While retailers address inventory shrink concerns more and more in earnings calls, could this headwind turn into a tailwind for investors? Yahoo Finance markets reporter Josh Schafer details how much retail theft is weighing on sales figures and how investors could actually benefit.

Video Transcript

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- Inventory shrinkage is a big issue for retailers, mostly at the hands of organized retail crime. Now Target CEO, Brian Cornell, telling Yahoo Finance last month that the problem is getting worse. And warning that it could cost target $500 million in profits this year. But despite that, there's one analyst who's saying that this big problem will turn from a headwind to a tailwind later this year. Yahoo Finance's Josh Schafer is here with more on that.

And Josh, explain this to me. This is a note out here from the team at UBS. But what are they saying, just in terms of how we are going to see this potentially benefit maybe some investors at some point?

JOSH SCHAFER: Yeah, so the way shrinkage works, right, I think we should start there, overall, you're talking about essentially the companies are losing money and losing profits. So if we were to see shrinkage go down, that $500 million, if we wanted to use that number in theory, at some point, would come back to target, right. So at a high level, that's what UBS is looking at.

And really what they're calling here is they're calling peak shrinkage. They're saying this is the most shrink we're going to get, we're reaching it right now. And something interesting they pointed to in that call was a graph showing how often shrink is mentioned on earnings calls.

So when you take a look at the past decade or so, when we're talking about shrink, you can see there when it reaches sort of peak, it then falls off, pretty significantly, the mentions do, and so does the actual shrink reporting that we then see in the following quarter.

So UBS essentially saying, you've heard a lot about shrink in the last couple of quarters, specifically the last quarter. You heard it from the likes of Walmart, Target, the dollar stores, Dollar General, Dollar Tree. They're now saying that they think that that's going to fall off in the next couple of quarters, so end of '23 probably, into '24, and then you see those profits come back. So if you were to sort of make that right trade now, then the profits come back, the gross margin goes back up, and it's a positive tailwind for the company.

- Kind of the expectation would be to buy the rumor, sell the news, or a situation like that. And I do notice more luxury retailers are trying to address that problem with how they're handling crowds who-- or I wouldn't call it crowds for luxury retailers. But--

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- Their numbers looking pretty good though.

- But, you know, how they're managing consumers coming into their stores, to deal with that issue. But, of course, the big retailers can't necessarily do that. And they've been kind of stopping staff from addressing issues that can lead to the shrink.

But I want to pivot a little bit and talk Nike. I saw shares under pressure today. This coming after analysts warn of inventory issues. So tell us about this.

JOSH SCHAFER: Yeah, I mean, when you're talking about shrink, you're also kind of talking about inventory in some ways, right. It's a little bit different for Nike, but we're staying with the trend here on inventory. And for Nike, it's been a story over the last couple of quarters of just, they've had very high inventory. A lot of retailers have had very high inventory.

For Nike, specifically, what the street has been concerned about is when you go back a month to that Foot Locker earnings call, they talked a lot about sales probably falling through the end of the year. They already have a lot of inventory. Who buys a lot of Nike shoes? Foot Locker. About 70% of their sales are Nike. So that was one thing that analysts were pointing out today.

But interesting to see that they think overall Nike might be able to hold up in this environment. Essentially saying that they think that North American sales are going to be down, North American inventories might be under pressure. But they might have some success in what they're doing outside of North America. And that could maybe buoy what might be a little bit of a decline here in the States.

- We will see. We get those results, what? Thursday?

JOSH SCHAFER: Next Thursday.

- Next Thursday, all right. So coming up here in just over a week. Right, Josh Schafer, thanks.