Abstract

This paper aims to debunk the myth that inventory shrinkage, primarily due to shoplifting and employee theft, is a trivial concern for large retail chains like Lowe's. Using financial data from Lowe's 2022 10-K report, we will quantitatively evaluate the multi-faceted impact of shrinkage on earnings, dividends, capital expenditure, and job creation.

Introduction

The common narrative around shoplifting often minimizes its impact by framing it as a 'victimless crime' that affects only large corporations or 'rich investors.' However, this perspective is not only misleading but also lacks a comprehensive understanding of the issue. This paper aims to present a rigorous analysis to quantify the real-world consequences of shrinkage.

Methodology

Financial data has been sourced from Lowe's 2022 10-K report. The metrics include net sales, cost of sales due to shrinkage, EBITDA, net income, dividends paid, and capital expenditures. Additional data includes the number of employees, stores, and the cost to open a new store.

Impact on Earnings

Inventory shrinkage cost Lowe's nearly $1 billion in 2022, representing 1% of net sales. While 1% might appear trivial, it significantly affects Lowe's earnings. For instance, the $997 million loss due to shrinkage represents 8.4% of Lowe's EBITDA and 15.5% of its net income for the year. In essence, for every $6.50 in earnings, Lowe's loses approximately $1 due to shrinkage.

Foregone Dividends

Lowe's paid out 36.8% of its net income as dividends in 2022. If shrinkage were eliminated, an additional $367 million would be available for dividend distribution, affecting not just institutional investors but also individual retail investors and pension funds.

Capital Expenditure and Job Creation

In 2022, Lowe's allocated 28.4% of its net income for capital expenditures, primarily for opening new stores and improving existing ones. Eliminating shrinkage would free up an extra $283 million for capital expenditures. This amount could finance approximately 12 new stores, leading to the creation of around 2,064 new jobs.

Conclusion

This analysis clearly illustrates that the impact of inventory shrinkage is far from trivial. It has a cascading effect on various aspects of Lowe's business, from earnings and dividends to capital expenditures and job creation. The notion that shrinkage is a 'victimless crime' is not only fallacious but also dangerously misleading. It's imperative to address this issue to safeguard the financial health of retail companies and, by extension, the broader economy.