Macy’s Inc. has lowered its profit forecast following an internal investigation that revealed an employee concealed millions of dollars in delivery expenses. This discovery has led to adjustments in the company’s financial outlook and a renewed focus on strengthening internal controls.
Table Content:
Expense Misstatement Impacts Financial Projections
The misstatement of delivery expenses will negatively impact Macy’s gross margin and adjusted earnings per share by $79 million for the full year, with the majority of the impact expected in the fourth quarter. Consequently, Macy’s has revised its earnings per share guidance to a range of $2.25 to $2.50, down from the previous projection of up to $2.90. The company also lowered its projected gross margin rate.
Following the announcement, Macy’s shares experienced a decline in trading, reflecting investor concern about the financial implications of the concealed expenses.
Investigation Findings and Remedial Actions
Macy’s investigation concluded that the misstatement stemmed from accounting errors by a former employee who hid approximately $151 million in delivery expenses over several quarters. The company emphasized that the investigation found no evidence of missing cash, unpaid vendors, or any material impact requiring restatements of previously filed financial statements. Revised financial information for the affected fiscal years has been published.
CEO Tony Spring affirmed the company’s commitment to preventing similar incidents in the future. “We’ve concluded our investigation and are strengthening our existing controls and implementing additional changes designed to prevent this from happening again,” he stated. Spring later clarified that the former employee acted alone and did not conceal the expenses for personal gain. CFO Adrian Mitchell explicitly stated, “This was not theft.”
Internal Control Weakness and Corrective Measures
Macy’s acknowledged a “material weakness” in its internal controls related to manual entries of delivery and other expenses. This weakness highlights a failure in the company’s internal processes to ensure accurate financial reporting. The company confirmed the former employee falsified documentation to conceal the misstated expenses.
Experts in accounting and internal controls emphasize the importance of multiple layers of review and approval for manual accounting entries to prevent errors and fraud. Macy’s is implementing changes to enhance its internal controls, including a reassessment of the risk of employee circumvention.
Furthermore, Macy’s stated that its auditor, KPMG LLP’s, previous opinion on the effectiveness of the company’s internal financial reporting controls should no longer be relied upon due to the identified material weakness.
Raised Sales Forecast and Strategic Pressures
Despite the accounting issue, Macy’s raised its full-year sales outlook, citing continued consumer interest in shopping. The company now projects net sales between $22.3 billion and $22.5 billion, up from the previous forecast.
However, Macy’s faces ongoing pressure from activist investors urging the company to restructure its operations, including the potential spin-off of its Bloomingdale’s and Bluemercury brands. Macy’s maintains its current strategy focused on optimizing performance at its most profitable locations.
Conclusion
The discovery of concealed expenses at Macy’s underscores the critical importance of robust internal controls in ensuring accurate financial reporting. While the company has revised its profit outlook and is taking steps to address its internal control weaknesses, the incident raises questions about the effectiveness of its previous safeguards. The long-term impact on investor confidence and the company’s strategic direction remains to be seen. Macy’s commitment to strengthening its internal controls and its revised sales forecast suggest a path forward, but the company will need to demonstrate sustained improvements to regain full trust in the market.
