The retail industry's biggest problem is about to become a huge opportunity
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The retail industry's biggest problem is about to become a huge opportunity
to downgrade Dollar General
The commonly referenced retail overhang known as shrink may finally be shrinking itself.
In a new note to clients on Tuesday, UBS analyst Michael Lasser wrote shrink — or merchandise theft — at retail chains might be at "peak" cycle in what has been a cyclical trend.
"The impact of shrink will turn from a headwind to a tailwind later this year and into next year," Lasser wrote. He added that this should result in a boost to profitability for a variety of retailers.
Shrink has been a challengefor companies such as Target (TGT), Walmart (WMT), Dollar General (DG), Dollar Tree (DLTR) and others for several quarters. In the most recent quarter, Target estimated it would lose $500 million in profits this year to shrinkage.
"Worsening shrink rates are putting significant pressure on our financial results," Target Chairman and CEO said in May.
But history shows the more executives talk about the shrinkage, the closer it is to a peak, according to UBS. Shrink mentions on earnings calls are at their highest levels since before the pandemic, per UBS, and that likely means shrink declines for the rest of 2023 and into 2024. In turn, a drop in shrink issues would be an upside to gross margins and profitability at some of the hardest-hitstores.
UBS points out Target, Walmart Dollar General, Dollar Tree, Home Depot (HD), Ulta (ULTA) and Kroger (KR) could all benefit from lowering shrink levels.
"Ultimately, shrink is a cost (albeit in some cases, a steep one) much like occupancy, utilities and others," Lasser wrote. "The managers of these companies have a fiduciary responsibility to maximize profits. We believe they will find solutions to address these issues and lower the costs in the quarters to come."
Retailers on average saw a 26.5% increase in Organized Retail Crime in 2021, according the National Retail's Federation most recent survey. One contributor to the rise in retail crime has been the increase in online shopping during the Covid-19 pandemic.
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