Macy’s (M) on Monday delayed its Q3 earnings release as it conducts an internal investigation into an employee hiding hundred of millions of dollars of expenses.
An employee responsible for small package delivery expense accounting intentionally made “erroneous accounting accrual entries” that hid nearly $132 million to $154 million from Q4 2021 through the fiscal quarter that ended Nov. 2, 2024, the company said.
Macy’s said the employee was no longer with the company and there was “no indication that the accounting error had any impact on the cash management activities or vendor payments.”
America’s largest department store was expected to post its Q3 earnings report on Tuesday before market open. In its preliminary results, same-store sales were down 1.3%, slightly better than expectations.
Its shares dropped 3% as investors digests the expense error and preliminary results.
“The preliminary numbers basically match exactly what people were looking for,” Morningstar analyst David Swartz told Yahoo Finance over the phone, adding the latest news were disappointing, but not a major issue.
“Macy’s has over $8 billion a year in operating expenses, so even if it’s $50 million a year underreported, that’s immaterial for Macy’s, that would be less than 1% of Macy’s annual expenses.”
“From what we know with the limited amount…a rogue employee did something wrong,” Swartz said. “Why it was not caught earlier is certainly a question that will be asked, because this should not happen, but it does happen sometimes.”
Net sales of $4.74 billion came in slightly below the $4.75 billion expected. The company did not reported adjusted earnings, which Wall Street expects to come in at a loss of one cent.
“While we work diligently to complete the investigation as soon as practicable and ensure this matter is handled appropriately, our colleagues across the company are focused on serving our customers and executing our strategy for a successful holiday season,” Chairman and CEO Tony Spring said in the release.
The company said it plans to provide its fourth quarter and full year outlook by December 11, 2024 “to allow for completion of the independent investigation.”
Many are left wondering how this employee got away with it for so long.
“Personal and professional greed, has reached unprecedented proportions, in part, fueled by gambling,” Burt Flickinger III of Strategic Resource Group told Yahoo Finance in a phone call.
Flickinger, who has been working in retail crime for nearly 40 years suspects the employee “likely” had a “gambling problem…that got too big for them to cover up, so they stole from their employer in epic proportions.”
Given the microscope Macy’s is under, especially after Macy’s ended talks with activist investor Arkhouse and Brigade Capital Management in July, Flickinger believes the company should create a “special investigation headed by trusted recent executive officers.”
That includes former Macy’s CFO and EVP Karen Hoguet, who served in the role from 1997 until she retired back in 2019. She now serves on Kroger’s (KR) Board of Directors. Elisa Garcia, former Macy’s Chief Legal Officer who retired last October, is another top choice of his, and Dan Reidy, who retired from Jones Day Law LLP.
Flickinger said “Karen and Ellen will be very decisive but also efficient and effective while minimizing investigative costs.” However, investors should note the investigation seems to be underway already.
Shares of Macy’s have dropped 20% year to date to $16 per share, far below the $24.80 per share buyout offer they rejected from Arkhouse and Brigade.
Here’s what Macy’s shared in its preliminary Q3 results, compared to Bloomberg consensus estimates:
Net sales: $4.74 billion versus $4.75 billion
Adjusted EPS: not reported versus -$0.01
Same-store sales: -1.3% versus -1.49%
The earnings developments come as Macy’s works on its Bold New Chapter Strategy. In the first 50 stores, where it’s making investments in more staffing, product assortment, alongside visual displays across the store, same-store sales grew for the third straight quarter, up 1.9% year-over-year, compared to the 0.8% in the previous quarter.
NEW YORK, NEW YORK – NOVEMBER 21: General view of holiday celebrations at Macy’s Herald Square on November 21, 2024 in New York City. (Photo by Eugene Gologursky/Getty Images for Macy’s) ·Eugene Gologursky via Getty Images
“You have different consumers looking for different things,” CEO Tony Spring said at Yahoo Finance’s Invest conference earlier this month. Shoppers are looking for “newness,” benefitting its luxury business, while other consumers are “looking for great value” and overall experience.
As part of the strategy, the company plans to close 55 stores in 2024 and 150 by 2026 while investing in its remaining locations. In Q3, the company saw asset sale gains of $66 million, compared to $61 million last year.
“We continue to believe that paring down the Macy’s store base to a more manageable (and profitable) size is prudent given structural shifts,” Dana Telsey of Telsey Advisory Group wrote in a note to clients.
As the company closes its “lowest-performing stores” and “store upgrades are implemented in the others,” same store sales are expected to improve, said Swartz in a client note.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on X at @BrookeDiPalma or email her at [email protected].
