8-K: Macy's Reports Q3 Results, Corrects Prior Accounting Errors, and Updates Guidance

Macy's announced its third-quarter 2024 financial results, which included revisions to correct past accounting errors related to delivery expenses, and updated its full-year guidance.

Summary

• Macy's reported a 2.4% decrease in net sales to $4.7 billion for the third quarter of 2024, with comparable sales down 1.3% on an owned-plus-licensed-plus-marketplace basis.
• The company identified a $151 million cumulative misstatement of delivery expenses from Q4 2021 through Q3 2024 due to a single employee's fraudulent actions, which led to revisions of historical financial statements.
• Despite the accounting errors, Macy's determined that the impact was not material to any prior annual or interim period.
• The company's 'First 50' locations showed a 1.9% increase in comparable sales, while Bloomingdale's and Bluemercury also reported positive comparable sales growth of 3.2% and 3.3% respectively.
• Macy's adjusted diluted earnings per share for the quarter was $0.04, exceeding prior guidance, and included a $0.04 adjustment to reflect the delivery expense correction.
• The company has updated its full-year 2024 guidance, projecting net sales between $22.3 billion and $22.5 billion, and adjusted diluted earnings per share between $2.25 and $2.50.
• A material weakness in internal control over financial reporting was identified, related to manual journal entries for delivery expenses, and the company is implementing remediation measures.
• Macy's voluntarily retired $220 million of debt during the quarter through a tender offer.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the decrease in sales, the discovery of a significant accounting error, and the identification of a material weakness in internal controls. However, there are some positive aspects, such as the performance of the 'First 50' locations, Bloomingdale's, and Bluemercury, and the updated guidance, which temper the overall negative sentiment.

Positives

• The 'First 50' Macy's locations showed positive sales growth, indicating the success of targeted investments.
• Bloomingdale's and Bluemercury continue to perform well, demonstrating strength in their respective markets.
• Macy's adjusted diluted earnings per share exceeded prior guidance for the third quarter.
• The company is actively addressing the identified material weakness in internal controls.
• Macy's has taken steps to reduce its debt through a tender offer.
• The company's updated full-year guidance indicates a positive outlook despite challenges.

Negatives

• Macy's overall net sales decreased by 2.4% in the third quarter of 2024.
• Comparable sales for Macy's were down 1.3% on an owned-plus-licensed-plus-marketplace basis.
• A significant $151 million misstatement of delivery expenses was discovered due to employee fraud.
• The company identified a material weakness in its internal control over financial reporting.
• Gross margin rate decreased by 60 basis points.
• Selling, general and administrative expenses increased by $24 million.

Risks

• The company faces risks related to the implementation of its 'Bold New Chapter' strategy.
• There are potential risks associated with real estate transactions and changes in interest rates.
• Macy's is exposed to competitive pressures from various retail channels.
• The company is vulnerable to potential systems failures and security breaches.
• There are risks related to reliance on foreign sources of production and potential disruptions to imports.
• The company is subject to the effects of weather, inflation, inventory shortages, and labor shortages.
• The company's performance is subject to general consumer spending levels and the availability of consumer debt.

Future Outlook

Macy's updated its full-year 2024 guidance, projecting net sales between $22.3 billion and $22.5 billion, comparable owned-plus-licensed-plus-marketplace sales change down approximately 1.0% to flat versus 2023, a gross margin rate of 38.2% to 38.3%, adjusted EBITDA as a percent of total revenue of 8.0% to 8.4%, and adjusted diluted earnings per share between $2.25 and $2.50.

Management Comments

• Tony Spring, chairman and chief executive officer of Macy's, Inc., stated that the third quarter results reflect the positive momentum the company is building through its 'Bold New Chapter' strategy.
• Spring also mentioned that they are encouraged by the consistent sales growth in the Macy's First 50 locations and the strong performance of Bloomingdale's and Bluemercury.
• Spring emphasized the company's commitment to achieving sustainable, profitable growth.
• Spring stated that the company has concluded its investigation into the delivery expense issue and is strengthening existing controls and implementing additional changes to prevent recurrence.
• Spring also stated that the company's focus is on ensuring that ethical conduct and integrity are upheld across the entire organization.

Industry Context

Macy's results reflect the ongoing challenges faced by traditional department stores in a competitive retail landscape, with the company focusing on strategic initiatives like the 'First 50' locations and growth in its Bloomingdale's and Bluemercury brands to drive sales. The company is also adapting to the changing retail environment by focusing on digital sales and cost management.

Comparison to Industry Standards

• Macy's comparable sales decline of 1.3% is in line with the challenges faced by many traditional department stores, such as Nordstrom and Kohl's, which have also reported declining sales in recent quarters.
• The growth in Macy's 'First 50' locations is a positive sign, similar to how other retailers are focusing on improving performance in key locations.
• Bloomingdale's and Bluemercury's positive comparable sales growth is a bright spot, outperforming many of their department store peers and demonstrating the strength of their luxury and beauty segments.
• The discovery of a $151 million accounting error is a significant issue, and while deemed immaterial by the company, it raises concerns about internal controls, which is a common challenge for large retailers with complex operations.
• Macy's updated guidance reflects a cautious outlook, similar to other retailers who are navigating economic uncertainty and changing consumer behavior.

Corporate Governance

Stakeholder Impact

• Shareholders may be concerned about the accounting errors and internal control weaknesses, potentially impacting the stock price.
• Employees may be affected by the changes in internal controls and the company's focus on ethical conduct.
• Customers may not be directly impacted by the accounting issues, but the company's performance could affect their shopping experience.
• Suppliers and creditors may be indirectly affected by the company's financial performance and any changes in its operations.

Next Steps

• The company will continue to implement changes to improve its internal control over financial reporting.
• Macy's will file its Form 10-Q for the fiscal quarter ended November 2, 2024 with the SEC on December 12, 2024.
• The company will continue to execute its 'Bold New Chapter' strategy.
• Macy's will monitor and respond to the impact of the delivery expense adjustment on its financial results.

Key Dates

Keywords

Macy's, Financial Results, Retail, Comparable Sales, EBITDA, Accounting Error, Internal Control, Guidance, Delivery Expenses, Bloomingdale's, Bluemercury