Shrink isn’t really shrinking profits for retailers, says report

"Shrinkage" (or shrink) and “organized retail crime” have become the go-to buzzwords for retailers looking to explain away mediocre earnings. However, they might not really be eating into profits as much as they seem to be.

A CNBC report looked into several retailers, including Target  (TGT) - Get Free Report, Dick’s Sporting Goods  (DKS) - Get Free Report and Macy’s  (M) - Get Free Report, and found that most of their losses due to shrink are generally in line with the retail industry’s standard of about one percent. Instead, the report found that other factors are contributing to their losses.

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Shrink is a retail and accounting term for loss of inventory caused by employee theft, shoplifting, fraud, and admin errors. The average cost of shrink across the retail industry is about 1% of sales. 

Target’s losses due to shrink bit into 0.9% of its gross margin during its fiscal second quarter this year, and about 0.7%, or $753 million in fiscal year 2022. During the last fiscal year, the retailer also experienced a 3.4% loss in gross margins, or $3.66 billion from “merchandising,” which includes promotions and markdowns they utilized to clear out excess inventory, as well as higher product and freight costs.

Liquidating excess inventory was also the main culprit for losses at Dick’s Sporting Goods, as they highlighted that shrink was “a drag on profits” during its earnings call last month. The sports equipment retailer said that its gross margin fell by 0.8%, or $27.1 million last quarter. Though this number seems significant, it does not stack up to the effects of liquidating outdoor equipment, which cut 1.7%, or $54.8 million, from their gross margin.

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Department store Macy’s has reported that shrink cost them about $11.2 million last quarter. However this pales in comparison to their reported slowdown in credit card revenue, which amounted to about $30.7 million in losses during the same period.

As more retailers continue to blame shrink and theft for the drain to their bottom line, it is clear that though these figures are higher than they were, they are not the clear drivers behind most of their losses.

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