Target CFO: Shrink, or retail theft, is still a significant obstacle for the retailer
Compared to the first half of 2023, there is "less pressure relatively" from the issue though.
Inventory shrink, including retail theft, is still weighing on Target (TGT).
In 2023, Target faced multiple headwinds, as tightening financial conditions dragged down its top and bottom lines. Higher inventory shrink — loss of items to retail theft, organized crime, damage, vendor fraud, and other factors — have created struggles throughout the year.
"Growth in shrink remains a significant financial headwind," CFO Michael Fiddelke said in a call with investors following the company's third quarter earnings results.
He added that inventory shrink is still growing on a year-over-year basis, but the growth has moderated in the third quarter compared to the first half of 2023, contributing to the company's increased gross profit margin. Target beat both its top and bottom line estimates for its Q3 report.
However, the company is not out of the woods yet and is actively monitoring the situation. Fiddelke called shrink "a lagging metric" and said more time is needed to solve the issue.
"We think progress there probably doesn't happen quickly but we're focused on progress over time, and you'll see us continue to take the actions to get a better outcome there over time, but it's not one that we'd expect overnight."
Inventory shrink knocked 40 basis points off Target's gross profit margin in the third quarter, which came in at 27.4%, according to the company.
In previous quarters, Target said that inventory shrinkage — mostly the theft of merchandise — would cut profits by $500 million this year. In 2022, profits took a $700 million hit from the issue.
"Given the macroeconomic backdrop that we are seeing [in retail], it's not surprising for the amount of shrink," Jane Hali & Associates senior research analyst Jessica Ramírez told Yahoo Finance over the phone.
The current financial landscape — such as student loan repayments, high interest rates, sticky inflation, and slowing wage — goes "hand in hand" with increasing retail theft, Ramírez added.
Ramírez says Target has handled the problem efficiently though.
As part of Target's solution to the issue, it closed nine stores at the end of October.
"We cannot continue operating these stores because theft and organized retail crime are threatening the safety of our team and guests, and contributing to unsustainable business performance," the company said in a statement at the time.
The stores that closed include one in Harlem, N.Y; two in Seattle; three near San Francisco and Oakland; and three in Portland, Ore.
Theft can particularly impact locations that were underperforming or treading water, since stolen goods decrease items available for sale, Ramírez explained.
Target has also been working on other methods to combat the problem.
At some hard-hit stores, the retailer is upping security, such as installing locking cases for merchandise categories that are "prone to theft," as pictured below.
Other efforts include investing in additional security members, third-party guard services, and training store leaders and employees, "so they can protect themselves and de-escalate potential safety issues associated with organized retail crime incidents," the company said ahead of the store closures.
The company is also investing in cyber defense technology. It's partnering with the investigations division of the US Department of Homeland Security to develop custom tools that detect and prevent criminal activity, and expand the scope of data alerts and analysis to "better capture" fraud.
Improving inventory management can also ameliorate the problem. Walmart CEO Doug McMillon at the company's annual meeting in June said that lower inventory helps since shrink is correlated with higher inventory levels.
Target's inventory fell 14% compared to last year, led by a 19% reduction in the stock of discretionary categories like apparel and home goods. Fiddelke said Target will continue to optimize inventory management to boost efficiency and profit.
Meanwhile, investors are applauding Target's "better than feared" results, as TD Cowen's Oliver Chen wrote in a note.
Shares popped more than 17% in midday trading, making this the third-best day ever for Target stock.
However, year to date the company is still down more than 13%, compared to S&P 500's 18% gain.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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