A range of retailers are again blaming shrink as one of the reasons they saw another quarter of lackluster profits.
But some of those companies have started to offer more detail than ever on how much shrink, or items lost to factors like external or employee theft, damage or vendor fraud, is cutting into their bottom lines.
At the same time, certain retailers pulled back on their contention that organized theft is a primary cause of losses, as scrutiny grows over claims about how much crime contributes to their struggles.
During second-quarter earnings reports in August and September, nearly two dozen retailers said shrink has continued to weigh on profits. The details and explanations provided by each retailer varied greatly. Still, it’s difficult to compare the losses to past years because most of the companies have never previously disclosed how much shrink cost them.
Generally, the inventory losses are only a small fraction of the retailers’ net sales. According to CNBC’s analysis of the balance sheets, they also pale in comparison to other factors that squeeze margins such as excessive discounts and promotions. While shrink is growing for some companies, losses are generally in line with the retail industry standard of 1% to 1.5% of sales — signaling the problem may not be as dire as certain retailers and trade associations have suggested.
Anti-theft locked beauty products with customer service button at Walgreens pharmacy, Queens, New York. Lindsey Nicholson | Universal Images Group | Getty Images
they reported second-quarter results, some companies like
Target and Dick’s Sporting Goods offered clues into how much shrink is costing them and squarely blamed theft. Target lost about $219.5 million to shrink during the three months ended July 29, while Dick’s lost about $27.1 million during the same period, according to a CNBC analysis.Meanwhile, Ulta
and Foot Locker, which both blamed “organized retail crime” for losses in May, did not mention theft during their most recent results. They only used the term “shrink” when discussing how it squeezed margins.Lowe’s has some of the highest shrink numbers among the companies analyzed by CNBC. The company has attributed the losses to a variety of factors. Sometimes it has said organized retail crime cut into profits, but in other cases, it blamed weather-related damages.
During its second quarter earnings call with analysts, the company saidshrink was in line with the year-ago period. But its annual securities filing offered
more detail: the retailer revealed that its shrink in fiscal 2022 ballooned to $997 million, up from $796 million in fiscal 2021. Other companies, like Walmart
, noted that shrink isn’t always related to retail theft when reporting second-quarter earnings. It stated that it is focusing on inventory losses from other sources, which are “more manageable”. “In the last few months, retailers have increasingly blamed shrinkage for their losses and blamed it on theft. They have not provided any details on how much inventory loss costs them. Experts say that some companies may be using crime to divert attention from other operational issues, like poor inventory management or staffing problems. Sonia Lapinsky is a managing director at AlixPartners Retail Practice and a partner. She told CNBC that companies that disclose shrink numbers and explain to investors what they are doing to fix it demonstrate that they understand the problem. Lapinsky said that companies who blame theft and shrinkage for their plummeting profit without giving much more information may be trying obfuscate any internal issues. “Are you clearing more inventory because of mis-planning and mis-buying and this is what’s actually causing a larger profitability hit?” Lapinksy. “But since everyone is saying, ‘let’s blame the theft that has increased and that is out of my control’, let me tell the street that this why it’s occurring and not disclose what really happens in operation.” CNBC looked at earnings calls, press release, and other publicly accessible records to determine how much shrink costs retailers. They also compared it to other factors such as excessive discounts. CNBC calculated shrink estimates for seven companies using these clues. Using those clues, CNBC calculated shrink estimates for seven companies.
Here’s how much shrink is costing those retailers, based on a CNBC analysis.
Fiscal 2022 annual shrink loss: $997 million
Lowe’s has been citing shrink as a drag on earnings for years – well before other retailers started referencing it during earnings calls and press releases — and has called out theft as a driver.
However, theft didn’t appear to fuel lower profits at Lowe’s during its most recent quarter ended Aug. 4. Home improvement retailer Lowe’s reported that its shrink rate was the same as the previous year, which saw a 0.1 percent hit to their gross margin. This was largely because of live goods damaged due to unseasonable weather.
On an annual basis, Lowe’s shrink has been steadily increasing at a rate that’s disproportionate to its revenue increases.
Between the fiscal years ended Feb. 1, 2013 and Feb. 3, 2017, Lowe’s annual shrink consistently represented about 0.6% of its net revenue, according to a review of the company’s annual securities filings. This trend started to shift during fiscal 2017. In fiscal 2022, shrink increased Lowe’s gross margin by 0.2 percentage points and was $201 million higher than the previous year. During fiscal 2022, it rose to $997 million, or 1.03% of sales.
- The inventory losses are still in line with the industry standard of about 1% to 1.5% of sales and tend to be less than profit drains from other factors.
For example, shrink during fiscal 2022 hit
Lowe’s gross margin by 0.2 percentage points and was $201 million higher than the year-ago period.
But high transportation costs and expenses associated with expanding its supply chain network squeezed profits by 0.3 percentage points. When taken as a percentage of sales, those costs came in at about $291 million.
