Macy's employee who hid $151 million in delivery expenses was trying to mask initial mistake, sources say

• Macy's on Wednesday said it has concluded an investigation into an employee who intentionally hid about $151 million of delivery expenses.
• In a statement, CEO Tony Spring said the retailer is "strengthening our existing controls and implementing additional changes designed to prevent this from happening again and demonstrate our strong commitment to corporate governance."
• The department store operator cut its earnings outlook and slightly raised its full-year revenue forecast, while still projecting a sales decline.

Macy's on Wednesday said it has wrapped up an investigation into an employee who intentionally hid about $151 million of delivery expenses on its accounting books for nearly three years and has revised those years of its historical financial statements.

On the company's earnings call, CEO Tony Spring, who stepped into the role in February, stressed that "integrity is paramount at Macy's."

"The responsible individual is no longer with the company, following discovery of their actions," he said. "We've also identified and begun to implement additional controls to be a stronger and more disciplined organization so that an action like this could not happen again."

The department store operator delayed its full quarterly earnings in late November, after discovering the accounting issue while preparing its financial statements for the fiscal quarter and beginning an independent investigation. It said Wednesday that that investigation has ended and found there was not a material impact to financial results in previous years or quarters.

Macy's independent investigation found that "a single employee with responsibility for small package delivery expense accounting intentionally made erroneous accounting accrual entries and falsified underlying documentation," according to a financial filing with the Securities and Exchange Commission on Wednesday morning. The filing said the investigation found "material weakness in its internal control over financial reporting" that allowed the person to circumvent validating information with "manual journal entries."

Spring said on the company's earnings call that the investigation found the employee "acted alone and did not pursue these acts for personal gain."

The employee told investigators that a mistake was initially made in accounting for small parcel delivery expenses, and then the person made intentional errors to hide the mistake, according to sources familiar with the investigation who were not authorized to share details from the probe.

Macy's latest outlook

Shares of the company sank by about 6% in early trading, after Macy's lowered its full-year earnings outlook. The company cut its guidance, saying it expects adjusted earnings per share of $2.25 to $2.50, lower than its previous outlook of $2.34 to $2.69.

However, Macy's slightly raised its full-year sales forecast, while still projecting a decline from the prior year. Macy's said it expects net sales will be between $22.3 billion to $22.5 billion compared with the range of $22.1 billion to $22.4 billion that it previously anticipated. That would be a year-over-year drop from the $23.09 billion it reported for fiscal 2023.

For comparable sales for the full year, a metric that takes out the impact of store openings and closures, Macy's expects a decline of roughly 1% to about flat compared with the year-ago period. That's an improvement from the previous range of a decrease of about 2% to a decline of about 0.5%. That metric includes merchandise that Macy's owns, items from brands that pay for space within its stores and Macy's third-party online marketplace.

Macy's had cut its full-year forecast in August, and its latest guidance is still below the upper end of the outlook that it had earlier in the year.

Here is what the retailer reported for the fiscal third quarter compared with what Wall Street expected, according to a survey of analysts by LSEG:

• Earnings per share: 4 cents adjusted. It was not comparable with estimates due to the accounting treatment of the delivery accrual investigation.
• Revenue: $4.74 billion vs. $4.78 billion expected

In the three-month period that ended Nov. 2, Macy's net income fell to $28 million, or 10 cents per share, from $41 million, or 15 cents per share, in the year-ago quarter.

On the company's earnings call, Macy's CFO and COO Adrian Mitchell said the company's forecast assumes "current pressure on the consumer persists and that they will remain choiceful in their discretionary spend."

A warmer start to winter hurt the company's outlook, he said. Comparable sales trends have improved since the third quarter, but he said Macy's does not believe it can make up for all of the "lost cold weather product sales, especially given this year's shortened holiday season."

There are five fewer days between Thanksgiving and Christmas compared with the year-ago holiday season.

Update on turnaround efforts

Macy's, which is in the middle of a new turnaround effort, previously disclosed some quarterly metrics. The company said its third-quarter sales totaled $4.74 billion, a 2.4% year-over-year drop. It also reported a comparable sales decline of 1.3% across its owned and licensed businesses, plus its online marketplace.

Macy's namesake brand remains the weakest part of the company. In the most recent quarter, comparable sales for the segment fell 2.2% on an owned and licensed basis and including its third-party marketplace.

However, Macy's said sales trends are stronger at the stores where it's stepped up efforts. The company is closing about 150 of its namesake stores by early 2027, which will mean it has about 350 Macy's locations across the country. It has already increased staffing and investment at 50 of those stores that will remain open. At those locations, dubbed the "first 50," comparable sales grew 1.9%.

Mitchell said Macy's expects to close about 65 locations this year. The stores will close after the holidays.

On the company's earnings call, Spring said those results at the first 50 stores with additional investment "are the best leading indicator of the growth potential of the Macy's brand." He said Macy's will talk about its plans to expand beyond the first 50 on the fourth-quarter earnings call.

He said Macy's has seen improving sales in tailored clothing and dresses and strength in categories including fragrances and mattresses.

Spring said Macy's is also testing additional staffing in women's shoes and handbag departments at about 100 locations that will remain open beyond 2027. He said those stores have dedicated runners that get shoes from the stockroom or salespeople who can spend time with shoppers looking for a handbag. Those locations did roughly 7% better in those sales categories than in stores that did not receive additional staffing.

"This illustrates the importance of dedicated customer assistance in high touch point categories," he said.

Spring said the company is also coaching store workers and encouraging digital tools to improve customer service. He added it's emphasizing some brands over others as it sees what shoppers like.

As Macy's closes namesake stores, it's opening more locations of Bloomingdale's and beauty chain Bluemercury. Those continued to be the company's bright spots in the third quarter.

At Bloomingdale's, comparable sales climbed 3.2% on an owned-plus-licensed basis, including the third-party marketplace. And Bluemercury comparable sales increased 3.3%, marking the 15th consecutive quarter of comparable sales growth for the beauty brand.

Along with scrutiny over the accounting incident, Macy's has felt the heat from activist investors. On Monday, activist Barington Capital revealed it has a stake in the company and said it wants the retailer to make moves, including a potential sale of its luxury brands. It is the fourth time in the last decade that the legacy department store has been targeted by activists.