Inside the organized crime rings plaguing retailers including Ulta, T.J. Maxx and Walgreens

In a tony suburban enclave in the San Diego foothills, police say, an organized retail crime “queenpin” had built an empire.

Tucked behind the stone walls of her 4,500-square-foot Spanish-style mansion, Michelle Mack had stockpiled a small fortune in cosmetics that had been stolen from Ulta and Sephora stores across the country, authorities said. 

Police don’t suspect that Mack, 53, took the items herself. Instead, they say, she pulled the strings from the shadows, employing a network of around a dozen women who stole the items for her so she could resell them on Amazon.

Michelle Mack’s home in Bonsall, California, Dec. 6, 2023.

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With their airfare, car rentals and other travel expenses paid by Mack, the suspects committed hundreds of thefts up and down the California coast and into Washington, Utah, Oregon, Colorado, Arizona, Illinois, Texas, Florida, Pennsylvania, Massachusetts and Ohio, investigators said. Mack selected which stores to target and what merchandise to take and the women were sent to clear out entire shelves of merchandise before making off with the stolen goods stuffed into Louis Vuitton bags, investigators said.

Investigators began referring to the theft group as the “California Girls” and considered Mack the crew’s ringleader. She made millions reselling the stolen items on Amazon to unwitting customers at a fraction of their typical retail price, investigators said, before she was arrested in early December.

Michelle Mack is taken into custody, Dec. 6, 2023.

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Law enforcement officials say Mack’s alleged theft ring is just one of the many that are plaguing U.S. retailers and costing them billions in losses annually. Their rise has led many companies to lock up merchandise, hire security guards and lobby lawmakers for stricter regulations.

These organized theft groups don’t typically carry out the splashy “smash and grab” robberies seen in viral videos. Instead, they pilfer goods quickly, quietly and efficiently. They often function within elaborate, organized structures that in some ways mimic the corporations they’re stealing from, police said.

CNBC has spent about eight months embedding with various law enforcement agencies and investigating theft groups to understand what organized retail crime looks like from the ground. In some cases, CNBC witnessed low-level shoplifting incidents involving people who appeared to be homeless or mentally ill. In other instances, CNBC saw takedowns of alleged organized theft groups that police said were reselling stolen merchandise at flea markets. Mack’s group, from her alleged network of professional thieves to her lucrative Amazon marketplace, was by far the most sophisticated one CNBC tracked alongside police.

California Highway Patrol officers arrest a retail crime suspect.

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But federal agents with Homeland Security Investigations, the Department of Homeland Security’s law enforcement branch, said some crime groups are even more elaborate — and theft is just one facet of their enterprises.

“We’re talking about operations that have fleets of trucks, 18-wheelers that have palletized loads of stolen goods, that have cleaning crews that actually clean the goods to make them look brand new,” said Adam Parks, an assistant special agent in charge at HSI, which is the main federal agency investigating retail crime.

“Just like any business, they’ve invested their capital into business assets like shrink wrap machines, forklifts,” Parks, who works out of HSI’s Baton Rouge, Louisiana, office, told CNBC in an interview. “That is what organized theft looks like, and it actually is indistinguishable from other e-commerce distribution centers.”

These theft groups in their myriad forms have become a thorn in the side of retailers big and small, prompting retailers to cite crime as the reason for lower profits, the inability to hire and retain staff, and the degradation of the in-store experience. They have also united politically divided Americans in their disdain for seeing everyday products locked up behind glass cases and witnessing brazen theft gone unchecked in stores.

Suspected stolen cosmetics found inside Michelle Mack’s home.

CNBC

Whether organized retail crime is actually rising is up for debate. Retailers including Target, Foot Locker, Walgreens and Ulta have said theft is a growing problem in recent years. But few have said how often it’s happening or how much money they’re losing from it, fueling accusations from some experts and analysts that they’re blaming crime in order to mask operational missteps.

The National Retail Federation estimates that retailers lost $40.5 billion to external theft, including organized retail crime, in 2022. That represented about 36% of total inventory losses — slightly lower than the 37% in 2021.

Even if theft has not meaningfully reduced some retailers’ profits, many have warned that crime can threaten the safety of workers and shoppers.

“The financial impact is real, but way more important is the human impact, the impact it has to our associates, the impact it has to our guests,” Ulta CEO Dave Kimbell told CNBC in a rare sit-down interview.

“It also impacts the communities in which we live,” he said. “If people don’t feel safe going in to shop in certain areas of a community, it really has an impact and can change neighborhoods and change communities over time.”

The government response to the issue has grown in turn. Both local and federal agencies have stepped up enforcement of laws targeting organized retail crime, and lawmakers are proposing and passing more measures that stiffen penalties for theft offenses.

HSI initiated 59 cases against organized theft groups in fiscal 2021, resulting in 55 indictments and 61 arrests, the agency said.

By the end of fiscal 2023, cases had more than tripled, to 199. Indictments spiked more than fivefold to 284, while arrests soared to 386, more than six times the number in 2021.

California Highway Patrol, which runs one of the most active retail crime task forces in the country, reports it made 170% more arrests for organized theft offenses in 2023 than it did in 2022.

It’s not clear whether organized theft offenses increased in that time or officials ramped up enforcement as the issue got more public attention and the retail industry’s lobbying engine pressed them to make it a priority.

