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2 Strategies For Investors To Combat Increasing Retail Theft

Shrinkage, also known as inventory shrink, has become a growing problem for retailers. In early 2023, Target (NYSE: TGT) reported shrinkage as a significant impact on profits. Other CEOs and retailers also commented on the issue throughout the year. For example, Dick’s Sporting Goods (NYSE: DKS) saw its shares drop by more than 25% due to shrinkage affecting its profits. This problem is costing retailers a significant amount of money, but it also presents an investment opportunity.

Key Points:
– Retail theft is on the rise and costing retailers billions, creating an investment opportunity.
– CDW is a leader in RFID technology and offers solutions to prevent retail theft.
– Avery Dennison provides solutions to control shrinkage from the moment inventory arrives at the dock until it leaves the store.

The Electronic Article Surveillance (EAS) market is a familiar concept. It includes electronic devices attached to clothing and other items that trigger alarms if not paid for. This market was estimated to be worth $1.10 billion in early 2023, while retailers anticipated losses 30 times higher due to theft. Organized retail crime (ORC) is the biggest concern, but small-scale theft is also a significant issue. The rise of inflation and high interest rates have reduced consumer spending power and increased theft. Despite these challenges, there is still an opportunity for investment. The EAS market is expected to grow at a significant rate in the next decade, even without considering other anti-theft measures such as packaging and closed display cases.

CDW (NASDAQ: CDW) is not solely focused on retail theft prevention, but the company has extensive involvement in the industry. It offers RFID devices and a range of services related to theft prevention. CDW’s stock trades at approximately 21 times its earnings and is known for its reliable dividend payments, which have been increasing steadily. The dividend growth rate is above 20% for the past five years, and the company shows strong cash flow conversion and a healthy balance sheet. Analysts rate CDW as a Moderate Buy, with expectations of improved revenue and earnings following a contraction.

Avery Dennison (NYSE: AVY) provides end-to-end solutions for loss prevention, starting from the moment inventory is received until it is sold. Although Avery Dennison has a smaller market capitalization than CDW, it offers a higher dividend yield. The stock trades at a similar valuation and has a 40% payout ratio. Avery Dennison’s dividend increases annually, but at a slightly lower pace of 10% compared to CDW. Analysts are more optimistic about Avery Dennison, upgrading it from a Moderate Buy to a Buy rating earlier this year. They expect the stock to rise by approximately 13%, driven by double-digit revenue growth and a 24% increase in adjusted EPS in 2024. UBS recently upgraded the stock to Buy, citing strength in core business areas and the RFID segment, which are expected to drive market-beating growth next year. UBS further anticipates a 14% to 15% compound annual growth rate (CAGR) for the next five years, enabling sustained double-digit dividend increases.

Overall, retail theft is a significant issue for retailers, but it also presents investment opportunities in companies involved in theft prevention. CDW and Avery Dennison offer solutions in different aspects of loss prevention and have the potential for future growth.

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