Target CFO Says It’s Made a Dent in Retail Crime

Target’s efforts to combat retail theft are paying off, according to recent statements from its leadership.

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On an earnings call last week, the big box franchise’s executive vice president and chief financial officer, Michael J. Fiddelke, said the company beat its second quarter estimates with a profit margin of 28.9 percent, up from 27 percent during the same period last year.

The executive told a reporter on the call that inventory shrink—which accounts for items that are damaged, improperly accounted for or stolen—was “one of the tailwinds to profit in the quarter, and as we stepped into the year, our aim was to have shrink plateau.”

“And so to improve from the deterioration we’ve seen over the last couple of years, two quarters in—we’re achieving that and then some,” he added.

The chain’s issues with shrink hit a nadir in 2022 when profits plummeted by $700 million, largely due to rising retail theft. At the time, it blamed “criminal networks” for pilfering products from its shelves at an untenable rate. Last September, the group announced that it would close nine stores across the nation, including disproportionately impacted locations in New York City, Seattle, Portland, Ore. and the San Francisco Bay Area.

The group said it could not continue operating the stores in question “because theft and organized retail crime are threatening the safety of our team and guests, and contributing to unsustainable business performance.”

At the time, Target said it had already invested “heavily” in strategies to staunch the bleeding, including hiring extra security and putting theft-deterrent tools in place like locked cabinets. It even teamed up with the U.S. Department of Homeland Security’s Homeland Security Investigations (HSI) division to develop advanced threat intelligence capabilities to digitally track organized retail crime groups.

While those efforts couldn’t save the nine locations that were forced to close, Fiddelke indicated that shutting down the problem stores and doubling down on security efforts have yielded significant gains in recent months. The CFO last week said that the group’s gross margin rate “reflected about 90 basis points of benefit from lower inventory shrink, compared with 20 basis point benefit in the first quarter.”

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“While our guidance assumes that the year-over-year benefit from shrink would increase this quarter, we’ve seen better-than-expected results in our most recent store inventory counts, resulting in a bigger-than-expected financial benefit in Q2,” he added. “Based on these updated accounts, we’re now expecting our Q3 gross margin rate will also benefit from lower shrink costs, but expect the magnitude of that benefit will be less than half of what we just experienced in the second quarter.”

Fiddelke said he expects shrink costs will level out in the fourth quarter compared to the year-ago period.

“While it’s encouraging to see this progress, we’ll continue our work to move shrink rates down to more sustainable levels in the years ahead, given the steep increase in shrink that our business has absorbed over the last five years,” he added.

“Based on our growth initiatives, ongoing efficiency work and continued opportunity to reduce the impact of inventory shrink, we expect to see additional progress in the years ahead,” Fiddelke said.

Target’s progress is notable when compared with overall retail crime trends. An August study from global retail and hospitality research and advisory firm IHL group on inventory distortion estimated that consumer theft will reach $118.7 billion in 2024. Meanwhile, research from Avery Dennison released last month showed that 42 percent of large U.S. and U.K. retailers believe retail theft is a bigger issue today than it was a year ago, and 64 percent believe it’s reached a crisis point.

Reports from law enforcement back up their observations. The first half of 2024 saw the average rate of shoplifting balloon by 24 percent year over year across dozens of cities including Atlanta, Philadelphia, Baltimore, Washington, D.C., Dallas, Chicago, Denver, New York, Boston, San Francisco and Seattle, according to the Council on Criminal Justice (CCJ), which amasses insights from police departments.

While it’s tough to find an upside to those statistics, the study’s authors underscored discrepancies in reporting trends across the country, noting that “more investigation is needed to untangle what’s driving the trend and discern how much it may be due to a rise in actual shoplifting or a rise in the rates at which retailers are reporting incidents to law enforcement.”

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