With just two weeks until Christmas, Macy’s has been operating under a cloud. The retailer shocked Wall Street last month when it said that an employee had “intentionally” hidden more than $150 million over the past few years, forcing the company to delay an earnings report that analysts use to gauge its health as it enters the most important selling season.
On Wednesday, Macy’s gave investors a full look at its financials and provided more information about the accounting snafu that involved how it measured the costs of delivering small packages. It found “no material impact” on its previous results, but nonetheless had to revise its accounts going back a few years and lower its forecast for profits this year.
Macy’s confirmed in a filing that a single employee, who is no longer with the company, “intentionally made erroneous accounting entries and falsified underlying documentation, to understate delivery expenses” from late 2021 through the third quarter of this year. Macy’s said it was taking measures to improve its financial controls, including “re-evaluating the risk of employee circumvention of controls.”
“Our focus is on ensuring that ethical conduct and integrity are upheld across the entire organization,” Tony Spring, the chief executive of Macy’s, said.
Concerns still remain about how the company will turn around its falling sales and fend off activist investors pushing for major changes.
After making adjustments for the accounting error, the company slightly raised its full-year forecast for revenue, but still expects a slight decline in comparable sales. It also cut its forecast for profitability, which spooked investors: The company’s already beleaguered stock dropped further in premarket trading.
Macy’s said its operating income last quarter fell 23 percent from the previous year. Inventory increased, a sign of adding new merchandise that the company hoped to sell as it prepared for its biggest quarter of the year.
Analysts who have covered Macy’s for years see much bigger challenges than lax accounting.
“The state of the company is generally unhealthy,” said David Swartz, an analyst at Morningstar.
Macy’s, the largest department store chain in the United States, is in the midst of its latest turnaround plan, overseen by Mr. Spring, a Bloomingdale’s veteran who took the reins in February. Shoppers are being more choosy about their spending, and Macy’s has struggled to attract these more discerning consumers.
Its turnaround plan, announced in February, seeks to draw shoppers to its stores, improve the service and merchandise that customers receive, and shutter the locations that aren’t worth operating anymore. The plan, many analysts say, is not much different than previous attempts to revive the chain: store closures, better in-store experience, wider profit margins.
“Macy’s is constantly downsizing and hoping that the turnaround plans will improve the performance of the remaining stores,” Mr. Swartz said. “But in the past, we have not seen that, and so people are not confident today either.”
Department stores are struggling. Fewer people are going to malls and brands that have historically sold inside Macy’s are opening their own stores and building direct relationships with their customers.
“The consumer shift has taken them elsewhere that isn’t a department store,” said Jessica Ramírez, analyst at Jane Hali & Associates. “I don’t think the strongest assortment actually ends up going to department stores.”
In November, Kohl’s said comparable sales dropped 9.3 percent in its latest quarter. On a call with analysts, Tom Kingsbury, the retailer’s chief executive, said the weakness was partly attributable to the economy and “squeezed” consumers who were spending less on discretionary items like clothes, in addition to company-specific factors like its product range and marketing approach. “It’s up to us to fix it,” he said. His successor, Ashley Buchanan of Michael’s, will take over as chief executive in January.
By contrast, retailers like T.J. Maxx and Walmart have been recording sales growth in recent quarters, in part because shoppers have said that they like what those stores are stocking. Macy’s has rolled out updates to its private-label clothing lines, which usually carry higher margins and can appeal to younger customers in the market for something fresh.
The next few weeks are crucial for Macy’s, which refers to itself as “the ultimate go-to for gifting.” It recorded 35 percent of its annual sales in the fourth quarter last year. Such a reliance on a single quarter may prove challenging to the company this year as consumers aren’t splurging on items as in years past, said Oliver Chen, an analyst at T.D. Cowen.
“They still feel inflation, and they’re still being cautious about big-ticket” purchases, Mr. Chen said. “They’re just prioritizing the critical gifts.”
Mr. Swartz of Morningstar said he saw a “glimmer of hope” in the 50 locations that Macy’s highlighted as its future based on geography, staffing and other factors. In the third quarter, the company said comparable sales at these stores rose 1.9 percent.
“We can’t be sure if that will last,” he said. “So people are not confident, which is why Macy’s stock price has gone nowhere.”
The company’s stock has fallen 15 percent since the start of the year.
The stock got some support this week after Barington Capital and Thor Equities said on Monday that they would mount an activist campaign to pressure Macy’s to reduce capital expenditures, buy back more of its shares and monetize its real estate portfolio, which was at the center of a previous activist campaign. The plan could pull money out of the company at a time it says it needs funds to improve its store experience, a pillar of its turnaround plan.
Macy’s responded in a statement saying it was confident with its strategy and said it was “committed to delivering sustainable, profitable growth and driving shareholder value.”
But Ms. Ramírez of Jane Hali & Associates said Macy’s was stuck in a “tough position,” adding that “the jury is still out on them.”
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