Losing inventory is a major cause of financial distress for retailers, some of whom have reported rising levels of "shrink."

"Shrink continues to be a significant headwind," said Kelly Dilts, CFO of Dollar General Corp ( DG ) on Thursday.

The company's shares dropped over 30% after the release of lackluster financial results for the second quarter.

Dollar General ( DG ) disappointed investors by missing analyst expectations. Operating profit dropped 20.6%, despite an increase in both same-store sales and consumer traffic. 

The results also took down shares of Dollar Tree Inc ( DLTR ) , which have fallen 14% in the last five trading days, including a substantial 10% drop between Wednesday evening and Thursday morning.

What Is Shrink? "Shrinkage" or "shrink" is the term accountants use to describe the differences between real product stock and what inventory says should be there.

The term “shrink,” colloquially, comes from shoplifting. But there are other factors behind it: employee theft, administrative errors, vendor fraud and product damage. This can occur during transportation as well as when products expire.

Shrink accounted for $112.1 billion in losses for U.S. businesses in 2022, according to the National Retail Federation. That's 1.6% of all sales.

The figure was up from 2021 by 20 basis points, and preliminary data coming from corporate this year calls hints that it may be increasing even more for some retail categories.

According to a Fortune report, shrink has doubled in the last five years across U.S. stores.

A Money-Tight Consumer: Dollar General ( DG ) CEO Todd J. Vasos said on Thursday that his company's softer-than-anticipated sales performance is attributable to a "core customer that is less confident of their financial position."

As one Truist Securities analyst suggested, the company could be losing share to Walmart Inc ( WMT ) .

Dollar General's ( DG ) core consumer comes predominantly from households earning less than $35,000 annually.

Although consumer spending continues to exceed expectations on a national level, the company's description of low-income consumer behavior is a testament for the negative effects of high inflation on the lowest economic cohorts.

In July, the Personal Consumption Expenditures index, which is the Fed's preferred measure for inflation, grew 2.5% compared to the same period last year.

"Inflation prints are slowly but surely becoming boring again," said one pundit on Friday.

Inflation data is strengthening assumptions that the Fed will cut interest rates in its September meeting.

Read also: Inflation Is Eating Into Sales Of Companies Across The Board, Even This Household Food Name

Company brass said during the call that they're "cautiously optimistic" that shrink will turn to a tailwind by the end of the year.

During its latest earnings call, competitor Dollar Tree ( DLTR ) also said shrink has been on the rise in its stores.

"Shrink is still a problem, but it’s not deteriorating like it was last year, said CEO and Chairman Rick Dreiling in June.

One solution the company found, said Dreiling, is to directly eliminate high-shrink products from stores.

"We started that about a year ago. And we’ve also placed things behind the checks — check stand counters where we can control them," said Dreiling.

The company's upcoming earnings call for the second quarter, on Sept. 4, might shed some light to the results of these actions in Dollar Tree's ( DLTR ) inventory.

Is Best Buy Doing It Right? Dollar store companies might take a page out of Best Buy Co Inc ( BBY ) , a company that has put a grip on shrink, at least when it comes to store theft.

The company's stock is up over 12% since Thursday after presenting better-than-expected quarterly results.

Some months ago, CNN reported that Best Buy ( BBY ) is dealing with shoplifters by increasing the amount of in-store employees.

According to a National Retail Federation, electronics and appliances, like those sold at Best Buy ( BBY ) stores, are stolen the most. Other categories include apparel, health and beauty, food and beverage, footwear, home furnishings and housewares, home improvement, eyewear, office supplies, infant care and toys.

Shrink as a term has been absent from Best Buy ( BBY ) earning call conversations for the past four consecutive quarters.

In August 2023, Best Buy ( BBY ) CEO Corie Sue Barry said that shrink as a percent of our revenue was "within 10 basis points of pre-pandemic" levels during the second quarter of 2023.

The "high-ticket nature" of the products it sells has caused the company to historically address shrink as a standard practice. 

"It's really embedded in the culture," said Barry. "We usually just have one entrance in our stores. We tend to have less self-checkout," she said.

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Image via Dollar General Newsroom.