(NEW YORK) One of the biggest problems Wal-Mart Stores itself identified in its latest profit warning was what it calls “shrinkage.”
Greg Foran, president and CEO for Wal-Mart U.S. said on the earnings call that “accelerating pressures in shrink” were one of three major factors that contributed to the company’s underperformance. The others were an overall decline in gross margin, and in particular, lower than expected pharmacy reimbursements. But its goal to reduce overall inventory balances may be contributing to its problem of “disappearing” inventory.
Despite media reports beginning in 2013 of store “out-of-stock” situations, the company’s stated goal has been to grow inventory less than sales. That goal has now been accomplished. Total inventory grew 2.2% in the second quarter, which is slower than the 4.8% sales growth that unit reported, and comparable-store inventories fell by 2.4% compared to the 1.5% sales growth.
Although the majority of this improvement was attributed in the earnings call to changes in replenishment strategies — the company said it “strategically moved inventory for certain items upstream from our store back rooms to our distribution centers” — it’s not clear how shifting the location of the inventory resulted in less of it on the balance sheet.
Inventory shrinkage or “shrink” is a loss of inventory or inventory value through theft, obsolescence or simple mismanagement. Sometimes the amount of inventory shown in a company’s systems is not the same as what’s on the sales floor. That’s the problem Wal-Mart WMT, -3.11% reportedly had beginning in 2013 with chronic out-of-stock situations. Inventory was going up, but so were out-of-stocks. A Bloomberg News report in March of 2013 said that former U.S. CEO Bill Simon told an internal group on February 1 that year that Wal-Mart was “getting worse” at stocking shelves. He said that an executive vice president had been appointed to fix the restocking problem, according to the minutes of the meeting seen by Bloomberg News.
According to a report by The Nation in June of 2014, which quotes several former employees, Wal-Mart was still tackling the problem . One former manager told the reporters that executives’ “preferred methods for improving this vital metric were not always aboveboard; they included an array of improper techniques to conceal shrinkage losses and make the inventory numbers—and profit margins—look better on paper than they were in reality.” A Wal-Mart spokeswoman told The Nation at that time that the company was conducting a “thorough review” of “store level processes.”
A company can have the same number of physical inventory items but drive a lower inventory financial value by manipulating price changes for merchandise, one of the tactics The Nation’s report alleged was being used. The balance sheet inventory number can also be manipulated by “adjusting” physical inventory counts or system records to hide inventory losses that occur for any number of reasons, sometimes because merchandise becomes unsaleable when it has been sitting in a store room past its seasonal usefulness or marketability.
One easy way to say you’re going to reduce inventory shrinkage is to step up theft prevention. In Tuesday’s earnings call, U.S. CEO Foran said the company had reinstated a “shrink” training program for its security and store management teams. But he also said that the company is still reviewing “end-to-end inventory management process with a special focus on shrinkage and working to close gaps.” He said the Customer Availability Program would replace obsolete processes with “modern technology and new routines that keep associates on the sales floor rather than in the stockroom.”
Foran, in essence, asked for more time.
A Wal-Mart spokesman declined comment beyond what was said in the press release and in the earnings call.