Inside Macy's $151 million accounting error

Macy’s, the iconic retail giant, recently disclosed a significant accounting misstatement involving $151 million in cumulative delivery expenses, spanning over three years.

The disclosure, while not materially affecting the company’s financial health or previously reported results, raises critical questions about corporate oversight and accounting integrity in one of America’s most recognisable brands.

The issue, which surfaced during the preparation of Macy’s unaudited third-quarter financial statements for 2024, has prompted the company to implement stricter internal controls. With an independent investigation concluded, Macy’s is now revising its historical financial statements while moving decisively to prevent similar incidents.

A $151 Million Oversight: What Happened?

The issue stemmed from the actions of a single employee responsible for the accounting of small-package delivery expenses. According to Macy’s, the employee intentionally made erroneous accrual entries to hide approximately $151 million in cumulative delivery expenses. This practice dated back to the fourth quarter of 2021 and continued through the third quarter of 2024.

Despite the scale of the misstatement, Macy’s investigation confirmed that it did not affect reported net cash flows, inventories, or vendor payments. The company emphasised that the accounting error had no material impact on its historical financial results. Macy’s subsequently revised affected financial statements to correctly reflect delivery expenses and associated tax effects.

“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. Our focus is on ensuring that ethical conduct and integrity are upheld across the entire organisation,” said Tony Spring, chairman and chief executive officer of Macy’s.

Macy’s filed a Form 8-K with the US Securities and Exchange Commission (SEC) outlining the revisions and additional financial details. These amendments underscore the company’s resolve to maintain transparent and accurate financial reporting.

Reinforcing Governance and Controls

In response to the incident, Macy’s has begun implementing a range of measures to bolster internal controls. This includes enhancing forensic accounting practices, introducing stricter oversight protocols, and reinforcing employee training on ethical accounting practices. The company hopes these measures will rebuild trust with investors and stakeholders.

The incident highlights the broader challenges faced by corporations in managing accounting integrity and employee oversight. While Macy’s ability to contain the issue before it caused significant damage is commendable, the episode serves as a cautionary tale for organisations globally about the importance of proactive governance.

Third-Quarter Performance Reflects Resilience

Amid the turbulence surrounding the accounting issue, Macy’s reported its third-quarter 2024 results, showcasing resilience and strategic progress. Net sales declined by 2.4% year-over-year to $4.7 billion, while comparable sales decreased by 2.4% on an owned basis and 1.3% on an owned-plus-licensed-plus-marketplace basis. However, some bright spots emerged.

The company’s “Macy’s First 50” locations delivered a 1.9% increase in comparable sales, marking the third consecutive quarter of growth. Bloomingdale’s also performed well, with owned comparable sales up 1.0% and owned-plus-licensed sales rising by 3.2%. Bluemercury, Macy’s luxury beauty retailer, extended its streak of comparable sales growth to 15 consecutive quarters, posting a 3.3% increase.

Despite these gains, the company’s overall gross margin rate declined slightly to 39.6%, driven by shifts in product mix and the adoption of cost accounting. Adjusted diluted earnings per share (EPS) came in at $0.04, exceeding prior guidance and showcasing Macy’s ability to navigate challenging market conditions.

Tony Spring attributed the positive momentum to the company’s “Bold New Chapter” strategy. “Our third-quarter results reflect the positive momentum we are building through our Bold New Chapter strategy,” Spring said. “Looking ahead, we remain committed to achieving sustainable, profitable growth for Macy’s.”

Updated Guidance and Strategic Path Forward

Macy’s has updated its annual outlook to reflect adjustments stemming from the delivery expense issue. The company now expects net sales between $22.3 billion and $22.5 billion, with comparable sales forecasted to range from a 1.0% decline to flat versus 2023. Adjusted diluted EPS is projected to fall between $2.25 and $2.50, reflecting the adjustments and accounting corrections.

The company’s strategic focus remains centred on its “Bold New Chapter” strategy, which prioritises investments in flagship locations, digital transformation, and customer-centric initiatives. Macy’s also continues to monetise non-core assets, achieving $66 million in asset sale gains during the quarter.