Macy's warns of 'material weakness' in internal control, cuts outlook; stock falls

Investing.com -- Macy’s Inc (NYSE:M) disclosed a “material weakness” in its internal controls for financial reporting, specifically related to manual journal entries for delivery expenses and certain other non-merchandise expenses. The retailer also slashed its annual profit forecast, sending its shares tumbling more than 10% in premarket trading Wednesday. 

The company identified deficiencies in the design of its controls, noting that the controls did not adequately account for the risk of employees bypassing them. This oversight affected the accuracy of accrued liabilities tied to delivery and other non-merchandise costs.

“The Company identified that a single employee, who is no longer with the Company, intentionally made erroneous accounting entries and falsified underlying documentation, to understate delivery expenses from the fourth quarter of 2021 through the third quarter of 2024,” Macy’s said in a 8-K filing.

The retailer stated that it is committed to resolving the issue and has started implementing changes to strengthen its internal controls. These efforts include re-evaluating the risk of employee circumvention and redesigning control processes to better address these risks.

“As the Company evaluates and enhances its internal control over financial reporting, it may take additional measures to modify, or add to, the remediation measures,” Macy’s added.

The announcement comes alongside Macy’s results for the third quarter and guidance. It lowered its annual profit outlook, and now forecasts an annual adjusted profit per share of $2.25 to $2.50, down from its previous estimate of $2.34 to $2.69, which had been revised following the accounting error.

The company attributed the revision to sluggish sales at its flagship stores, which have prompted greater reliance on holiday season promotions.

As part of its cost-cutting measures, Macy's has been closing underperforming locations and has increased its store closure target for this year to 65, up from 55 announced in August.

The department store chain also lifted its annual net sales target to $22.3 billion to $22.5 billion, up from $22.1 billion to $22.4 billion expected earlier.

For the third quarter, Macy’s reported earnings per share of $0.04, outperforming the $0.01 per share loss that analysts expected. Revenue for the period came in at $4.74 billion, in line with consensus estimates.