Shoplifting Is a Big Problem. Dollar General Is Just the Latest to Highlight It.

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Dollar General,

Nordstrom,
and
Dick’s Sporting Goods
all warned about the rising impact retail theft is having on their bottom lines-and they aren’t alone.

More than a dozen retailers said inventory shrink, the industry term that encompasses merchandise theft and damage, was a problem this past quarter. That list includes major players across the sector, from big-box and home-improvement retailers to department stores and other specialty outlets.

“The shrink environment has continued to worsen,” said Kelly Dilts, Dollar General’s (ticker: DG) chief financial officer, on a call with investors Thursday.

Barron’s combed through 17 earnings conference-call transcripts in a bid to distill what the industry is saying about retail theft. Here is what we found.

The Rise in Theft Caught Retailers Off Guard

The industry has been warning of a surge in retail theft for a few quarters now. While shoplifting is nothing new, organized crime groups have led the recent surge, experts say.

This quarter, shrink increased at a faster clip than expected.

“Shrink was the thing that surprised us in the quarter, and that’s really the driver when we think about the operating margin adjustment for the year,” said Scott Settersten,
Ulta Beauty
(ticker: ULTA) chief financial officer. Ulta beat expectations and raised its financial forecasts for the fiscal year on Thursday.

The Dick’s (DKS) management team also said high shrink levels were the biggest surprise this quarter, adding the extent of the problem became apparent when the company conducted its annual physical inventory count. Dick’s plans to count inventory more frequently.

Violent Incidents Are Increasing

A viral video of a roughly 30-person daytime snatch-and-grab incident at a Nordstrom (JWN) store in Topanga, Calif., exemplified to many how theft is becoming a safety challenge, for both employees and customers. According to police reports, the people used bear spray on a security guard and ransacked shelves and display tables.

Nordstrom addressed the incident Thursday.

“The safety of employees and customers is always the top priority,” said CEO Erik Nordstrom.” Certainly what happened in our Topanga store is disturbing to all of us. But the loss is a concern. Losses from theft are at historic highs.”

In its earnings call last week,
Target
(TGT) said its stores saw a 120% increase in theft incidents involving violence or threats of violence.

Shrink Is Eating Away at Margins

From a financial standpoint, company margins have been victims of the rise in theft.

“[Shrink] is something that we’ve called out in the last two quarters that has weighed on our margins,” said Jill Timm,
Kohl’s
(KSS) chief financial officer. Gross margin fell 0.61 percentage points this quarter.

Home Depot
(HD) saw its gross margin fall by 0.08 percentage points from a year earlier, mainly because of shrink.
Academy Sports & Outdoors
(ASO) noted that total losses from shrink were 0.76 percentage points higher than the year-ago quarter. Dick’s said higher shrink would reduce full-year gross margins by about 0.5 percentage point.

Some executives now expect shrink to pressure margins throughout the fiscal year.

“The headwinds we’re having in shrink are muting our margins right now,” said Jeffrey Davis,
Dollar Tree
(DLTR) chief financial officer. Shrink will restrict margins by about 0.75 to 0.80 percentage points on a year-over-year basis, he added.

Competitor Dollar General expects shrink to drag down sales by an additional $100 million.

Theft-Reduction Strategies Are Working, but They Take Time

As Barron’s has reported, many companies have undertaken initiatives to curb shrink. While it takes time for these efforts to take root, some are starting to pay off.

Lowe’s
(LOW), for instance, has invested in asset-protection strategies such as embedding radio-frequency identification technology into power tools to prevent theft. That makes a piece of equipment inoperable until it is scanned and purchased, the company said. Shrink was “in line” with last year’s results, management said.

Factoring losses into projections can also cushion the blow if theft levels rise. Nordstrom, Target,
Foot Locker
(FL),
TJX Cos.
(TJX), and Kohl’s were some of the companies that said they had already baked theft into their forecasts for margins. So far, the levels of shrink these companies have seen are in line with projections, they said.

As Target CEO Brian Cornell put it: “Shrink in the second quarter remained consistent with our expectations but well above the sustainable level where we expect to operate over time.”

Write to Sabrina Escobar at [email protected]

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