Many retailers are grappling with a rise in theft at their stores that is cutting into profits. But the three retail names in our portfolio are built differently than their peers — and are taking the right steps to minimize the damage. Theft has always been an issue in the retail sector. In recent years, however, the problem has escalated. “Shrink” — an industry term that refers to unaccounted for inventory, typically from theft or shoplifting — represented $94.5 billion in losses in 2021, according to the most recent available data from the National Retail Federation. That’s up about 4% from 2020, and almost double the $50.6 billion in 2019. Most losses were attributed to organized retail crime, employee theft and process-control failures. The problem hasn’t gone away in 2023. Mentions of “shrink” in earnings calls “spiked significantly over the last few quarters,” UBS said in a research note this week. Shrinkage has been a broader trend within the retail sector that’s been cited by CEOs and management teams at grocery, footwear and apparel retailers alike as a drag on bottom lines. While theft is an industry-wide phenomenon, the shrink headwind appeared to have more of a material impact among discount retailers. For example, Dollar Tree (DLTR) mentioned “elevated levels of shrink present a persistent challenge,” during its first-quarter earnings call and Target (TGT) called out “worsening shrink rates” as a “significant headwind” that pressured its financial results in the first quarter . The three retail stocks in Jim Cramer’s Charitable Trust have not been immune. In its fiscal first-quarter earnings , Foot Locker (FL) said its gross margins declined by 400 basis points due to a mix of higher promotions and “an increase in theft-related shrink.” Off-price retailer TJX Companies (TJX) also cited shrink as a headwind to gross margins in its latest results . Meanwhile, wholesale retailer Costco (COST) said its shrink only slightly increased in its most recent quarterly results , but remains “intact.” ” Every retailer today is dealing with shrink and working to figure out ways to minimize the impact,” Dana Telsey, CEO of Telsey Advisory Group (TAG) told CNBC. She added that retailers across the board are taking security measures and safety protocols to address the shrinkage shock. “We’re seeing companies put in more of a presence in terms of employees … some of them are putting goods on lock and key.” However, we believe our retail names are better positioned to tackle the problem. Tighter control over their inventories, improving strategies on store surveillance and simply having business models that naturally hedge against this risk all give these stocks an edge over rivals. TJX, for example, has been quick to reduce its inventory, helping the off-price retailer to fare better than competitors. “Some of the retailers that experienced the greatest growth in inventory are now contending with the most significant issues with shrink,”…
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