To The Moon

$Macy's(M)$ will be delaying the release of its third quarter results until December 11, due to an accounting issue. During the preparation of its financial statements, the company identified that an employee responsible for small package delivery had made incorrect accounting entries to conceal delivery expenses ranging from $132 million to $154 million. That individual is no longer employed by the company.

Macy's stated that the erroneous entries did not affect its cash management or vendor payments. However, the earnings release and conference call have been delayed to allow time for an independent investigation to be completed. The company's stock dropped 3.4% following the announcement.

In the meantime, Macy's shared preliminary results, reporting a 2.4% decline in third-quarter net sales.

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Performance Review

Macy's third-quarter performance for fiscal 2024 has been overshadowed by a significant accounting issue. The company discovered that an employee responsible for small package delivery expenses intentionally hid $132–$154 million in expenses through erroneous accounting entries between Q4 2021 and the current quarter. Macy's has delayed the release of its full Q3 financial results to complete an independent investigation, which is expected to conclude by December 11, 2024. The implicated employee is no longer with the company, and no further employee involvement has been identified. The company emphasized that the issue did not impact cash management or vendor payments.

Preliminary results indicate that net sales dropped 2.4% year-over-year to $4.74 billion, slightly exceeding analysts' estimates. Macy’s is also optimistic about its holiday season performance, with comparable sales in November showing improvement relative to Q3 trends​.

EPS Declining

Market Sentiment

Market sentiment around Macy's has been largely cautious due to the delayed Q3 earnings report following the accounting irregularities. Investors reacted negatively, with Macy's stock falling 3.4% shortly after the announcement. Concerns are primarily centered on corporate governance, transparency, and the implications of the hidden $132–$154 million in expenses, despite reassurances that cash management and vendor payments remain unaffected.

Analysts have also noted a mixed picture for Macy's operational performance. While net sales decreased 2.4% year-over-year, the decline was marginally better than expectations. November's improved comparable store sales provided a glimmer of hope, signaling potential recovery as Macy's approaches the crucial holiday season.

Challenges

Declining Sales Trends: A 2.4% drop in Q3 net sales reflects ongoing struggles in maintaining customer engagement amid increased competition from e-commerce giants like Amazon and value-focused retailers such as Walmart and Target​.

Macroeconomic Headwinds: Inflationary pressures and interest rate hikes have reduced discretionary spending power, particularly for middle-income consumers, who represent a core customer base for Macy’s​.

Inventory Management: Macy's has faced challenges in balancing inventory levels, a critical factor in mitigating markdowns and optimizing margins, especially during uncertain consumer demand patterns.

Dependence on Holiday Season: A large portion of Macy's annual revenue is generated during the fourth quarter. Any disruptions to holiday sales, whether from macroeconomic conditions or operational issues, could disproportionately impact performance.

Risks

Reputation Damage: The accounting issue may erode trust among investors and customers, affecting Macy's brand equity and its attractiveness as an investment.

Execution Risk in Strategic Initiatives: Macy's omnichannel and cost-cutting strategies must be executed effectively to remain competitive. Missteps could lead to further sales declines or profitability erosion.

Rising Operating Costs: Higher labor, supply chain, and delivery expenses could compress margins, particularly if sales growth does not offset these costs​.

Market Competition: With the retail landscape rapidly evolving, Macy's faces risks from e-commerce platforms, direct-to-consumer brands, and more agile competitors.

Investment Highlights

Bullish Perspective:

1. Resilience in Retail: Despite a 2.4% decline in Q3 net sales, Macy's has shown resilience by exceeding analyst expectations. Improving comparable sales in November suggest the potential for a strong holiday season, a critical driver for retail performance​

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2. Omnichannel Strategy: Macy's continues to integrate its physical stores with a robust online presence. This approach positions it well in a competitive retail landscape and leverages its established brand recognition.

3. Cost Control Post-Investigation: Addressing the accounting issue and enhancing internal controls could rebuild investor confidence and ensure greater financial discipline going forward.

Bearish Perspective:

Governance Concerns: The $132–$154 million expense concealment raises red flags about oversight and internal processes, potentially deterring risk-averse investors until full transparency is restored​.

Macroeconomic Pressures: High inflation and potential reductions in consumer spending power could weigh on discretionary retailers like Macy's.

Declining Sales Quarterly

Declining Sales Trends: While November's performance appears positive, the overall 2.4% drop in Q3 net sales highlights ongoing challenges in driving growth.

Conclusion:

Investors with a long-term perspective might view Macy's as a value play, especially if it successfully addresses governance issues and capitalizes on operational strengths. However, short-term risks tied to the investigation, market conditions, and competitive pressures require careful monitoring.