Target’s CEO Says Theft Will Affect Profitability To The Tune Of $500 Million This Year

Theft and organized retail crime has become so much of a problem that Target’s
TGT
CEO has warned that escalating incidents—which are becoming increasingly violent—will affect profits this year.

In an investor call to discuss Target Corporation’s first quarter results, chair and CEO Brian Cornell, said: “We continue to contend with significant headwinds caused by inventory shrink, building on a worsening trend that emerged last year. While shrink can be driven by multiple factors, theft and organized retail crime are increasingly urgent issues that impact the team, our guests and other retailers.”

He put the problem in stark financial terms: “Worsening shrink rates are putting significant pressure on our financials. Specifically, based on the results we’ve seen so far this year, we expect shrink will reduce our profitability by more than $500 million compared with last year.”

According to data compiled by Statista, in fiscal 2021, almost 11% of retailers in the United States stated that they experienced inventory shrink of 3% and higher, with a further 16% reporting shrinkage of between 2% and 2.99%. But, the scale of the problem seems to have grown quickly, limiting product availability, creating a less convenient shopping experience, and putting employees and shoppers in harm’s way.

Cornell told analysts on Wednesday morning before markets opened: “The unfortunate fact is that violent incidents are increasing in our stores and across the entire retail industry. When products are stolen, simply put, they are no longer available to customers. Left unchecked, theft and organized retail crime degrade the communities we call home.”

Cities At The Top Of The Retail Crime Epidemic

An example of the way this is playing out is San Francisco where large numbers of retailers—the latest being Nordstrom
JWN
and Coco Republic—have left the city, with staff safety issues cited, among others. The National Retail Federation has listed the top five cities affected by organized retail crime in the past year to 18 months as Los Angeles, San Francisco/Oakland, New York, Houston, and Miami.

Target’s CEO has been clear that he will not be pulling out of any of the retailer’s near 2,000 locations—not just yet. “We’re focused on keeping our stores open in the markets where problems are occurring,” he said. “They create jobs, serve local shoppers, and act as critical hubs in communities. We’ll do everything in our power to keep our doors open.” However, the company is also closely monitoring the safety of its team and shoppers as well as the financial impact to the business “to determine the right path forward.”

The issue has become so big that it may have gone beyond the means of the retail industry to sort it out. The NRF has estimated that in 2021, retail shrink reached almost $95 billion from $91 billion the year before. The association’s vice president for research development and industry analysis, Mark Mathews, said at the time that organized retail crime was “a burgeoning threat.” He added: “Retailers are bolstering security efforts to counteract these increasingly dangerous and aggressive criminal activities.”

Target’s Cornell is calling for a more substantial effort to combat the escalation. He said: “While we are doing all we can to address the problem, including protecting our merchandise and adjusting our assortments, this is an industry and community issue which can’t be solved by a single retailer. We’re actively collaborating with legislators, law enforcement, and retail industry partners to advocate for public policy solutions to combat organized retail crime.”

Multiple Macro-Economic Challenges

Shrinkage was one of a series of challenges, mostly macro-economic, that Minneapolis-based Target battled with in Q1. But it managed to deliver traffic and store sales growth, though earnings per share of $2.05 were down 4.8% from $2.16 in 2022.

Comparable Q1 sales were flat versus last year’s first quarter, reflecting store sales growth of 0.7% and digital sales down by 3.4%, generating total revenue of $25.3 billion up by 0.5%. Operating income of $1.3 billion was down 1.4% year-over-year, driven mainly by an increase in the company’s non-production costs. These were partly due to investments in pay and benefits with starting wages now at $15 to $24 across the country.

By segments within digital, same-day services saw mid-single digit growth, led by high-single-digit growth in drive-up services. Across product categories, beauty led with growth in the mid-teens followed by food and beverage, and household essentials. These offset continued softness in discretionary categories, which the company said was due to consumers “fearing a looming recession” and making “difficult trade-off decisions.” Target’s inventory at the end of Q1 was 16% lower than last year, as a result of more than a 25% reduction in discretionary categories.

Despite the softening sales trends in the first quarter, CEO Cornell said that Target was maintaining full-year financial guidance. This is based on expected benefits from efficiency and cost-savings, while making long-term investments in stores, supply chain and staff. The company says it plans to “rally around retail fundamentals” by making sure it stays consistent and affordable while continuing to grow in scale.

In early trading today, Target’s stock was up 2.4%.