CNBC embedded with teams from HSI and California Highway Patrol to witness four organized retail crime operations for this investigation. The probe is also based on more than a dozen interviews with law enforcement officers, retail leaders and customers, along with records, including court filings, company reports and property records.

New Orleans

On a sweltering Monday morning in July, about a dozen agents from HSI New Orleans gathered behind the U.S. Custom House, preparing for Operation French Quarter.

The officers were instructed to pose as shoppers inside three Walgreens stores and one CVS store in the area seeing high rates of theft, sometimes as many as 20 to 30 incidents per day, agents said.

As federal law enforcement agents who typically investigate terrorism, sex trafficking and gang leaders such as Joaquin “El Chapo” Guzman, the officers weren’t there to arrest people for petty theft. They had a clear directive: Find out who’s stealing and follow them out of the store to determine who else they may be working with.

“Obviously, the name of the game, guys and girls, is trying to get the bigger and better fish,” Assistant Special Agent in Charge Scott Robles, who led the operation, told the assembled officers. “We’re trying to identify the people who are in charge of this organized crime.”

Assistant Special Agent in Charge Scott Robles of Homeland Security Investigations addresses a team of undercover agents in New Orleans, July 17, 2023.

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At the bottom of organized retail crime rings are boosters — the people who go into stores and take the items. Robles was hoping the serial thieves targeting the drugstores could lead them to a larger operation.

“It can be anybody. It could be the mom with five kids just looking for extra money. It can be somebody that’s part of a team. … They may be getting paid with food, they may be getting paid with beer or drugs,” Robles said. “Some people get paid cash or they’re trying to work off a debt.”

Throughout the hourslong operation, agents identified at least one case that they say plainly showed organized theft.

Surveillance footage of the incident shows a man enter one of the Walgreens stores, head to the cosmetics aisle, remove a plastic shopping bag from his pants and calmly load it up with 17 jars of nail polish, valued at around $200. He then walked about a half mile away to the New Orleans Public Library’s main branch, where he sold the nail polish to a security guard, police said.

Federal agents briefly questioned the security guard, and the incident remains under investigation.

Beyond that instance, the vast majority of the thefts agents witnessed during the operation were low-level and petty, involving people who appeared to be homeless, mentally ill or transient. One man stole paper towels and then walked into a homeless shelter. A group took a case of beer and later went to a park to drink it. A woman stole a case of water, set up a stand to resell it and then defecated on the sidewalk.

Operation French Quarter showed how the lowest level of a retail crime operation can function, and how even small thefts can involve coordination among bad actors. Still, the incidents underscore the challenges investigators face when trying to build cases; they also demonstrate just how petty many thefts are, especially in urban areas with high rates of homelessness and addiction.

A Walgreens spokesperson told CNBC that the chain is “focused on the safety of our patients, customers and team members” and is taking steps to “safely deter theft” and “deliver the best patient and customer experience.”

“We are working closely with law enforcement, elected officials and community leaders to draw greater attention to and improve our response to retail crime,” the spokesperson said.

San Jose

Crates filled with unopened jugs of Gain, Tide and Downy detergent. Boxes stuffed with Gillette razors, Olay moisturizer and Allegra allergy pills. A pile of sparkly silver boots in sizes 8, 9 and 10 with the T.J. Maxx tags still on.

This is just some of the merchandise that California Highway Patrol found inside a home and storage container belonging to suspected members of an organized retail crime ring during a raid in November.

A bin filled with sparkly silver boots that police suspect an alleged San Jose, California, crime ring stole from T.J. Maxx.

Gabrielle Fonrouge

In all, investigators uncovered nearly 20,000 items valued at more than $550,000 across five locations connected with the group, according to CHP. Police suspect the majority of the items were stolen from T.J. Maxx stores and a variety of drugstores and grocery stores in and around the Bay Area.

CHP’s probe began in September, when investigators from TJX Companies, the owner of T.J. Maxx, reached out to the agency’s organized retail crime task force with information about a crime ring that it said was buying and reselling stolen goods — a “fencing” operation.

When boosters need to cash in on the items they take, they turn to fencers, who buy the products for pennies on the dollar and resell them at a margin Wall Street could only dream of, retail crime investigators have said.

Experts said retailers can have a hard time persuading law enforcement to investigate theft at stores because it is often considered a property crime, which police tend to see as less urgent than homicides, shootings and narcotics crimes.

To show law enforcement the scope of the problem, TJX investigators began conducting surveillance on the alleged crime ring. CHP agreed to take the case. Sgt. Manny Nevarez, who oversees all organized retail crime investigations in the Bay Area for CHP, told CNBC the group had hit stores in multiple counties in an effort to evade detection.

“They are not catching on that some of the retailers have their own loss prevention personnel and typically, if you target one store in San Jose, then the word gets out and then the next store is notified,” said Nevarez. 

Sgt. Manny Nevarez oversees organized retail crime investigations in the Bay Area for California Highway Patrol.

CNBC

Police learned that alleged members of the group were reselling the suspected stolen merchandise out of their homes and at the local Capitol Flea Market — a sprawling swap meet on the outskirts of San Jose. Officers also witnessed members of the crew receiving suspected stolen merchandise, transferring those goods to others in their network and exchanging money.

