By Sabrina Escobar
Macy's dealt investors a wild card Monday, reporting that an employee had hid more than $100 million in expenses.
The company said one of its employees had intentionally made erroneous accounting entries to hide approximately $132 million to $154 million of delivery expenses from the fourth quarter of 2021 through the latest quarter, ended Nov. 2, 2024.
Macy's postponed its fourth-quarter earnings release, originally due Tuesday morning, until Dec. 11 while it wraps up an investigation into the accounting errors.
The news sent Macy's stock down more than 2% Wednesday, to $15.93, bringing its year to date loss to just over 20%. Macy's has been struggling to convince investors about the strength of its business model, and the latest revelation didn't help.
While there is a lot we don't know yet about the accounting issue -- including the employee's motivation -- here is what we do know so far:
Macy's Accountant
KPMG has been Macy's auditor since 1988, according to Macy's annual filing with the Securities and Exchange Commission, submitted in March.
The firm gave Macy's finances a stamp of approval earlier this year.
"The consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 3, 2024 and January 28, 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended February 3, 2024, in conformity with U.S. generally accepted accounting principles," reads the statement from KPMG's team that accompanied Macy's 10-K.
A representative for KPMG declined to comment for this article.
Potential Earnings Impact
Evercore ISI analyst Michael Binetti estimates that the accounting error could amount to what he described as an "immaterial" 20-basis-point (or 0.2 of a percentage point) reduction to cumulative gross margins over the three-year period. He posits that the company found out recently and doesn't yet have the full details that would enable it to provide a complete margin and earnings update -- hence, the postponed earnings release.
It is likely the retailer will provide more insight when it releases its final earnings report. Meanwhile, the news could "cause increased uncertainty" about the company, wrote Ashley Helgans, an analyst at Jefferies.
Third-Quarter Sales Were OK
Macy's released preliminary results for the quarter ended Nov. 2. While net sales decreased 2.4%, to $4.742 billion, from a year ago, the results were largely in line with analysts' expectations. Encouragingly, same-store sales at Macy's First 50 locations, a group of stores in which Macy's is testing new initiatives, rose 1.9%, marking the third consecutive quarter of growth. Luxury brands Bloomingdale's and Bluemercury also notched positive comparable-store sales.
November also got off to a good start, the company said, which bodes well for holiday sales trends.
The Market's Reaction
Although Macy's stock fell on Monday, the real loss, Evercore's Binetti notes, is that the accounting errors shifted the focus away from what the market may have perceived as an otherwise good quarter from Macy's.
"This could've been a positive stock catalyst that is now focused on a lack of detail around a 20bp accounting issue," he wrote in a note Monday. "No change to our earnings assumptions until we hear more detail."
Lorne Bycoff, CEO of The Bycoff Group, an investment firm, says he is optimistic that this is a one-off issue, rather than a systemic issue related to the company's accounting practices.
Bycoff had recently been considering buying Macy's stock. He is still upbeat on the stock, noting it has several things working in its favor, including the strength of its luxury brands and a relatively low entry price. But, he added, he's in no rush to jump in -- at least not until the company provides more assurance that the issue is resolved.
"These things do happen," he said. "They obviously caught it and are rectifying it. I definitely want to make sure their accounting practices are shored up going forward, but I try to do my best to give the benefit of the doubt."
Investors Have Questions
Macy's hasn't identified the employee, but has said the employee no longer works at the company. Nor has it shared how the employee erred in making "erroneous accounting accrual entries" or perpetuating these missteps.
Bycoff, like other potential -- and current -- Macy's investors, has plenty of questions for Macy's management, and will likely pay close attention to the company's next earnings call for more details.
In particular, Bycoff said, he would like to know what checks and balances the company will implement to prevent a similar mistake from happening again.
Binetti wants more clarity on whether the expenses skewed earlier or later in the roughly three-year period -- chiefly to determine how much this affects the profit and loss statement for the current fiscal year.
Write to Sabrina Escobar at sabrina.escobar@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 25, 2024 16:49 ET (21:49 GMT)
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