Stolen Profit: Retailers Step Up Efforts To Thwart Increased Theft That’s Hitting Their Bottom Lines
Stolen Profit: Retailers Step Up Efforts To Thwart Increased Theft That’s Hitting Their Bottom Lines
Chains Stop Carrying Certain Products, Lock Up More Store Merchandise
Chains expect retail theft to keep rising nationally, cutting into profits through the rest of the year — even as they take aggressive steps such as pulling some merchandise from store shelves or securing it in locked cases.
During the past two weeks on calls discussing earnings, several prominent retailers including Nordstrom, Ulta Beauty, Dick’s Sporting Goods, Macy's, Target, Dollar Tree, Home Depot and Walmart all mentioned the negative financial effect that increased levels of theft had on their second-quarter results. Some also said their attempts to curtail stealing — such as moving high-theft merchandise away from entrances or just not stocking certain goods — will take time to make a difference. And several referenced more outbreaks of violence at brick-and-mortar locations.
“Losses from theft are at historical highs,” CEO Erik Nordstrom said on his namesake company's call.
Retail theft, or so-called shrink, has been accelerating and plaguing the industry, and these days it’s often committed by organized crime rings made up of professional thieves rather than casual shoplifters. It’s reached such a level in some cities, including San Francisco and Chicago, that some retailers — Nordstrom, for example — cited the problem as a reason they closed stores in high-crime areas. That’s been the most drastic way chains have addressed the problem.
On their recent earnings calls, no one specifically said they planned to shutter any additional locations as a result of retail theft. But according to several executives, theft is increasing far ahead of their expectations.
“As we think about shrink and mix, it has definitely advanced a little further than what we had anticipated in our guidance that we had given last quarter,” Dollar Tree Chief Financial Officer Jeff Davis told Wall Street analysts. “And as you're adding new actions to reduce it, it takes time for those things to actually take hold.”
Government intervention, including stricter nationwide anti-theft laws, are needed to address the problem, retailers said, and they are working with the National Retail Federation to get such legislation passed. The NRF has estimated that retail theft accounted for $94.5 billion in losses in 2021, up from $90.8 billion in 2020.
“The rise in retail executives openly discussing organized retail crime highlights the significance of this growing problem," NRF Vice President of Asset Protection and Retail Operations David Johnston said in a statement to CoStar News. "Retailers are spending more than ever to provide a safe environment for customers and associates, and they need the support of federal authorities, state and local law enforcement, municipalities, cities and towns to combat retail crime.
While retail executives are more openly discussing the worsening level of theft, the issue isn't new. During and especially in the wake of the pandemic, retailers such as Walmart and Walgreens complained that crime in their stores was soaring. Even so, chains have been taking additional steps in reaction to the problem.
'Very Defensive Approach'
Chesapeake, Virginia-based Dollar Tree, which owns its namesake and Family Dollar stores, offered a detailed account of some of its actions to combat retail theft.
“We are now taking a very defensive approach to shrink,” Dollar Tree CEO Rick Dreiling said. “And it's taken us a quarter, but we have several new shrink formats that we'll introduce in the back half of the year."
Dollar Tree’s measures include locking up some cases and even going “to the point where we have some stores that can't keep a certain [product] on the shelf just discontinuing the item,” according to Dreiling
“So, we have a lot of things in the works that are going to roll forward,” he said.
Dollar Tree’s operating income declined about 28% in the second quarter and its gross margin contracted due to product-cost inflation and the elevated disappearance of merchandise, according to Davis, restricting margins about 75 to 80 basis points on a year-over-year basis.
Dick's Sporting Goods, based in Coraopolis, Pennsylvania, also took a hit on its second-quarter gross margin because of "higher inventory shrink, organized retail crime and theft in general, an increasingly serious issue impacting many retailers" according to President and CEO Lauren Hobart.
"Based on the results from our most recent physical inventory cycle, the impact of theft on our shrink was meaningful to both our second quarter results and our go-forward expectations for the balance of the year," she told analysts. "We are doing everything we can to address the problem and keep our stores, teammates and athletes safe."