At the end of November, dozens of CHP investigators working with TJX descended on the five locations connected with the alleged fencing ring and carried out search warrants in a raid cops dubbed “Operation Kingsfall.” The locations included numerous homes along with a storage unit. 

“Nosotros somos policia,” the officers shouted in Spanish outside one of the homes. “Police, search warrant. Open the door with your hands up,” they continued, switching between English and Spanish before using a battering ram to knock down the door.

Officers from California Highway Patrol approach a home suspected to be connected with an organized retail crime ring in San Jose, California, Nov. 28, 2023.

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The location, an innocuous single-family home with Christmas decorations out front, looked like any other on the block. But on the sidewalk and grass near the property line sat dozens of discarded clothing tags, anti-theft devices, hangers and other retail store detritus.

Inside the home, CHP officers and TJX personnel found mountains of goods they suspect were stolen to resell, including bags of apparel with the tags still affixed, boxes of Huggies diapers, liquor and power tools.

By the time authorities completed the raids, they had enough suspected stolen merchandise to fill three 20-foot-long U-Haul trucks. A spokesperson for the Santa Clara County District Attorney said it is charging nine defendants in connection with the alleged crime ring.

Investigators examine suspected stolen merchandise connected with an alleged organized retail crime ring in San Jose, California.

CNBC

The law enforcement operation witnessed by CNBC showed the breadth of some of the fencing rings in the U.S. and how flea markets can play a role in the sale of stolen goods. Capitol Flea Market didn’t respond to a request for comment. 

“There’s certain crimes that come up where the public reaches a point where they’re like, ‘We have had enough of this,’ right?” Lt. Michael Ball, who helped oversee the operation, told CNBC. “And this is one of those that’s reached that level where people are saying widely and shouting it all the way up to our governor’s office that they have had enough of this.”

In a statement, a TJX spokesperson said the company is “thankful” for CHP’s efforts and is taking organized retail crime “very seriously.” The spokesperson said TJX is “laser-focused on ways to mitigate theft in our stores.”

The company told CNBC it will not resell the recovered merchandise. If TJX considers the items to be in suitable condition, it will donate them to charities in the area where they were found, the company said. If it deems the products unsuitable, it will work to dispose of them “responsibly,” it said.

San Diego

When Donna Washburn started shopping for a Christmas gift for her daughter in December, she wanted to “splurge” and buy her a bottle of Nars foundation. But she couldn’t find it in stock at a store close to home.

So, like many consumers, she Googled the product. She saw it was available on Amazon and cost around $38 before tax, nearly 30% cheaper than its typical retail price of $52.

“I said, you know, ‘It’s Amazon, it’ll come fast.’ It was the beginning of December. So I really didn’t want to wait too much longer for Christmas,” Washburn told CNBC in an interview, adding she was told it would arrive by Dec. 11.

Donna Washburn bought a beauty product from Michelle Mack’s Amazon store that police suspect had been stolen.

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Unknown to Washburn, police say, that bottle of foundation had likely been stolen by the crew of boosters allegedly employed by Mack — the suspected retail crime mastermind accused of running an illicit business from her San Diego mansion.

The Christmas gift ultimately never arrived, because Mack was arrested before she could ship the package, which was one of many found in Mack’s residence by investigators.

“I pay attention, but not that much, you know?” said Washburn, a 63-year-old clinical education associate in St. Augustine, Florida. “I’m shopping from Amazon. Hopefully you can trust it. So now that we know better … we’ll think twice.”

Washburn had bought the foundation from an Amazon storefront dubbed Online Makeup Store, which Mack had opened in 2012. CNBC viewed it before it was taken down in late 2023.

Suspected stolen cosmetics found inside Michelle Mack’s home.

CNBC

On its face, Mack’s storefront looked no different from the millions of others on Amazon’s marketplace. It had 4.5 stars on more than 100 reviews, and featured cosmetics from popular brands such as Mac, Tarte and Charlotte Tilbury that shoppers can find in neighborhood beauty stores.

There was just one red flag: the prices. Many of the products for sale at Mack’s store were listed at a fraction of the typical retail price, including a $25 bottle of Estee Lauder foundation that typically retails for $52 and Too Faced mascara that typically goes for $29 and was being sold for $17.

The store brought in millions. Since 2012, Mack sold nearly $8 million in cosmetics through the storefront before it was shut down, and she brought in $1.89 million in 2022 alone, Amazon sales records provided to investigators show.

Mack could offer such low prices, police suspect, because her crew of boosters had stolen the products in hundreds of incidents over more than a decade. Some of the thefts brought in around $2,000 in merchandise while others netted as much as $50,000 worth of merchandise, prosecutors said.

Mack’s business was humming along ahead of the holiday shopping season until the carefully crafted empire police say she built crumbled. On a cool December morning just before dawn, a convoy of CHP and HSI agents, armed with a search warrant, raided her sprawling mansion.

Mack, dressed in a baby pink pajama set and a pair of fuzzy mule slippers, was handcuffed and put into a police car as her teenage daughters stood in the driveway, watching.

Inside her garage, investigators found what they described as a “mini-store” — shelves and shelves of beauty products, sunglasses and designer bags organized in neat bins and categorized by product. They also found hundreds of postmarked yellow envelopes destined for unwitting customers, including Washburn, with “Online Makeup Store” marked as the return address.

