Is the target heading for its biggest plunge since 1987?

The “Black Monday” – October 19, 1987 – shares of the retail giant Target (TGT -26.43%) suffered its largest single-day drop on record, dropping 32.8% in a single day . So at least “Black Wednesday 2022” wasn’t quite that bad for the target.

It was, however, more than enough. After announcing its first-quarter 2023 results on Wednesday, Target shares fell 26% in the first 15 minutes of trading – just a day after a smaller shortfall sent its much larger rival, walmart (WMT -7.41%)resulting in a loss of nearly 12%.

Expected to report earnings of $3.06 per share, Target reported just $2.19 per share, pro forma, on Wednesday. Target “beat” on sales, recording $25.2 billion in revenue.

Image source: Getty Images.

Target vs. Walmart

To that extent, today’s huge drop in Target’s stock price follows Walmart’s huge drop yesterday. And there were other similarities between the two major US retailers.

Like Walmart, Target’s sales both beat estimates and grew year-over-year, with same-store sales up 3% and total sales up 4%. Like Walmart, Target’s sales growth hasn’t translated into profit growth, far from it. Target’s earnings were actually cut in half, falling 48% year-over-year to just $2.16 a share, double the decline at Walmart.

But the differences between Walmart’s results yesterday and Target’s today are perhaps even more stark. Consider: Arguably the biggest surprise from Walmart’s earnings yesterday was the dizzying decline in Walmart’s cash output. Walmart just suffered its first negative free cash flow quarter in nearly a decade, and its first negative Operating quarter of cash in over 25 years.

Target also reported negative cash flow from operations today ($1.4 billion), swelling to negative $2.3 billion. free cash flow after taking into account expenditure on property, plant and equipment. (The last time Target experienced negative operating cash flow was in the third quarter of 2004, according to data from S&P Global Market Intelligence, but Target experiences negative free cash flow more regularly than Walmart – last time in the first quarter of 2019).

Walmart blamed its dip in red ink on its inventory purchases — at inflation-boosted prices — presumably to stock up against supply chain grunts. Target also appears to have invested heavily in inventory in the first quarter, spending $1.2 billion to fill its warehouses. However, the target also said it incurred higher costs in the quarter to “reduce excess inventory” (as well as spend more on freight and transportation), which resulted in “gross margin pressure.”

So Target’s problem seems different from Walmart’s. At the same time, Target was sourcing some products to address supply chain issues, it was discounting other goods — because he apparently bought things that weren’t selling.

This speaks to poor inventory management at Target — or at least worse than at Walmart. And that pretty much explains why Target stock is hit so much harder today than Walmart stock was hit yesterday.

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