As finance executives fight theft, which cuts into profits, investors and analysts want more details about how much a contributor it really is to retail shrinkage, The Wall Street Journal reported. The Journal defined the term as the  difference between inventory on the books and what’s physically on hand.

Other elements of retail shrinkage are lost or damaged goods and inaccurate records. The current situation, which retailers said has been accelerating, may also have been distorted by effects of the pandemic and inflation, analysts interviewed by the Journal said.

A return to pre-pandemic norms rather than new trends in theft may account for higher shrinkage, the analysts said. Reduced visits to physical stores starting in 2020 decreased the opportunities for theft, they said, and that changed as people started shopping in person again.

U.S. retailers absorbed an estimated $142 billion in losses due to inventory shrinkage in 2023, up by more than 25 percent from the previous year, according to an October report from analysts at investment bank William Blair. But retailers’ more recent reporting suggests that those numbers may overstate the case, according to consumer equity research analyst Dylan Carden, who co-wrote the report.

Shrinkage is better evaluated as a percentage of sales, because that measure smooths out the impact of inflation, Carden told the Journal. Inventory shrinkage was expected to be about 2 percent of sales in 2023, its highest level since at least 2015, according to William Blair's analysis of National Retail Federation data. That figure compares with 1.6 percent in 2022, 2020 and 2019—and 1.4 percent of sales in 2021.

“We got a lot of discussion around the margin impact of shrink,” Carden told the Journal, referring to past years. “What wasn’t discussed there was normalization.”

Companies may also be using the focus on theft as an “opportunity to draw attention away from margin headwinds in the form of higher promotions and weaker inventory management,” the William Blair report said.

Analysts want more information about shrinkage, Dean Rosenblum, a senior U.S. retail analyst at Bernstein Research, told the Journal. “We want them to talk about what the heck is going on, what are you doing about it, and how should we bake this into their models?”

Companies, such as Dollar General and Dick’s Sporting Good, are providing some details about the financial damage. Retailers have also responded by adding security staff and technology, by locking up goods and by closing some stores that have been hardest hit. Last year, one national chain, Target, said that shrinkage was expected to cut into profitability by more than $500 million, and it announced in September that it would close nine stores, citing higher theft and safety concerns for shoppers and workers.

Some retailers, such as Costco Wholesale, are less exposed to theft because they sell larger, harder-to-steal products, and stores are laid out with one primary entrance and exit. 

Home Depot reported in November that its gross profit for the first nine months of fiscal year 2023 decreased by 3.4 percent, compared with the same period a year earlier, a decline driven in part by shrinkage. The company has tried to curb the problem by locking up certain items and using live-view parking lot cameras.

“We’re actually pleased with the results we’re seeing, but it remains a pressure to our [profit],” CFO Richard McPhail told the Journal.

Tractor Supply’s CFO, Kurt Barton, told the Journal that his team has for years assessed shrinkage by weighing the exposure against the costs to mitigate theft. The company is investing in measures such as surveillance cameras, locks and alarm cables for certain items.

“We have to make decisions on how much we would invest and does that mitigate the risk and, like any other investment, how much return do you get?” he said. “If I can invest a few extra million dollars, but it can save me $10 million or $20 million of shrink, then we will make that investment.”