Police recovered nearly 10,000 items worth a total of more than $387,000, CHP said.

A California Highway Patrol evidence photo of suspected stolen goods taken from the garage of Michelle Mack, who is accused of masterminding an organized retail crime network from her home in San Diego.

Source: California Highway Patrol

A California Highway Patrol evidence photo of suspected stolen goods taken from the garage of Michelle Mack, who is accused of masterminding an organized retail crime network from her home in San Diego.

Source: California Highway Patrol

A California Highway Patrol evidence photo of suspected stolen goods taken from the garage of Michelle Mack, who is accused of masterminding an organized retail crime network from her home in San Diego.

Source: California Highway Patrol

In February, California Attorney General Rob Bonta filed a total of 140 felony charges against Mack; her husband, Kenneth Mack; and seven other alleged members of the crew. The charges included conspiracy to commit organized retail theft, grand theft and receipt of stolen property. The defendants have all pleaded not guilty. CNBC contacted each defendant multiple times for comment, but none of them responded.

“This is a multimillion-dollar criminal scheme. It was complex. It was orchestrated,” Bonta said when announcing the charges. “We are not talking about garden-variety shoplifting.”

Court records filed in connection with the case provide a rare glimpse into the inner workings of an alleged organized retail crime ring. They show text messages between the suspects and details about the operation.

“I’m not stealing regular I’m going to start filling up my bag quick. So I want to know stuff I can grab in bulks too,” Kimora Lee Gooding texted Michelle Mack on Jan. 7, 2023.

Between Jan. 30 and Feb. 16, 2023, Gooding committed at least 10 separate thefts at Ulta stores across California, prosecutors allege in court records. In each case, Gooding took more than $950 worth of goods, the records say.

On Feb. 21, a few days after Gooding’s string of thefts, Mack sent her a screenshot of “Online Makeup Store” with an address she could ship the stolen products to. It was the same business address that was listed on Mack’s Amazon page before it was shut down, and traced back to a post office box a few miles from her home.

“Even without lancome we still did well,” Michelle Mack texted her husband two days later, allegedly referencing a prestige cosmetics brand owned by L’Oreal.

Soon, orders were pouring into Michelle Mack’s Amazon store.

California Highway Patrol Officer Andrew Barclay outside Michelle Mack’s home during her arrest.

Scott Zamost

“Lots of orders let’s get shipping,” Kenneth Mack texted Michelle Mack alongside an image that showed a bin full of paper.

By July 8, it appeared that the haul Gooding and others had allegedly brought in had dried up. Michelle Mack needed more things to sell.

“Did you get some new girls?” Michelle Mack texted Alina Franco, another person charged in connection with the theft crew. “I really need product so if you have anything please let me know.”

A day later, two more thefts connected to the ring were committed and many more followed, prosecutors said.

In addition to Ulta and Sephora, the theft organization targeted a range of other retailers, including Macy’s-owned Bloomingdale’s, Prada, Bath & Body Works, Victoria’s Secret, and Luxottica’s Sunglass Hut and LensCrafters, prosecutors said.

Sephora and Bath & Body Works declined to discuss the case with CNBC. Victoria’s Secret, Macy’s, Prada, Sunglass Hut and LensCrafters didn’t respond to requests for comment.

Despite the recent surge of headlines and commentary on the topic, organized theft groups have long operated around the world. But retail industry leaders and some law enforcement officials argue the rise of online marketplaces and e-commerce has caused such incidents to increase or have made it easier for theft groups to operate.

“There’s an ease of distribution that has become even more prevalent for stolen goods through online marketplaces. … You used to have to sell stolen goods at flea markets or out of the trunk of your car or maybe just locally,” said Ulta’s Kimbell. “Now, you have more sophisticated tools to have a broader reach across the country or even internationally.”

Ulta Beauty CEO Dave Kimbell said online marketplaces need to do more to prevent the sale of stolen goods.

CNBC

While Kimbell didn’t name Amazon specifically, he said online marketplaces are “part of the problem” and should be using the data, analytics and other technology available to them to be more “proactive” in shutting down bad-actor sellers.

“We shouldn’t have an environment where it’s possible to steal from one retailer and [have it] end up on any other platform, any other large-scale, mainstream platform” that people consider legitimate, said Kimbell.

Bonta called on Amazon and other marketplaces to “do more.” He said they could inform law enforcement, or at least talk to a seller, when red flags such as unusually cheap goods pop up.

“If you freeze out the demand and remove the market by closing out the marketplace where the stolen goods are so easily sold, you make organized retail crime as an organized crime less attractive. And we need to create barriers, instead of ease, for the ability to commit these crimes,” Bonta said in an interview.

California Attorney General Rob Bonta discusses Michelle Mack’s case in an interview on Feb. 16, 2024.

CNBC

In response, an Amazon spokesperson said that the company has “zero tolerance for the sale of stolen goods” and that the company invests more than $1 billion annually in preventing fraud and abuse.

“We leverage sophisticated detection and prevention solutions across our stores and fulfillment operations, allowing us to quickly spot a range of organized retail crime (ORC) schemes,” the spokesperson said in a statement.

