![]() Specifically, van der Baan pointed to returned merchandise that is damaged or that can’t be resold, such as undergarments or beauty items. “One of the biggest reasons is stock that cannot be restocked.” If shrinkage has increased, there are a lot of reasons, not just theft,” Melodie van der Baan, CEO of Max Retail, which helps retailers and brands sell excess inventory, told MarketWatch. “I think we need to be clear about what shrinkage is. Set against this backdrop, analysts say there are multiple pieces that make up the puzzle of retail shrink. Related: As Target prepares to close stores, crime data and foot traffic are in the spotlight Target’s recent announcement that it will close nine stores across four states, for example, has been scrutinized in light of local crime and foot-traffic data. “We also believe some more recent permanent store closures enacted under the cover of shrink relate to underperformance of these locations.” “While theft is likely elevated, companies are also likely using the opportunity to draw attention away from margin headwinds in the form of higher promotions and weaker inventory management in recent quarters,” Carden added. However, he feels there’s a disconnect between the expected increase in shrink and the level of attention the topic has drawn. William Blair analyst Carden says elevated shrink is expected in 2023, coinciding with growing organized retail crime. The National Retail Federation’s 2023 Retail Security Survey, which was released in September, found that the average shrink rate in fiscal year 2022 increased to 1.6%, up from 1.4% in fiscal year 2021. When taken as a percentage of total retail sales in 2022, that shrink represents $112.1 billion in losses, according to the NRF. Related: Retail earnings begin this week. “We believe context is important, namely that much of the increase in 2022 was related to shrink normalization coming out of the pandemic, when temporary closures and subsequent in-store shopping restrictions led to a more dramatic decrease in shrink.” “Over the course of 20, retailers have increasingly highlighted rising shrink concerns and related headwinds on margin,” William Blair analyst Dylan Carden said in a recent note. Left unadjusted, the book records could overstate income because the stub period shrinkage results in a decrease to ending invento.But analysts say there is much more to retail-industry shrink than just theft. The parties refer to this period as the stub period. There are many causes of shrinkage, including employee theft, customer theft, vendor theft, damage, accounting and recording errors, errors in marking retail prices, cash register errors, markdowns taken and not recorded, errors in accounting for customer returns, and errors in accounting for vendor receipts and returns.Because Wal Mart does not conduct a physical inventory at year-end, its perpetual inventory records do not account for any shrinkage that may have occurred during the period between the date of the last physical inventory and the taxable year-end. Because shrinkage reduces profits, WalMart has devoted extensive resources to monitoring and mitigating shrinkage. The physical inventories of both Wal-Mart and Sam's usually revealed shrinkage.Shrinkage (or overage) is the difference between the inventory determined from the perpetual inventory records and the amount of inventory actually on hand. Sam's also periodically conducted item audits, counting the goods on hand for a particular merchandise unit and recording those results the next day. Generally, Wal-Mart does not record the results of a physical inventory in its books until the following month.Sam's Club conducs its physical inventories in the same manner except that physical counts are usually taken twice a year and recorded the very next day. The reconciliations is reviewed by Wal-Mart's internal audit department. The results of the physical count were then reconciled with the book inventory. The independent counters generally counted every inventory item. ![]() Wal-Mart's independent auditors, Ernst & Young, also sent representatives to randomly selected physical counts to test their accuracy. Each physical count is then conducted by a team of independent counters (18 to 40 persons) and representatives from Wal-Mart's loss prevention department (1 to 2 persons), internal audit department (1 to 3 persons), and operations division (1 to 2 persons). Forty-five days prior to conducting a physical inventory in one of its stores, Wal-Mart's internal audit department sends the store a preparation package, which included instructions on how to prepare for the physical count.
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