When it comes to retail stocks, one area that investors should pay attention to is what they call “Organized Retail Crime,” or ORC for short.
In 2023, retailers nationwide have been whining about the level of ORC in their stores. Financial blogger Barry Ritholtz, a very successful financial planner, discussed this subject in a mid-December blog post.
The headline says it all: Retailers Lobby: “We Lied About Organized Theft.”
“That line is just another in a long series of falsehoods put forth by the professional bullshitters at the National Retail Federation,” Ritholtz wrote.
He discusses how the NRF’s claim that “nearly half” the inventory losses from ORC is more like 5% or one-tenth.
Yet many well-known retailers in this country have been shouting to the rafters about the need for governments to snuff out ORC. They’ve even pushed for Congress to pass the Combating Organized Retail Crime Act, making it easier to use federal resources to crack down on ORC.
There’s an implied contract when a retailer sells you something; it’s a quality item sold at a fair price. However, what happens when a retailer breaks that trust? To me, as an investor, companies that whine about ORC without tangible evidence have broken this trust.
Let’s explore three retail stocks to sell based on this broken trust.
Target (TGT)
All three of the names on this list are companies I’ve recommended to investors. Unfortunately, when Target (NYSE:TGT) CEO Brian Cornell used this convenient excuse for slowing sales earlier in 2023, I became less enamored with his management abilities.
CNBC discussed the falsehoods of Target’s claims in a Dec. 19 article about stores the discount retailer closed earlier in 2023.
“CNBC’s findings cast doubt on Target’s explanation and raise questions about whether the company’s announcement was designed to advance its legislative agenda — seeking a crackdown on organized retail crime — and to obscure poor financial performance at the stores as it grapples with sliding sales,” CNBC’s Gabrielle Fonrouge stated.
Fonrouge quoted Columbia Business School professor Mark Cohen, the Director of Retail Studies, Marketing Division. The long-time retail executive said Target provided no “smoking gun” in their statement against ORC.
As Ritholtz points out, these accusations are made because it’s easier to blame the bad guys than to admit your business is falling well short of execution. This applies to both in terms of the sell through of product and protecting your employees from the actual external theft that does occur in the stores.
Target’s broken trust with consumers. Investors should take notice.
Dick’s Sporting Goods (DKS)
This one irked me because as recently as August, I had gone to bat for the sporting goods retailer, suggesting that Dick’s Sporting Goods (NYSE:DKS) promotion of Lauren Hobart to CEO from President in 2021 was an enlightened move for two reasons. First, it placed a woman in the CEO role. Secondly, it didn’t hire externally to replace Ed Stack, the CEO for 37 years, and its controlling shareholder.
Just after my article was published in August, Dick’s reported weak second-quarter earnings. Its shares dropped 25%. They have since recovered all of those losses.
“Organized retail crime and theft in general is an increasingly serious issue impacting many retailers,” Business Insider reported Hobart’s comments post-earnings. “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.”
Hobart and Stack blamed ORC for a 23% drop in earnings despite its sales increasing by nearly 4% year over year (YOY). Miraculously, the theft problem disappeared when it reported strong Q3 results in November.
How can you trust anything they tell investors?
Home Depot (HD)
Home Depot (NYSE:HD) is the strangest of the three retailers to blame ORC. It’s difficult to hide a two-by-four under your shirt to sneak it out of one of their stores. Yet, Home Depot has joined the bandwagon.
CEO Ted Decker said so in October.
“‘It’s a big problem for retail,’ Home Depot CEO Ted Decker told CNBC’s Squawk Box. ‘This isn’t the random shoplifter anymore.”
Yahoo Finance reported Decker’s comments on Oct. 23.
The article, while very sad — reported that two of Home Depot’s employees were killed in the past year due to separate theft incidents — totally papers over the fact this might not have been related to organized retail crime but random theft.
The rest of the article describes Home Depot has been hit hard, thanks to criminals who don’t care about the consequences of their actions.
Incredibly, a company so big — expected to pay $1.8 billion in interest on its debt in fiscal 2023 — would resort to unproven theories about ORC to lobby the government for change.
Yes, theft is terrible, but how much do you read in the news about organized retail crime in convenience stores? I’m sure it’s there. Home Depot just has a much bigger megaphone.
It’s a bad look for the world’s largest home improvement company.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.