The spokesperson said Amazon supports efforts to trace items throughout the supply chain and investigates allegations of stolen merchandise to find out how products were obtained.

“When we identify an issue, we work closely with law enforcement, retailers, and brands to stop bad actors and hold them accountable, including withholding funds, terminating accounts, and making law enforcement referrals,” which have led to arrests, product seizures and the disruption of retail crime rings, the spokesperson wrote.

The company said it assisted with the investigation into Michelle Mack’s alleged theft crew and provided evidence to investigators. It said it’s “pleased” the suspects were arrested because it “sends a strong message that the sale of stolen goods has severe consequences.”

Consumers, many of whom are hungry for deals as they contend with lingering inflation and high interest rates, may feel that buying stolen goods is a victimless crime, experts say.

Michael Krol, HSI’s special agent in charge, disagrees with that idea. He said not only does theft lead to higher prices for consumers but also the items they’re buying could be unsafe because of how they were stored or otherwise manipulated.

“Those items might not have the quality assurance and compliance that we expect in the United States. Baby formula, your medicines … [Consumers] could be buying baby formula that’s expired by three months,” said Krol.

The Inform Consumers Act, which took effect in June, was designed to curb the sale of stolen, counterfeit or otherwise harmful products on online platforms by requiring marketplaces to verify and share identifying information on certain third-party sellers.

The law was designed to prevent the exact type of illicit business Michelle Mack is accused of conducting on Amazon. If sellers are required to provide their contact information to marketplaces and on their listings, bad actors may be deterred from selling illicit goods.

However, Michelle Mack’s business name and an address belonging to it had been verified and was publicly available on her seller’s page. She’d already been on the platform for more than a decade by the time the Inform Act rolled around.

The verification process that Amazon conducted for Michelle Mack’s store after the Inform Act passed wasn’t enough to raise the company’s suspicions, either.

“In this instance, we did not receive signals to identify the seller was engaged in selling stolen goods,” Amazon said.

As part of the law, marketplaces are also required to provide a way for people to report suspicious product listings. But the law doesn’t require the marketplaces to do anything with that information.

“Amazon works hard to ensure our store is a safe and trusted place for shoppers,” Amazon says on a page where people can report suspicious listings. “If you believe any product, seller or other activity in our store is suspicious, please report this using one of the below methods.”

“While we are not able to respond directly to each report,” it says, “we appreciate your feedback.” 

— Additional reporting by Ali McCadden  

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Weight loss drugs boost sales at retail pharmacies, but they may not help profits much

A pharmacist displays boxes of Ozempic, a semaglutide injection drug used for treating type 2 diabetes made by Novo Nordisk, at Rock Canyon Pharmacy in Provo, Utah, U.S. March 29, 2023. 

George Frey | Reuters

Drugmakers aren’t the only ones feeling the impact of the weight loss industry gold rush. 

Retailers with pharmacy businesses, such as Walmart, Kroger and Rite Aid, said increased demand for prescription weight loss drugs helped boost sales for the second quarter. 

But analysts note that those blockbuster treatments are minimally profitable for retail pharmacies – and may even come with margin headwinds.

“More recently, you’re starting to hear retailers talk about these drugs. But I wouldn’t say they’re necessarily beneficiaries of the increased popularity,” Arun Sundaram, an analyst at CFRA Research, told CNBC. “They’re really not making much of a profit on the drugs. So it’s really just a traffic driver and not really a profit pool for retailers.” 

Buzzy drugs like Novo Nordisk‘s obesity injection Wegovy and diabetes treatment Ozempic have skyrocketed in popularity over the last year, with high-profile names like billionaire tech mogul Elon Musk among recent users.

Those treatments are known as GLP-1s, a class of drugs that mimic a hormone produced in the gut to suppress a person’s appetite. 

Other drugmakers, such as Eli Lilly and Pfizer, are developing their own GLP-1s in a bid to capitalize on a weight loss drug market that some analysts project could be worth $200 billion by 2030. An estimated 40% of U.S. adults are obese, making successful treatments a massive opportunity for drugmakers. 

But the boom in demand for GLP-1s is also being felt in other parts of the drug supply chain, including the pharmacies that dispense the prescription drugs to patients. 

Are weight loss drugs profitable? 

On an earnings call Thursday, Walmart CEO Doug McMillon said the company expects weight loss drugs to help drive sales for the rest of the year: “We still expect food, consumables, and health and wellness, primarily due to the popularity of some GLP-1 drugs, to grow as a percent total in the back half.” 

In June, likewise, Rite Aid CFO Matthew Schroeder said a jump in pharmacy revenue and the company’s decision to hike its full-year revenue guidance was “due to the increase in sales volume in Ozempic and other high-dollar GLP-1s.” Schroeder was referring to the hefty price tags of GLP-1s, which range from around $900 to $1,300 in the U.S. 

He said those drugs have high sales amounts per prescription, but emphasized that the increased volume of GLP-1s has a “minimal impact” on Rite Aid’s gross profit. 

Kroger CEO Rodney McMullen similarly said during an earnings call in June that GLP-1 drug “sales dollars are a lot bigger than the margin dollars.” 

“We would expect the GLP-1 type drugs to continue but remember, the impact on profitability is pretty narrow,” he said.

