Target CEO Brian Cornell offered a sobering warning to investors during the company’s post earnings conference call on Wednesday.
“The unfortunate fact is violent incidents are increasing at our stores and across the entire retail industry,” Cornell said. “Beyond safety concerns, worsening shrink rates are putting significant pressure on our financial results.”
Then he offered a stunning number. “We expect that shrink will reduce our profitability by more than $0.5 billion compared with last year,” Cornell said, using the industry term for lost inventory. Cornell’s comments highlight a growing challenge across the retail sector.
“Shrink was a clear problem that continues, but is an industry issue,” Wells Fargo analyst Edward Kelly said in a research note.
The issue popped up regularly in February, when retailers disclosed their results for the holiday quarter. Retailers from
TJX
Cos. (TJX) to
Dollar General
(DG) called out losses from theft, and in some cases it had a greater impact on profits than in the past.
“So, just about every conversation we had today centered about shrink,” wrote BMO Capital Markets analyst Simeon Siegel when discussing TJX’s fourth quarter. “That was new.”
The number of retailers grappling with shrink looks certain to rise again this reporting season.
The National Retail Federation said shrink was nearly a $100 billion problem in 2021, the most recent year for which data are available. Barron’s previously noted how industry stars like
Costco Wholesale
(COST) have succeeded by taking the situation seriously.
“While inventory shrink has always been viewed as a ‘cost of doing business’ in the retail industry, shrink levels have increased markedly for many chains since the start of the ongoing COVID-19 pandemic, directly impacting profitability,” wrote Loop Capital analyst Laura Champine in a late March note discussing the issue.
On Wednesday, New York City’s Mayor Eric Adams announced a comprehensive plan to combat shoplifting, saying complaints have jumped consistently in recent years.
But New York is not the only place affected. In 2021,
Walgreens Boots Alliance
(WBA) cited theft in shutting down several stores in San Francisco, a city where
Amazon.com
(AMZN) also closed its flagship Whole Foods location because of concern over workers’ safety. (Many retailers tell rank-and-file employees not to confront shoplifters, given the potential for dangerous encounters.) Privately held convenience store operator Wawa closed two Center City Philadelphia stores in 2022 due to “safety and security challenges.”
Although retail earnings season only began in earnest this week, at least three companies have already discussed losses from theft in their conference calls. TJX said it was “laser-focused on our shrink initiatives and continue[s] to look for additional ways to mitigate the impact.” And
Home Depot
(HD) noted on Tuesday that its own gross margin declined from a year earlier, primarily because of shrink.
The problem goes beyond ordinary people taking items they can’t afford. Although the ubiquity of self-checkouts, staffing shortages, and higher prices have likely resulted in more stealing, and theft by employees has long been a concern, those factors often aren’t the main drivers of the issue.
Target noted that “theft and organized retail crime are increasingly urgent issues,” while noting the more prosaic issue that stolen merchandise isn’t available for other customers to buy.
The rise of organized shoplifting groups predates the pandemic, but the increase in online shopping that resulted from Covid-19 has made it easier to profit by selling stolen goods. Last year, the Biden administration asked Congress to pass legislation encouraging online marketplaces to tackle the sale of stolen goods on their platforms.
NRF echoed both those points last month, noting an uptick in the presence of organized theft in recent years, saying “criminal groups have become more brazen and violent in their tactics and are using new channels to resell stolen goods.”
Write to Teresa Rivas at [email protected]
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