Target blames criminal networks for up to $600M in lost profits

Target is the latest big retailer blaming shoplifting for putting a big hit on its profits. The company said its gross margin rate dropped from 28% in last year's 3rd quarter to 24.7% this year. Along with shoplifting, referred to as shrink in the industry, the company blamed higher markdown rates and freight costs for dragging down profits.

The company says "inventory shortage or shrink" is a major drain on profits and it "is a growing problem." Target expects theft to cost it $600 million in lost profits this year.

"At Target, year-to-date, incremental shortage has already reduced our gross margin by more than $400 million vs. last year and we expect it will reduce our gross margin by more than $600 million for the full year," company CFO Michael Fiddelke said in an earning conference call this week. "This is an industry-wide problem that is often driven by criminal networks."

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"It started probably in some localized geographies originally, but we see those circles expanding and the impact continuing to grow," John Mulligan, Target COO said. "This is primarily driven by organized crime."

Target says it is working on training and technology to help cut down on theft and is working with other companies to find industry-wide solutions.

It is also locking up items. Images from a Target in Queens showed items like toothpaste and razors locked behind glass doors. Customers are required to use a sensor device to summon store workers to unlock the items.

Target has also taken shoplifting so seriously that it has its own forensic science team.

Based in Las Vegas and Minneapolis, the forensic team helps solve organized retail crimes committed at Target stores through video and image analysis, latent fingerprint, and computer forensics.

Company leaders noted on the earnings call that many stolen items end up being offered for sale online.  Target says it strongly supports the passage of legislation to prevent criminals from selling stolen goods through online marketplaces.

As Target noted, it is a problem across the retail industry.

Last month, Rite Aid said shoplifting has gotten so bad in New York City that the company is considering putting everything into locked displays.

The company recently reported $5 million in additional losses in the past 3 months due to what is referred to as "shrink" in the retail industry. That's another word for stolen items.  

Rite Aid CEO Heyward Donigan cited New York City's stores as the main source of the problem.

The company says that there is no insurance on shrink and it is a hit on the company's gross margin.

Chief Retail Officer Andre Persaud said, "The environment that we operate in, particularly in New York City, is not conducive to reducing shrink just based upon everything you read and see on social media and the news in the city."

"We're looking at literally putting everything behind showcases to ensure the product is there for customers who want to buy it," Persaud said.

Shoplifting has grown in the past two years in New York City.

There were 32,358 retail theft complaints in 2020. That grew to 43,864 in 2021.  The trend has continued into 2022.

Manhattan District Attorney Alvin Bragg has received much criticism for the problem due to his no-bail policies for what are considered non-violent crimes.

Earlier this year Bragg said that he planned to address the problem with a small business alliance task force made up of small business leaders from across the borough.  That report was due in May.  Shoplifting has not become less of a problem.

Target said that while it is dealing with retail theft, Mulligan said, "The biggest focus for us is keeping our team and our guests safe."