Target stores are getting looted, and it's taking a huge bite out of profits.
The discount retailer told reporters on a call to discuss its third quarter earnings results that inventory shrinkage — or the disappearance of merchandise — has reduced its gross profit margin by $400 million so far in 2022 compared to 2021.
"At Target, year-to-date, incremental shortage has already reduced our gross margin by more than $400 million vs. last year," Target CFO Michael Fiddelke said on the earnings call, "and we expect it will reduce our gross margin by more than $600 million for the full year."
Fiddelke detailed how there are "a handful of things that can drive shrink in our business and theft is certainly a key driver. We know we're not alone across retail in seeing a trend that I think has gotten increasingly worse over the last 12 to 18 months. So we're taking the right actions in our stores to help curb that trend where we can, but that becomes an increasing headwind on our business and we know the business of others."
A Target spokesperson told Yahoo Finance via email after the call the shrinkage was mostly specifically attributed to "organized retail crime."
Organized retail crime is not just a Target issue as it has impacted other big name retailers such as Best Buy and Rite-Aid. From Yahoo Finance Editor-in-Chief Andy Serwer earlier this year:
"Why are people stealing these days? That’s a tough one. To some degree it’s a reflection of our times. Simply put, America’s social contract is straining. Until recently we’ve been able to lay out goods—often in mammoth, big box stores with only a handful of employees. When our social contract is strong—i.e people are getting a fair shake—it’s a model that works. Now it seems more people are stealing instead. (BTW, our stressed social contract may be capping how far we can push this people-light, technology-heavy model. Last month Wegman’s ended its scan-and-go shopping app. Why? Shrinkage, of course.)
I think wealth inequality has everything to do with all this. Think back to the so-called Public Enemies era in the 1930s, when bank robbers ran rampant across the land. That also coincided with the Great Depression. Less money in the hands of poor people and more stealing. Seems like cause and effect to me."
Goods stolen from stores increased to $94.5 billion in losses in 2021, up from $90.8 billion in 2020, according to a new report from the National Retail Federation (NRF). The report found that the average inventory shrinkage rate last year was 1.44%. While that's a modest decline from the prior two years, it remains comparable to the five-year average of 1.5%.
"Retailers face security-related challenges on many fronts," the NRF said. "Most of the retailers surveyed report in-store, e-commerce and omni-channel fraud are all on the rise. The majority of respondents also reported that guest-on-associate violence, external theft, ORC and cyber crimes have become higher priorities for their organizations. Challenges with labor shortages, employee retention and hiring – as well as issues related to masking and maintaining COVID precautions – have contributed to the risks of violence and hostility."
Clarification: This story has been updated with an additional quote from the earnings call to make clear that shrinkage led to $400 million more in profit loss year-to-date as compared to 2021.