Higher shrink will reduce Dick's full-year gross margins by roughly 50 basis points from 2022, according to Navdeep Gupta, the retailer's chief financial officer.
"We thought we had adequately reserved for" retail theft, he said. "However, the number of incidents and the organized retail crime impact came in significantly higher than we anticipated, and that impacted our second quarter results as well."
‘Record Levels’ of Theft
On Macy's earnings call, Chief Financial Officer Adrian Mitchell described the effects of "shortage," namely retail theft, on the company.
"Our assumption for shortage, which impacts gross margin, remains materially unchanged," he said. "Shortage continues to be a headwind, and we are focused on a variety of mitigation strategies including testing the use of advanced technology, reporting, and tools; moving high-theft product away from entrances in our stores; optimizing asset-protection staffing to target high-risk areas; and collaborating with external parties to advocate for legislative change."
Retail theft "has been at elevated levels for multiple years," according to Mitchell.
"So, shortage for us for the second year in a row will be at record levels," he said. "Now, we continue to put mitigation strategies in place to address it, but these mitigation strategies will likely take time to effectuate."
“Inventory shrink continued to be a headwind this quarter," Ulta Chief Financial Officer Scott Settersten said on the earnings call. "Our efforts to address shrink are having an impact, but the overall environment remains challenging. Today, we have the new fragrance fixtures in more than 50% of our stores and expect to have these installed in 70% of the fleet by year-end. We remain focused on taking action in areas we can control, including continued investment in fixtures, associate training, staffing, as well as operational improvements, and leveraging our influence to enact broader changes that will disincentivize unlawful behavior.”
Asked if locking up fragrances was having any effect on sales, Ulta Chief Operating Officer Kecia Steelman said, "What we're seeing is in those initial stores that we rolled out the locked fragrance cases for, we actually saw a sales improvement because we were in stock with the product and we had them available to the guests."
Ulta has also hired more workers to serve shoppers and make locked-up items available to them quickly.
"The bottom line is that we're pleased that we're able to maintain our in-stock for our guests and, quite frankly, keep the bad actors from coming into our stores," Steelman said.
Ulta didn't return a call from CoStar News on Monday seeking details on its new fragrance fixtures.
Safety Concerns Rise
Earlier this year discount giant Target reported that it expected inventory shrink to reduce its profitability by $500 million this year compared with last year. That would take its theft losses to more than $1 billion for 2023.
On a second-quarter earnings call, Target CEO Brian Cornell discussed violence related to negative customer reaction to the retailer's Gay Pride month merchandise and theft.
"Unfortunately, safety incidents associated with theft are moving in the wrong direction," Cornell said. "During the first five months of this year, our store saw a 120% increase in theft incidents involving violence or threats of violence. As a result, we're continuing to work tirelessly with retail industry groups and community partners to find solutions to promote safety for our store teams and our guests."
Target also noted an expected headwind from inventory shrink, according to Chief Financial Officer Michael Fiddelke.
"As Brian mentioned, we're working hard, both inside our stores and with government and community partners, to achieve lower loss rates over time," he said. "And our long-run expectation is that shrink rates will moderate from today's unsustainable levels. But so far, we've only seen indications that loss rates might soon be reaching a plateau but have not yet seen evidence that loss rates will begin to come down."
Seattle-based Nordstrom on its earnings call was asked about the ransacking of its Westfield Topanga mall store in Canoga Park, California, where up to 50 thieves grabbed as much as $300,000 in merchandise a couple of weeks ago in a brazen coordinated theft.
"Certainly, what happened in our Topanga store is disturbing to all of us. ... And I'd say we find it unacceptable and needs to be addressed," CEO Erik Nordstrom said. "That being said, while it's unacceptable, it is within our plans. We have not seen a continuing rising of shrinkage that has exceeded what we planned. So, it's in line with how we lead out this year."
He added that "the drag on earnings — just from a financial performance — that needs to come down. And we've done a lot of things, and we're looking at everything we can do to make our stores safe and secure, first of all, that they can be, but also to address the loss. And there's things within our control that we can invest in, but also involves partnering with local jurisdictions, and law enforcement. I think the legislation is part of the mix, too, here that the whole industry needs to come to some of the better solutions on."