growth is really there for Costco. That has to be a concern for investors.

Hill: Meanwhile, not as big a story, but worth nothing: We've talked before about Nordstrom, the Nordstrom family looking to take that company private. They took their first shot at it this week, Ron. They got rejected by the board. I think it might have had something to do with the fact that the offer from the family was actually lower than what the stock was trading at per share.

Gross: In Wall Street parlance, that's called a take-under rather than a takeover. It's kind of shameful. The Nordstrom family controls more than 30% of the shares, and maybe they thought they could pull a fast one and get it on the cheap. And who wouldn't want to buy something as cheaply as possible? You can't really fault them for that. But you can fault them for treating shareholders perhaps not as nicely as they could have.

Hill: Yeah, when the stock is at $52 a share, and you come in and say "We'll buy the company out at $50 a share," I mean, even I'm smart enough to turn that one down.

Gross: That was an opening gambit. We'll see where this goes.

Matt Argersinger: At least you have a floor on the stock right now, if you just want to be conservative.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon. Jason Moser has no position in any of the stocks mentioned. Matthew Argersinger owns shares of Amazon. Ron Gross owns shares of Amazon and Costco Wholesale. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Costco Wholesale and Nordstrom. The Motley Fool has a disclosure policy.