Dive Brief:
- Macy’s Inc. is delaying its Q3 earnings results in order to complete an investigation into accounting irregularities, following its discovery that an employee had purposely hidden between $132 million to $154 million in delivery expenses. The company's Q3 report had been scheduled for Tuesday.
- The “erroneous accounting accrual entries” were from Q4 2021 to Q3 this year and didn’t affect the department store’s cash management or vendor payments, per a financial filing. The person involved is no longer employed at Macy’s, and no one else has been implicated.
- The retailer issued preliminary Q3 results: Net sales fell 2.4% year over year to $4.7 billion, with comps, including licensed and marketplace sales, down 1.3%. Macy’s net sales fell 3.1%, with overall comps down 2.2% and “first 50” comps up 1.9%; Bloomingdale’s rose 1.4%, with comps up 3.2%; and Bluemercury rose 3.2%, with comps up 3.3%.
Dive Insight:
Macy’s Inc. CEO Tony Spring may be ready to turn the page on 2024.
Spring took the helm in February, as a takeover battle was heating up and with the namesake banner in need of a turnaround. It wasn’t until July that the company officially spurned what had grown to a $6.9 billion bid from activist firms Arkhouse Management and Brigade Capital Management.
Now the company has had to postpone its earnings report after the discovery of accounting inaccuracies that date from 2021. That raises questions of potential incompetence by its auditors and fuels concerns about its performance, according to GlobalData Managing Director Neil Saunders.
“The delay in Macy’s full third quarter results is not a good look,” Saunders said in emailed comments.
In a statement, Spring said that Macy’s promotes “a culture of ethical conduct” and that the inquiry is ongoing.
“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,” he also said.
Much is riding on the season: Macy’s Inc. last year derived 65% of its annual operating profit from the fourth quarter, according to analysis from S&P Global Ratings earlier this month. In another statement, Spring noted that comparable sales at all banners so far this month have improved compared to the third quarter.
“The majority of the quarter is still very much ahead of them,” Evercore ISI analysts led by Michael Binetti said in a Monday client note.
Those analysts downplayed the likely effect of the problematic expense accounting on Macy’s overall results, estimating that in the end, for the duration of the fraud, there will be a 20 basis-point hit to cumulative gross margin.
“We think Macy’s found out recently and doesn’t have the full details yet prepared to give a completed gross margin and [earnings per share] update (thus the delayed earnings release),” Binetti said, adding that there’s much that Macy’s doesn’t yet know. Based on conversations with Macy’s, the company can’t comment on where exactly the inaccurate reporting of delivery expenses falls, so it can’t say how much it impacts year-over-year comparisons, or whether it can reaffirm its gross margin guidance for Q3 and the full year, according to Evercore.
Still, the accounting snafu distracts from the fact that overall Macy’s had a decent Q3. The 1.3% comp decline beat Evercore’s estimate, and its “first 50” stores — those that have been revamped — had their third straight quarter of positive comps. Comps at those locations rose 1.9% year over year, Macy’s said.
The company’s “other revenue” fell 9.6% to $161 million, including a 15.5% credit card revenue decline to $120 million and a 13.9% ad revenue increase to $41 million, “reflecting higher advertiser and campaign counts,” per Macy’s release.
Many of the department store’s rivals — even off-price retailers that have been taking market share — “are barely achieving the low end of their [comp] guidance,” according to Evercore’s Binetti.
“While the fraud notice is very unfortunate, we think pre-releasing this today shifts the focus to a very small accounting error and takes the focus away from what would’ve otherwise been viewed as a very strong quarter for Macy’s,” he said.
