By Jordyn Holman
With just two weeks until Christmas, Macy’s has been operating under a cloud.
It lifted, in part, when the retailer on Wednesday gave more details about how an employee had hidden more than $150 million in expenses over the past few years. The company said the effect was not “material,” but it had to revise its previous accounts and lower its forecast for profits this year. That was unwelcome news as it enters the most important selling season.
Macy’s said 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. On a call with analysts, Adrian Mitchell, Macy’s finance chief, said the error was not made for personal financial gain.
“This was not theft,” he said. “There was no impact to revenues, and there was no impact to cash or inventories, as all vendors were fully paid.” The company said it was taking measures to improve its financial controls.
But concerns still remain about how the retailer will turn around weak sales and fend off activist investors pushing for major changes.
Macy’s slightly raised its full-year forecast for revenue, but still expected a slight decline in comparable sales. After making adjustments for the accounting error, it also cut its forecast for profitability, hitting its already beleaguered stock, which fell 6%.
Macy’s said its operating income last quarter fell 23% 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 its CEO, Tony 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 from previous attempts to revive the chain: store closures, better in-store experience, wider profit margins.
The retailer said it planned to close about 65 stores this fiscal year, which ends in early 2025.
“Macy’s is constantly downsizing and hoping that the turnaround plans will improve the performance of the remaining stores,” 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.
In November, Kohl’s said comparable sales dropped 9.3% in its latest quarter. On a call with analysts, Tom Kingsbury, the retailer’s CEO, said the weakness was partly attributable to the economy and “squeezed” consumers, in addition to company-specific factors such as its marketing and product range. “It’s up to us to fix it,” he said. His successor, Ashley Buchanan of Michael’s, will take over as CEO 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.
Spring said that Macy’s saw strong sales in fragrances and that demand for women’s handbags had slightly improved. The company said warmer-than-usual weather had hurt sales in the autumn; it discounted some of its seasonal merchandise.
The next few weeks are crucial for Macy’s, which refers to itself as “the ultimate go-to for gifting.” It recorded 35% 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, Chen said. “They’re just prioritizing the critical gifts.”
Macy’s forecast for the rest of the year assumes the pressures on consumers will persist, and it is looking to attract cost-conscious consumers while also maintaining profitable growth.
“We’re navigating a number of things,” Mitchell, the company’s finance chief, said. “We’re navigating weather. We’re navigating a competitive environment. We’re navigating a variety of promotions.”
Swartz 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%.
“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 about 20% since the start of the year.
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