By Jordyn Holman
With only two weeks remaining until Christmas, Macy’s has been operating under a shadow.
This cloud partially lifted when the retailer provided further clarity on Wednesday regarding how an employee had concealed over $150 million in expenses across the past few years. The company indicated that the impact was not “material,” but it was necessary to adjust its earlier reports and lower its profit predictions for the year. This news was not welcome as it approaches the most significant selling season.
Macy’s disclosed in a filing that a single employee, who is no longer with the organization, “intentionally made misleading accounting entries and fabricated related documentation, to understate delivery costs” from late 2021 through the third quarter of this year. During a call with analysts, Adrian Mitchell, Macy’s finance chief, asserted that the mistake was not made for personal financial gain.
“This was not theft,” he explained. “There was no effect on revenues, and there was no impact on cash or inventory levels, as all suppliers were fully compensated.” The company stated it is implementing measures to enhance its financial controls.
However, worries persist regarding how the retailer will revitalize its weak sales and withstand activist investors advocating for significant changes.
Macy’s has slightly modified its full-year revenue outlook upward, but still anticipates a slight dip in comparable sales. After accounting for the accounting errors, it reduced its profitability forecast, affecting its already struggling stock, which fell by 6%.
Macy’s reported that its operating income for the last quarter decreased by 23% compared to the previous year. Inventory levels increased, indicating the addition of new merchandise that the company was looking to sell as it readied for its biggest sales quarter of the year.
Analysts who have tracked Macy’s for years perceive much larger obstacles beyond inadequate accounting practices.
“The condition of the company is generally poor,” remarked David Swartz, an analyst at Morningstar.
Macy’s, the leading department store chain in the United States, is currently undergoing its latest turnaround strategy, managed by its CEO, Tony Spring, a veteran of Bloomingdale’s who took over in February. Consumers are becoming more selective with their expenditures, and Macy’s has struggled to capture the attention of these more discerning shoppers.
The turnaround strategy, unveiled in February, aims to draw shoppers into its stores, enhance the quality of service and merchandise offered, and close locations that are no longer profitable. Many analysts argue that the plan resembles earlier attempts to revive the brand: store closures, an enhanced in-store experience, and improved profit margins.
The retailer plans to shut down around 65 stores this fiscal year, concluding in early 2025.
“Macy’s is continuously downsizing, banking on its turnaround strategies to enhance the performance of its remaining locations,” Swartz said. “However, historically, we haven’t witnessed success from these efforts, leading to a lack of confidence today as well.”
Department stores are facing challenges. Fewer customers are visiting malls, and brands that used to exclusively sell within Macy’s are establishing their own stores and building direct relationships with consumers.
“The shift in consumer behavior has moved them to places that are not traditional department stores,” noted Jessica Ramírez, an analyst at Jane Hali & Associates.
In November, Kohl’s reported a 9.3% drop in comparable sales for its latest quarter. During a call with analysts, Tom Kingsbury, the company’s CEO, indicated the decline was partly due to economic conditions and “squeezed” consumers, in addition to unique issues within the company such as its marketing and product assortment. “It’s up to us to resolve this,” he stated. His successor, Ashley Buchanan from Michael’s, will assume the CEO position in January.
Conversely, retailers like T.J. Maxx and Walmart have been experiencing sales growth in recent quarters, partly attributed to customers expressing satisfaction with the products available in these stores.
Spring stated that Macy’s experienced strong sales in fragrances and indicated that the demand for women’s handbags had improved slightly. The company noted that warmer-than-average weather negatively impacted autumn sales, leading them to discount some seasonal products.
The upcoming weeks are vital for Macy’s, which brands itself as “the ultimate go-to for gifting.” Last year, it generated 35% of its annual sales in the fourth quarter. Such heavy reliance on a single quarter could pose challenges for the company this year, as consumers are not spending as freely as they have in the past, remarked Oliver Chen, an analyst at T.D. Cowen.
“They are still feeling the effects of inflation and are being cautious about large purchases,” Chen stated. “They are prioritizing essential gifts instead.”
Macy’s projections for the remainder of the year assume that consumer pressures will linger, and it is seeking to engage cost-conscious shoppers while also pursuing profitable growth.
“We are navigating multiple factors,” Mitchell, the finance chief, remarked. “We are navigating the weather. We are navigating competitive challenges. We are navigating various promotions.”
Swartz noted that he observed a “glimmer of hope” in the 50 locations that Macy’s has identified as its future prospects, based on location, staffing, and other conditions. In the third quarter, the company reported a 1.9% increase in comparable sales at these stores.
“We cannot guarantee that this trend will continue,” he cautioned. “Therefore, confidence remains low, which is reflected in Macy’s stagnant stock price.”
The company’s stock has dropped approximately 20% since the beginning of the year.
