“Shrinking Margins”

If you listened to any of the large retailers’ earnings calls this past quarter you may have heard the term “shrink”. But what is it? Shrink is the loss of inventory due to theft or damage, and it is on the rise. Companies such as Target, Home Depot, T.J Maxx, Dick’s Sporting Goods, Nordstroms, Dollar General, and BestBuy have all mentioned shrink is above historical trends and is becoming a significant drag on their margins. So, how big of an impact does shrink really have on these companies that are worth billions?

Target CEO Brian Cornell said during their May earnings call the retail crime driven shrink is expected to reduce profits by $1.2 billion this year, up from $500 million last year. Lowes, which blamed both theft and weather-related damages, said shrink account for $997 million in losses in fiscal 2022, up from $796 million the year prior. According to the National Retail Federation annual survey, retail shrink hit $94 billion in 2021 up about 4% year over year but up 53% since 2019. Some management teams are blaming shippers for the increase in damaged goods, while others blame theft. Unfortunately, tracking shrink data is relatively new for retailers and there is not much publicly available data to compare. According to Target, in their most recent 10-Q, inventory shrink accounted for a 0.90% reduction in gross margins or about $220 million during just the second quarter. But the impact on margins goes beyond that of just shrink losses. Margins are also impacted by increased insurance costs that have to account for damages. In addition, there are higher capital expenditures as retailers must increase security measures, such as adding security tags, locking up inventory in glass cases, or adding sophisticated store wide camera monitoring systems. Because of the lack of publicly available data some analysts think the situation is being blown out of proportion and is a scapegoat to explain why margins are shrinking as inflation persists and consumers tighten their wallets. Most companies that you see in the news do not even mention shrink their earnings filings.

It seems, however, that some retailers have some truth to their story as increased theft is becoming a more concerning issue. Thieves are becoming more organized as they look for larger paydays. A Nordstrom in Los Angeles was part of an orchestrated robbery last month in which thirty people entered the store and began grabbing merchandise making out with $300,000 worth of goods in just a few minutes. Walmart has also seen a growth of theft with CEO Carl McMillion, saying “if the problem isn’t corrected then prices will be higher and struggling stores will be closed”. Walmart has already closed about forty stores since 2021 citing high crime areas that are making conducting business too risky. They are joined by CVS, Walgreens, Nordstrom, and Starbucks who have all cited theft and crime in decisions to close stores. This creates a snowball effect as consumers will face more limited shopping options or in some cases even limited access to medication as Walmart, CVS, and Walgreens leave areas where shrink-related theft is the highest.

As it may be frustrating for shoppers to deal with longer drives to stores and more locked or security tagged inventory, it may give retailers justification for eliminating stores with struggling margins or slow growth. Corporations can “trim the fat” and become more efficient operators in the long run. It remains to be seen how retailers can resolve their shrink issues and who ultimately pays the price; the retailers and their margins or the consumers.

 

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