Second quarter shrink cost: $219.5 million Shrink bit into Target’s gross margin by 0.9 percentage points during its fiscal second quarter ended July 29, the retailer said in a securities filing. Second quarter shrink cost: $219.5M Target Second quarter shrink cost: $219.5M
Shrink bit into Target’s gross margin by 0.9 percentage points during its fiscal second quarter ended July 29, the retailer said in a securities filing. For the first half of the year, shrink costs have reached about $444 million.
- Target previously revealed it is on pace to lose more than $1 billion this fiscal year from shrink, up from $753 million last fiscal year.
Target’s shrink losses for fiscal 2022 accounted for 0.7% of total sales. The company reported in its annual filing that “merchandising,” which is a part of the retail industry, reduced its gross margins by about 3.4 percentage point. This equated to $3.66 billion in profits. Those costs included all of the promotion and markdowns Target took to clear out excess discretionary merchandise, plus higher product and freight costs.
Target’s margins have improved this year from fewer markdowns, lower freight costs and price increases.
Second quarter shrink cost: $11.2 million
When the department store reported quarterly results for the period ended July 29, it posted a net loss of $22 million, or 8 cents per share. During a call with analysts,
- executives said shrink reduced earnings per share by 4 cents.
That would amount to a loss of about $11.2 million during the quarter, based on the 279 million diluted shares it had at the end of the period. These costs are after tax.On another hand, Macy’s earnings per share were 11 cents less than the projected amount for the quarter due to a slowdown of credit card revenue. This amounts to approximately $30.7 million. Macy’s cut its forecast for the year in the previous quarter because of higher shrink costs. The retailer cut its earnings per share expectations by almost a dollar, from $3.67-$4.11 to $2.70-3.20. It attributed this to “increased macro pressures,” but also to a 12 cent impact of “increased shrink relative our previous expectations.” This would translate into a shrink loss of approximately $33.5 million. The increase was attributed to the “change in organized theft.” The off-price retailer said it expected shrink to remain flat in fiscal 2024. This is the period that will end in January 2024. As a percentage, the shrink rate was $150 million higher in its fiscal 2023 period compared to that of the prior year. Those figures are expected to remain steady during its current fiscal year.
Meanwhile, TJX’s 2023 full-year results took a 1.2 percentage point hit because of “incremental freight costs and higher markdowns,” Chief Financial Officer John Klinger said during a February call with analysts. Taken as a percentage of sales, that amounts to about $599 million.
Fiscal 2022 shrink cost: $71.46 million higher than the year prior
The makeup giant said shrink during fiscal 2022 was 0.7 percentage points higher than the previous year. When taken as a percentage of sales, shrink was about $71.46 million higher than in 2021.[shrink]Contrary to other retailers, shrink was the largest drag on
earnings during fiscal 2022, according to a securities filing.
In May, it reduced its full-year outlook for its operating margin by 0.2 percentage points “primarily” because of shrink but also because of the “increased promotional environment.” Ulta has added an extra $22 million to its projected fiscal year losses due to shrink and promotional activities based on net sales between $11 billion and $11.1 billion. The company declined to tell CNBC how much of the 0.2 percentage points was related to shrink and how much was linked to promotions.
- Dick’s Sporting Goods
Second quarter shrink cost: $27.1 million
For the first time in nearly 20 years, Dick’s last month mentioned shrink as a drag on profits during its earnings call and press release. Dick’s Sporting GoodsSecond quarter shrink cost: $27.1 millionFor the first time in nearly 20 years, Dick’s last month mentioned shrink as a drag on profits during its earnings call and press release. When taken as a percentage of sales, that amounts to a hit of about $27.1 million.
Efforts to liquidate excess inventory from the company’s outdoor category also cut into Dick’s gross margin by 1.7 percentage points, the company said. As a percentage, Dick’s liquidation costs were $54.8 million for the quarter. This is about twice the impact of shrink. It is because of shrink that Dick’s has reduced its outlook for the full year. The retailer’s second-quarter results, increased shrink and higher selling, general and administrative expenses, including items like payroll, advertising, are all taken into account in the reduced outlook. The reduced outlook takes into account the retailer’s second-quarter results, increased shrink and higher selling, general and administrative expenses, which includes items like payroll and advertising.
- Second-quarter shrink cost: at least $87.84 million
In its latest quarterly securities filing,
Dollar Tree noted that shrink had reduced its gross margin by 0.6 percentage points for the first half of the year. According to the first half of fiscal 2023 sales of $14.64billion, Dollar Tree’s shrink costs were about $87.84m. It’s unclear if that was the total amount of shrink Dollar Tree saw or just how much it increased compared to the prior year period.Meanwhile, margins for the first half of the year were reduced by 2.2 percentage points because people bought more lower-margin items and the company saw higher costs, among other factors, according to a securities filing.
Taken as a percentage of sales, that cut into profits by about $314.75 million.
Dollar Tree also factored shrink into its full year profitability outlook.
- It’s expecting earnings to be 55 cents per share lower than previously expected
because of shrink and category mix, Chief Financial Officer Jeffrey Davis said on a call with analysts on Aug. 24.