- Macy’s finally released its third-quarter earnings on Wednesday after having to delay it due to a massive accounting scandal caused by one employee. The employee, who no longer works for Macy’s made one mistake that led to years of coverup.
We’re right in the middle of the holiday season, and Macy’s is making news—not just for its Thanksgiving Day parade and Black Friday sales—but for finally closing the book on a massive accounting error. On Wednesday, Macy’s announced it had just completed an investigation into a $151 million accounting error, and pinned it on a single employee.
In late November, the department store chain announced it would delay its third-quarter earnings release and conference call to complete an investigation and forensic analysis into delivery expenses in one of its accrual accounts. The investigation revealed that one employee “intentionally made erroneous accounting accrual entries,” ultimately hiding more than $150 million in delivery expenses from Q4 2021 through the fiscal quarter that ended Nov. 2.
The investigation found the employee (who is no longer working at Macy’s), had made one accounting mistake in late 2021, which snowballed into years of coverup, a person briefed on the probe told The Wall Street Journal.
“We’ve concluded our investigation and are strengthening our existing controls and implementing additional changes designed to prevent this from happening again and demonstrate our strong commitment to corporate governance,” Tony Spring, chairman and CEO of Macy’s, said in a statement. “Our focus is on ensuring that ethical conduct and integrity are upheld across the entire organization.”
The employee told investigators they had mistakenly understated the amount of small parcel delivery expenses in late 2021, the person briefed on the probe told WSJ, and they continued to intentionally make erroneous accounting entries to mask the mistake. Macy’s confirmed in a statement the employee worked on small package delivery expense accounting, but didn’t provide further information about them.
The employee “didn’t act out of personal or financial gain,” the person briefed on the probe told WSJ, and Macy’s confirmed on Wednesday this investigation didn’t impact Macy’s revenue, cash, inventory, or vendor payments.
“This was not theft,” Adrian Mitchell, Macy’s chief financial officer and chief operating officer, said during an analyst call. “There was no impact to revenues, and there was no impact to cash or inventories as all vendors were fully paid.”
Macy’s didn’t immediately respond to Fortune’s request for comment as to how its auditor, KPMG, didn’t catch the errors. KPMG declined Fortune’s request for comment.
Macy’s pays for accounting scandal
Although Macy’s was forthright about the massive accounting error, its stock paid the price. On the day Macy’s announced it had to delay its third-quarter earnings results, its stock price dropped 3.5%.
On Wednesday, Macy’s also officially released its third-quarter results since the accounting investigation had been completed. Net sales dropped 2.4% to $4.7 billion, showing lower overall retail activity Macy’s also lowered its full-year earnings outlook and cut its guidance, saying it expects adjusted diluted earnings per share of $2.25 to $2.50. Macy’s shares tumbled 10% in premarket trading on Wednesday.
The accounting investigation caps off a challenging year for Macy’s. In January, the retailer announced it would lay off 3.5% of its workforce and rejected a $5.8 billion takeover from hedge fund Arkhaus Management and investment manager Brigade Capital Management. In February the chain announced it would close 150 underproductive stores during the next three years after fourth-quarter 2023 losses and declining sales.
But the company has made the choice to focus on the Macy’s locations the company believes have the most opportunity for growth.
“Over a number of years, we’ve seen that business decline over time, but we decided to make what I would call some bold moves,” Adrian V. Mitchell, Macy’s chief operating officer and chief financial officer, told Fortune’s Sheryl Estrada for the Nov. 11 CFO Daily newsletter. “There’s so much that we’re learning as we’re really peeling back the onion on how to make this business better and even healthier.”
Spring also said he’s “encouraged” by third-quarter sales growth at the 50 store locations where it introduced better merchandising and improved in-store experiences by hiring more staff and improving visual displays.
“Quarter-to-date, comparable sales continue to trend ahead of third quarter levels across the portfolio,” Spring said. “Looking ahead, we remain committed to achieving sustainable, profitable growth for Macy’s.”