Dick’s Sporting Goods (NYSE: DKS) has seen its share price fall off a cliff this week, sliding by nearly 25% after the company’s earnings update included a significant outlook cut. One of the most eye-catching facets of the earnings update was the company’s concerns about theft.
In this article, we’ll explore what’s going on at the company and look at how retail crime has been impacting stocks.
What is Dick’s Sporting Goods?
Dick’s Sporting Goods (NYSE: DKS) is a well-known American sporting goods and retail company. It operates a chain of stores that offer a wide range of sporting equipment, apparel, footwear, and accessories for various sports and outdoor activities.
Since being founded in 1948 by Richard "Dick" Stack and has since grown to become one of the largest sporting goods retailers in the United States.
Stores typically carry products for sports such as baseball, basketball, football, soccer, golf, tennis, and more. They also offer outdoor equipment for activities like camping, hiking, fishing, and hunting. In addition to its retail stores, the company also operates an e-commerce platform where customers can shop online.
Over the years, Dick's Sporting Goods has expanded its reach and has become known for its commitment to community engagement, including initiatives to promote youth sports and active lifestyles. The company has also taken stances on certain social issues, such as its decision to stop selling assault-style rifles in its stores.
What Impact Has Theft Had?
In its second-quarter earnings, Dick’s reported earnings per share (EPS) and revenue both fell short of analyst expectations. EPS came in at $2.82, compared with consensus expectations of $3.81, while revenue of $3.22bn fell short of the $3.24bn that analysts had anticipated.
Additionally, the business slashed its earnings outlook for the full year.
Speaking during the company’s earnings call, Chief Executive Officer Lauren Hobart said:
“Organized retail crime and theft in general is an increasingly serious issue impacting many retailers. Based on the results from our most recent physical inventory cycle, the impact of theft on our shrink was meaningful to both our Q2 results and our go-forward expectations for the balance of the year.”
Additionally, Chief Financial Officer Navdeep Gupta commented:
“The biggest impact in terms of the surprise for Q2 primarily came from shrink. We thought we had adequately reserved for it. However, the number of incidents and the organized retail crime impact came in significantly higher than we anticipated, and that impacted our Q2 results as well.”
It’s worth noting the definition of “organized retail crime” here. This is not small-scale shoplifting, but rather large-scale organized theft where the perpetrators generally have the intention of reselling the stolen goods.
Which Other Stocks Have Been Hit?
Dick’s is not alone in facing the problem of retail theft. In May, Target (NYSE: TGT) said in its first-quarter earnings that it expected annual profitability to take a hit of more than $500m.
The reason given for this massive impact?
Theft and organized retail crime were clearly highlighted by Target as “increasingly important drivers of the issue”. The business has indicated that it will be implementing new strategies to combat this problem, but some of these look a little alarming.
Photographs from a Target store in San Francisco show that locked cabinets now hold basic toiletries like soap and toothpaste, indicating just how problematic the issue of crime has become.
Other methods being employed by retailers include the implementation of metal detectors, increased hiring of security personnel and improved lighting in stores and parking lots.
Home Depot (NYSE: HD) is another major retailer to have warned about theft, with CEO Ted Decker telling CNBC’s Squawk Box program that the issue “isn’t the random shoplifter anymore”.
Other retail players to specifically highlight crime include:
Walmart (NYSE: WMT)
Lowe’s (NYSE: LOW)
Walgreens (NASDAQ: WBA)
CVS (NYSE: CVS)
Nordstrom (NYSE: JWN)
Best Buy (NYSE: BBY)
So, does research support retailers’ assertion that crime is on the rise? And what is causing any increase in theft?
What Do the Figures Say?
First off, it’s worth noting that National crime data on organized retail crime does not specifically exist. This is because the majority of law enforcement authorities do not specifically track it as a category of crime.
Even so, we can build a picture of what’s going on.
According to the 2022 National Retail Security Survey, approximately 70% of retailers believe the threat of organized retail crime has been on the rise over the last five years.
What’s the cause?
There’s one obvious driver in higher inflation having made it harder for many individuals to keep up with the cost of living. However, several other catalysts have been put forward too.
Former Home Depot CFO, Carol Tome, told CNBC in May that she saw the problem as being driven by the opioid crisis.
She’s not alone in blaming the issue on narcotics either, with Iowa Senator Chuck Grassley having sought to highlight the problem:
“We’re seeing a disturbing link between organized crime targeting American retailers and the drug cartels that are fueling record overdose deaths in the United States. Our communities are caught in a harmful cycle where workers and businesses are robbed, sometimes violently, to advance money-laundering schemes that enable drug cartels to send poison right back to those same communities.”
Meanwhile, some point to the ease with which thieves can resell stolen goods thanks to the growth of online marketplaces like Amazon.
But while there are plenty of indications that crime is having a major impact, should we be looking elsewhere to explain major retailers’ struggles?
Is Crime A Scapegoat?
While there are certainly figures that indicate rising crime is having a significant impact on retailers, it’s worth noting the evidence against it.
Indeed, according to the Federal Bureau of Investigation’s Crime Data Explorer, theft and larceny rates fell to their lowest level since 1985 in 2020. This indicates that any increases over more recent years are from record low levels.
Additionally, some cynics think major retailers are using crime as an excuse for their poor performance. In reality, the only issue retailers can definitively point to is shrink, which refers to lost inventory.
Richard Hollinger, a retired professor of sociology and criminology at the University of Florida, told CNN that “there’s no way to know exactly where the losses are coming from”.
Jonathan Simon, a criminal justice professor at UC Berkeley School of Law, added to the network that blaming theft allowed retailers to gloss over their own missteps or strategic problems. “It’s much more convenient if we can blame it on people we already consider reprehensible,” he said.
In short, retailers may be over-egging the crime narrative to dodge scrutiny in periods of poor performance.
As an investor, it’s therefore wise to be cynical and take what you hear from the CEO with a pinch of salt.
