Macy’s () lowered its profit forecasts after completing its investigation into an employee’s scheme to hide millions of dollars in expenses.
The misreporting of delivery expenses, which Macy’s said was linked to a former employee who intentionally hid costs, will have a total impact of $79 million on gross margin and adjusted earnings per share, according to a statement released this week. Wednesday (11). Most of the impact will be recorded in the fourth quarter.
Read more:
As a result, Macy’s adjusted its earnings forecast to $2.25 to $2.50 per share, compared with the previous August range of $2.90. The company also reduced its projection for the gross margin rate.
Macy’s shares fell 11% when the market opened in New York, the biggest drop since Aug. 21. As of Tuesday, shares had already fallen 17% this year.
Macy’s said the investigation concluded there was no “material impact or reclassifications” to its previously presented financial statements. The company reiterated that the investigation revealed no evidence of missing money or unpaid suppliers, but pointed to accounting errors by a former employee who hid approximately $151 million in delivery expenses from the fourth quarter of 2021 through the third quarter of this year.
Continues after advertising
The company said it will publish revised financial information for those fiscal years on Wednesday.
“We have completed our investigation and are strengthening our existing controls and implementing additional changes designed to prevent this from happening again,” CEO Tony Spring said in the statement. He later informed analysts on an earnings call that the former employee acted alone and did not hide the expenses for personal gain.
In recent years, Macy’s has focused on reducing its delivery expenses and other costs to increase profitability. The company’s chief financial officer mentioned delivery expenses in all but one of the 16 quarterly earnings calls he has participated in since joining the retailer in 2020.
Continues after advertising
Investigators were told by the employee that there had initially been an error in accounting for delivery expenses, according to a person familiar with the investigation who asked not to be identified disclosing information that has not been made public. After this initial error, the employee intentionally made erroneous accounting entries to hide the error, the source added. The employee no longer works at Macy’s, according to the retailer.
“This was not theft,” CFO Adrian Mitchell told analysts on Wednesday. “There was no impact on revenue and there was no impact on cash or inventories as all suppliers were paid in full.”
Macy’s said in a regulatory filing published Wednesday that it found “material weaknesses” in its internal controls over manual entries of delivery costs and other expenses. The company added that the former employee also falsified underlying documentation.
Continues after advertising
The department store operator said it has begun implementing changes to improve its internal controls, including “reassessing the risk of employee circumvention of controls.”
Macy’s also said that an opinion published in March by its auditor, KPMG, on the effectiveness of its internal controls over financial reporting “should no longer be relied upon” due to the material weakness discovered. A KPMG spokesperson declined to comment.
Macy’s raised its full-year sales forecast. The company now expects net sales in the range of $22.3 billion to $22.5 billion, up from its previous forecast of $22.1 billion to $22.4 billion. Same-store sales, in owned and licensed locations, are expected to remain stable or fall 1% compared to the previous year. The company previously expected this measure to fall by up to 2%.
Continues after advertising
“I see a consumer who — while still selective and looking for value — is interested in making purchases,” Spring told analysts.
The department store operator delayed releasing its full third-quarter results last month when it revealed the accounting problem, and instead released preliminary numbers.
Pressure from activists
Macy’s is under pressure from Barington Capital Group and Thor Equities, which are urging the company to form a separate real estate unit while cutting its capital spending. They are also asking Macy’s to consider spinning off its upscale chains, Bloomingdale’s and Bluemercury.
Barington and Thor want seats on Macy’s board and would encourage the retailer to create an internal subsidiary for its real estate, which would include all of the company’s owned and leased properties, including its stores and distribution centers. Macy’s would then pay rent to the subsidiary.
Barington owned 650,000 Macy’s shares, or a 0.2% stake, according to a Sept. 30 regulatory filing. That’s an increase from the 100,000 Macy’s shares he owned in June.
Macy’s said it will maintain its current strategy, which focuses on improving results at the company’s most profitable locations.
© 2024 Bloomberg L.P.