That’s because GLP-1s like Wegovy and Ozempic are branded drugs with “very, very low gross margins,” according to CFRA Research’s Sundaram. 

He said retail pharmacies generate high sales for each GLP-1 prescription they dispense but rake in low profits, which is having a slight negative impact on the overall gross margins of retailers like Walmart and Kroger. 

UBS analyst Michael Lasser similarly highlighted in a recent note that gross margins for Walmart’s U.S. business “would have looked even better had it not been for the contribution of the GLP-1 drugs since these carry very low profit rates.”

A selection of injector pens for the Saxenda weight loss drug are shown in this photo illustration in Chicago, Illinois, U.S., March 31, 2023. 

Jim Vondruska | Reuters

Gross margins for branded medications are 3.5% on average for pharmacies, according to a 2017 study from USC’s Schaeffer Center for Health Policy and Economics. That suggests it may take years before a branded drug significantly contributes to a pharmacy’s bottom line.

In contrast, gross margins for generic drugs – the cheaper equivalents of branded medications – are 42.7% on average for pharmacies. 

There are several reasons for the lower margins of branded drugs. For one, branded drugs don’t directly compete with other medications because they have patent protections. That gives drug manufacturers more power when they negotiate drug discounts with wholesalers, which purchase medications and distribute them to pharmacies. 

As a result, there is “little room for wholesalers and pharmacies to capture large margins due to their relative lack of negotiating power,” according to the Association for Accessible Medicines, a trade association representing the manufacturers and distributors of generic prescription drugs. 

What other impacts do retailers face?

But there are also other impacts of GLP-1s to consider beyond a retailer’s pharmacy business.

For companies like Walmart and Kroger, GLP-1 drugs may be indirectly impacting other business categories in a positive way.

That makes some analysts less worried about margin headwinds in pharmacy: “The gross margin headwind is less of a risk overall for Walmart because any footstep in the door often ends up with multiple items in a basket,” KeyBanc analyst Bradley Thomas told CNBC. 

“Walmart is generally not a quick store that you just pop in on the way home,” he said. “They’re going to make multiple purchases, and I think we’re seeing a lot of discretionary categories actually see a lift from some of this incremental traffic they’ve been getting lately.” 

Thomas added that GLP-1 drugs only fall under one part of Walmart’s business: “If you’re listing off the most important things that are driving Walmart’s strong sales performance right now, it’s probably not making the top 10,” he said. 

It’s a slightly different situation for Rite-Aid and similar companies like CVS Health and Walgreens.

Those companies have retail pharmacies but also other business segments that are directly affected in different ways by the boom in GLP-1 drugs.

For example, CVS also operates a health insurer and pharmacy benefit manager, or PBM, which maintains formularies and negotiates drug discounts with manufacturers on behalf of insurers and large employers.

The increased demand for GLP-1 drugs is likely more of a headwind for health insurers since they have to cover the costly drugs for beneficiaries, but CVS says “the risk is manageable” in that business division.

Meanwhile, PBMs may benefit more from the increase in GLP-1 use since they negotiate significant discounts on drugs and drive competition between manufacturers – but they often don’t pass along all of the savings to insurers.

“Each of the businesses kind of has GLP-1 in them and they are impacting them in a variety of different ways,” CVS CEO Karen Lynch said during an earnings call last month.

Correction: The Association for Accessible Medicines is a trade association representing the manufacturers and distributors of generic prescription drugs. An earlier version misstated its name.

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Top Wall Street analysts pick these stocks to climb 2023’s wall of worry

The Spotify logo hangs on the facade of the New York Stock Exchange with U.S. and a Swiss flag as the company lists its stock with a direct listing in New York, April 3, 2018.

Lucas Jackson | Reuters

Coming off a week that was packed with corporate earnings and economic updates, it is still difficult to determine whether a recession can be avoided this year.

Investing in such a stressful environment can be tricky. To help with the process, here are five stocks chosen by Wall Street’s top analysts, according to TipRanks, a platform that ranks analysts based on their past performances. 

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Apple

Ahead of Apple’s (AAPL) December quarter results, due out on Feb. 2, investors are fairly aware of the challenges that the company faced during the period. From production disruptions in the iPhone manufacturing facility at Zhengzhou in China to higher costs, Apple’s first quarter of fiscal 2023 has endured all. Needless to say, the company expects a quarter-over-quarter growth deceleration.

Nonetheless, Monness Crespi Hardt analyst Brian White expects the results to be in line with, or marginally above, Street expectations. The analyst believes gains in Services, iPad and Wearables, Home & Accessories revenue could be a saving grace.

Looking ahead, White sees pent-up demand for iPhones come into play in the forthcoming quarters, once Apple overcomes the production snags. (See Apple Stock Investors’ sentiments on TipRanks)

The analyst feels that the expensive valuation of approximately 27 times his calendar 2023 earnings estimate for Apple is justified.

“This P/E target is above Apple’s historical average in recent years; however, we believe the successful creation of a strong services business has provided the market with more confidence in the company’s long-term business model,” said White, reiterating a buy rating and $174 price target.

White holds the 67th position among almost 8,300 analysts followed on TipRanks. His ratings have been profitable 63% of the time and each rating has generated a 17.7% average return.

