Lower Shrink, Little Explanation

Several of the largest retailers in the country have reported, in the span of a few weeks, that inventory shrink is no longer the problem it was. The margin benefits are real. The explanations are not there.

Executives at Kroger, Target, Dollar General, and TJX each cited lower shrink as a contributor to improved gross margins in their most recent results. Target CFO Jim Lee said the improvement delivered roughly 90 basis points of gross margin benefit and returned the company to pre-pandemic levels. At TJX, lower-than-expected shrink expense boosted pretax profit margin and gross margin during the quarter; for the full fiscal year, reduced shrink added 0.2 percentage points to gross profit margin. Dollar General’s gross profit rate rose to 30.4% in the fourth quarter of fiscal 2025 from 29.4% in the same period a year earlier, driven primarily by lower shrink, higher inventory markups, and lower inventory damages. Kroger cited lower shrink as a contributor across multiple recent quarters, including its most recent fourth quarter, when gross margin reached 23.1% of sales compared to 22.7% the prior year.

What none of these companies has offered is a substantive account of how the improvement happened.

Most retailers contacted for comment didn’t respond to requests for more information about how they reduced their exposure; TJX declined entirely. On earnings calls, most alluded to operational improvements without specifying them. Target CFO Jim Lee, at the company’s annual investor day, described the reduction as reflecting “the great work of our team, along with industry and community efforts to combat retail theft.” That is the only attribution to theft reduction made by any named executive across the four companies. The NRF’s vice president of asset protection and retail operations, David Johnston, offered a broader frame, crediting operational adjustments alongside antitheft measures, without specifying what changed at any particular retailer.

The silence matters because shrink is not a number that interprets itself. Its causes are layered, and as the NRF’s own data problems over the past two years have demonstrated, its measurement is more contested than the earnings-call cadence of citing it might suggest. The conditions now bearing down on retail inventory accounting are about to make both problems harder to untangle.

Why the Number Has Never Been Straightforward

Shrink measures the gap between what inventory records say a retailer has and what a physical count reveals. That gap can reflect theft, but also process failures, receiving errors, supplier discrepancies, and accounting distortions. The pandemic widened all of those gaps simultaneously: supply chains broke down, staffing turned over rapidly, and stable pricing, consistent processes, and experienced staff all became harder to maintain at the same time.

The data infrastructure meant to track shrink deteriorated alongside operations. In 2023, the NRF retracted a prominent claim from a special report on retail crime that had attributed nearly half of the $94.51 billion in industry shrink to organized retail crime; the figure turned out to be based on a misinterpretation of a 2016 NRF estimate of total shrink, not a current measurement of organized retail crime’s contribution. The following year, the NRF canceled its annual shrink survey, which it had published for more than three decades. The most recent independent benchmark available, from the Council on Criminal Justice, a nonpartisan think tank, found that the shoplifting rate in 2023 was 10% lower than in 2019, consistent with police data from the Real Time Crime Index. The industry had been narrating a theft crisis whose scale its own data could not support.

Appriss Retail, a loss prevention technology company with a commercial interest in how shrink is defined and measured, published its 2026 Total Retail Loss Benchmark Report in February, drawing on analysis of 250 million unique customer identifiers. The report calculated industry shrink at $90 billion in 2025 and estimated that 73% of it was preventable, attributing losses to employee theft ($26 billion), inventory errors ($19 billion), operational errors ($12 billion), and organized retail crime ($9 billion). Organized retail crime, the category that dominated retail’s public narrative for several years, accounts for $9 billion of that total, roughly 10%.

The composition of that figure matters for interpreting what “lower shrink” actually means when a retailer reports it. If the pandemic-era spike was driven primarily by operational breakdown rather than a crime wave, the subsequent improvement may reflect stabilization rather than any specific intervention. Appriss Chief Revenue Officer Pedro Ramos pointed to staffing as one factor, noting that the process errors introduced by rapid pandemic-era hiring have since resolved. The implication, though Ramos did not state it in these terms, is that some portion of the current improvement may represent a return toward pre-pandemic operating norms rather than a discrete structural gain, which carries different implications for how durable the improvement proves to be.

Returns, the Larger Loss Category Retailers Discuss Less

The theft framing also crowds out the loss category that, by dollar volume, is considerably larger.

Appriss calculated that $706 billion in merchandise was returned in 2025, with 14.2% of that total, roughly $100 billion, classified as preventable loss from fraud and abuse. Returns abuse, meaning excessive but technically legitimate returns, accounted for 12% of returns-related loss. Outright fraud accounted for 2%. Appriss CEO Michael Osborne described returns as overwhelming the majority of financial loss retailers endure, a framing the dollar figures support regardless of the source’s commercial position.

Buy online, return in-store transactions have become the fastest-growing fraud and abuse vector by Appriss’s measure, generating $208 billion of the $706 billion in total returns. That exposure sits at the intersection of e-commerce operations and store-level process, not in the territory traditionally owned by loss prevention teams. Category managers, operations leaders, and brand teams whose sell-through data feeds into retailer inventory systems are working with shrink figures that don’t include it.

None of the four retailers that reported lower shrink addressed returns in the same context.

What Tariffs Add to an Already Unclear Picture

Even accepting the reported improvement at face value, the accounting methods that generate the underlying numbers introduce a separate layer of imprecision, one that current tariff conditions are actively amplifying.

Roughly a quarter of U.S. retailers use the retail inventory method, known as RIM, according to PwC, including Walmart, Target, and Home Depot. RIM calculates inventory value using a cost-to-retail price ratio averaged across broad merchandise groups rather than tracking actual costs at the item level. The method works reasonably well when prices are stable. When prices change frequently, the ratio introduces distortions between what records show and what is physically on hand, and distortions between records and physical counts are precisely what shrink measures.

Under RIM, all inventory, including older stock unaffected by new tariffs, is subject to the same ratio, meaning margins fluctuate with tariff-driven price changes in ways that don’t reflect actual inventory movements. Loss prevention consultant Brand Elverston flagged the consequence directly: as tariff-driven price volatility continues, shrink will become harder to analyze for retailers still on RIM, because every price adjustment introduces new counting errors between the books and the shelf. Target and Dollar General are among the retailers still using the method.

Macy’s and Nordstrom have both moved away from RIM in recent periods. Macy’s CFO and COO Adrian Mitchell told analysts the conversion was complete; Nordstrom CFO Cathy Smith described the shift as laying the foundation for more effective business decisions. For retailers that haven’t made that transition, reported shrink figures in a tariff-volatile environment may reflect accounting behavior as much as actual inventory performance, a distinction the figures themselves don’t reveal.

The reported improvement across Kroger, Target, Dollar General, and TJX is real in the sense that it is showing up in margins. Whether it reflects structural operational gains, a stabilization of pandemic-era disruptions, an artifact of accounting conditions, or some combination of all three remains an open question those retailers have not moved to answer. PwC has noted that for large, non-fast-fashion retailers using RIM, it typically takes two to four quarters for cost volatility to settle and reported profitability to approach its true level.

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