Spotify

 Audio streaming subscription service Spotify (SPOT) is also among the recent favorites of Brian White.

“Spotify is riding a favorable long-term trend, enhancing its platform, tapping into a large digital ad market, and expanding its audio offerings,” said White, reiterating a buy rating and $115 price target.

The analyst does acknowledge some challenges that await Spotify this year but remains optimistic about its margin improvement plans and several favorable industry developments. While it may be tough to attract new premium subscribers, while facing continued pressure from a lower digital ad spending environment, Spotify should benefit from ad-supported monthly active users (MAUs) this year. (See Spotify Stock Chart on TipRanks)

White is particularly upbeat about the waning mobile app store monopolies, after the European Union passed the Digital Markets Act last year. The act will be imposed from May 2023. One of the benefits for Spotify will be the ability to promote its cheaper subscription offers. Now, it can make the offers available outside Apple’s iPhone app. (This had been a challenge, as Apple previously would allow it to only promote its subscriptions through iPhone app.)

CVS Health Corp.

CVS Health (CVS), which operates a large retail pharmacy chain, has been on Tigress Financial Partners analyst Ivan Feinseth‘s list in recent weeks. The analyst reiterated a buy rating and a $130 price target on the stock.

The company’s “consumer-centric integrated model” as well as its increasing focus on primary care should help make health care more affordable and accessible for customers, according to Feinseth. CVS bought primary health-care provider Caravan Health as part of this focus. Moreover, the impending acquisition of Signify Health “adds to its home health services and provider enablement capabilities.”

The analyst also believes that the ongoing expansion of CVS’s new store format, MinuteClinics and HealthHUBs, will increase customer engagement and thus, continue to be a key growth catalyst. (See CVS Health Blogger Opinions & Sentiment on TipRanks)

Feinseth is also confident that CVS’s merger with managed healthcare company Aetna back in 2018 created a health-care mammoth. Now, it is well positioned to capitalize on the changing dynamics of the health-care market, as consumers gain more control over their health-care service expenditures.

Feinseth’s convictions can be trusted, given his 208th position among nearly 8,300 analysts in the TipRanks database. Apart from this, his track record of 62% profitable ratings, with each rating delivering 11.8% average returns, is also worth considering.

Shake Shack

Fast food hamburger chain operator Shake Shack (SHAK) has been doing well both domestically and overseas on the back of its fast-casual business concept. BTIG analyst Peter Saleh has a unique take on the company.

“Shake Shack is the preeminent concept within the better burger category and the rare restaurant chain whose awareness and brand recognition exceed its actual size and sales base,” said Saleh, who reiterated a buy rating on the stock with a $60 price target. (See Shake Shack Hedge Fund Trading Activity on TipRanks)

On the downside, the analyst points out that the expansion of services outside New York has weakened Shake Shack’s margin profile by generating low returns per unit and exposing the company to greater sales volatility. However, margins seem to have bottomed, and the analyst expects profitability to gain momentum over the next 12-18 months. A combination of higher menu prices and deflation of commodity costs are expected to push restaurant margins up to mid-teen levels.

In its preliminary fourth-quarter results, management at Shake Shack mentioned that it plans to tighten its hands with general and administrative expenses this year, considering the macroeconomic uncertainty. This “should prove reassuring for investors given the heightened G&A growth (over 30%) of the past two years.”

Saleh has a success rate of 64% and each of his ratings has returned 11.7% on average. The analyst is also placed 431st among more than 8,000 analysts on TipRanks.

TD Synnex

Despite last year’s challenges, business process service provider TD Synnex (SNX) has benefited from a steady IT spending environment amid the consistently high digital transformation across industries. The company recently posted its fiscal fourth-quarter results last week, where earnings beat consensus estimates and the dividend was hiked.

Following the results, Barrington Research analyst Vincent Colicchio dug into the results and noted that rapid growth in advanced solutions and high-growth technologies were major positives. Even though the analyst reduced his fiscal 2023 earnings forecast due to an expected rise in interest expense, he remained bullish on SNX’s efforts to achieve cost synergies by the end of the current fiscal year. (See TD Synnex Dividend Date & History on TipRanks)

Looking forward, the analyst sees a largely upward trend in growth, albeit a few hiccups. “The key growth driver in the first half of fiscal 2023 should be advanced solutions and high-growth technologies and in the second half should be PCs and peripherals and high-growth technologies. We expect Hyve Solutions revenue growth to slow in fiscal 2023 and slightly rebound in fiscal 2024 versus fiscal 2022 growth,” observed Colicchio, reiterating a buy rating and raising the price target to $130 from $98 for the next 12 months.

Importantly, Colicchio ranks 297th among almost 8,300 analysts on TipRanks, with a success rate of 61%. Each of his ratings has delivered 13% returns on average.

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Dollar General’s new Popshelf stores chase inflation-weary shoppers in the suburbs

HENDERSONVILLE, Tennessee — Dollar General‘s next big strategy for growth is tucked in a strip mall in suburban Nashville, and it is coming to other cities soon.

It’s a new store called Popshelf. Over the past two years, the Tennessee-based discounter has tested the store concept, which caters to suburban shoppers with higher incomes, but sells most items for $5 or less.

A wide range of merchandise fills the shelves, including holiday-themed platters, party and crafting supplies, novelty foods such as gourmet chocolates and Portobello mushroom jerky, and gifts like dangly earrings, lip gloss and toys. It’s designed to be a treasure hunt that keeps shoppers coming back.

Now, with inflation still high, Dollar General is ramping up its plans for Popshelf. It aims to double the banner’s locations to approximately 300 stores next year. Over the next three years, it plans to grow to about 1,000 locations across the country. Eventually, it sees an opportunity to reach about 3,000 total locations. It is also testing mini Popshelf shops inside of some of its Dollar General stores. So far, it has about 40 of those shops.

But Popshelf will have to prove it can hold up in a tougher economy. Walmart, Best Buy, Costco and others have warned of weaker sales of discretionary items as consumers spend more on necessities. Target recently cut its holiday quarter forecast, and Kohl’s pulled its outlook, citing middle-income consumers who feel stretched.

On Dollar General’s recent earnings call, CEO Jeff Owen said even customers who make $100,000 a year have been shopping at its stores.

Chief Merchandising Officer Emily Taylor said Popshelf can draw spending-conscious shoppers by offering items that don’t cause guilt.

“The fact that we have such great value across a lot of these categories gives our customers at Popshelf an opportunity to really treat themselves at a time where they may have a difficult time doing that in other locations,” she said.

Higher incomes, higher profits

Popshelf is designed to drive higher sales and higher profits than the Dollar General store banner. It has more general merchandise, which typically has higher margins than food. Each Popshelf store is projected to hit between $1.7 million and $2 million in sales annually with an average gross margin rate that exceeds 40%.

In the third quarter, Dollar General’s gross profit as a percentage of net sales was 30.5%. That includes all of its stores, but the vast majority are under the namesake banner. It does not disclose annual or quarterly sales on a store level.

By the numbers

POPSHELF

  • About 100 stores in nine states
  • Carries mix of home goods, seasonal decor, party supplies, crafts and toys
  • Most items for $5 or less
  • Suburban locations
  • Draws shoppers with a household annual income from $50,000 to $125,000

DOLLAR GENERAL

  • About 18,800 stores in 47 states
  • Carries many everyday items, such as food, cleaning supplies and paper products
  • A mix of price points, with about 20% of items for $1 or less
  • About 75% of stores are in small towns or rural areas with 20,000 people or less
  • Core customers have an annual household income of $40,000 or less

Source: Dollar General

The new store concept also courts a wealthier customer who lives in the suburbs — like a busy mom who is juggling a couple of kids, said Tracey Herrmann, senior vice president of channel innovation. That customer may need to buy toothpaste and cleaning supplies, but she wants to go a place where she can browse and toss fun items into her basket as well, Herrmann said.

Inside of Popshelf stores, the brands and items on shelves reflect that customer. For example, stores sell food and household brands often carried by higher-end grocers, such as Mrs. Meyer’s hand soap, Amy’s frozen meals and Tillamook cheese. It has a selection of global snacks, such as Pocky and Hello Panda. And it has specialty kitchen and baking items, such as inexpensive spices and unique condiments.

It also has exclusive brands, such as its own line of low-priced candles, room sprays and diffusers — including a signature scent, Citron Berry, which fills up its store. It carries some private brands sold by Dollar General, such as Believe Beauty, a makeup brand that’s been touted by influencers, including Bethenny Frankel of Bravo’s “The Real Housewives of New York City.”

It has rotating seasonal items, depending on the time of year, such as Christmas decor, pumpkin-themed items, bright colors for Easter and beach towels in the summer.

Herrmann said the store’s name was inspired by that mix of merchandise, which constantly gets refreshed.

“We believe the product pops off the shelf and really brings itself to life without us really even having to do much with it,” she said.

Discounters’ time to shine

Over the past several years, John Mercer, Coresight’s head of global research, said those value-conscious retailers have benefited from millennials buying homes and starting families as they juggle expenses such as college debt. Plus, he said, members of the second-largest generation — baby boomers — are looking for value as they retire and live on a fixed income.

Inflation has become an additional tailwind for the off-price and discounter sector this year and into 2023, he said.

Dollar General has historically performed well in economic downturns. It posted same-store sales gains during every quarter of the Great Recession in the late 2000s. On the other hand, Target, Macy’s, Nordstrom and Kohl’s were among the retailers with seven or eight quarters of negative same-store sales in that period.

Investors have been bullish about Dollar General. Shares of Dollar General have risen about 4% so far this year, as the S&P 500 Index has fallen by about 16% in the same period.

Corey Tarlowe, a retail analyst for Jefferies, said Popshelf may face some pressure in the near term as consumers think more carefully about purchases. Yet he said the tight labor market means most shoppers are still employed. Plus, he added, Popshelf’s middle- or upper-income consumer likely has a larger budget and bigger bank account.

Tarlowe said the store’s wide mix means it can steal away share from many different retailers, including crafting stores like Joann, Michaels and Hobby Lobby, pet stores like Petco, drugstores like CVS and Walgreens and dollar stores like Five Below and Dollar Tree.

“At the end of the day, it’s all about the value messaging,” he said. “That’s the core of it. It’s Dollar General pricing wrapped in a pretty bow.”

–CNBC’s Nick Wells contributed to this report.

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