Macy's Shares Drop 10% Amid Accounting Irregularities and Lowered Profit Outlook

Macy's, Inc. (M) shares plummeted 10% on Wednesday after the company revealed accounting irregularities and lowered its full-year profit outlook. The retailer disclosed that an employee intentionally hid up to $154 million in delivery expenses over three years, leading to a delay in its Q3 earnings report. This news has raised concerns among investors about the company's financial management and transparency.

The accounting irregularities at Macy's involve a single employee who manipulated the retailer's accounting systems for three years, hiding approximately $132 to $154 million of cumulative delivery expenses. The employee, who is no longer with the company, acted alone, and there is no indication that other employees were involved. Macy's has launched an independent investigation into the matter and fired the responsible employee.

The discovery of these accounting irregularities has significant implications for Macy's credit rating and access to capital. As of 2024, Macy's has a market capitalization of $4.25 billion and a debt-to-equity ratio of 1.27, indicating a substantial reliance on debt financing. The accounting issues may raise concerns among creditors and rating agencies about the company's financial management and transparency. If the irregularities are deemed to have a material impact on Macy's financial statements, it could lead to a downgrade in its credit rating, increasing the company's cost of borrowing and potentially limiting its access to capital markets. Additionally, the ongoing investigation and delayed earnings report may further erode investor confidence, making it more challenging for Macy's to raise funds through equity offerings.

Macy's internal controls failed to detect the accounting irregularities due to a lack of oversight in the small package delivery expense accounting department. The employee responsible for this area intentionally hid expenses totaling up to $154 million over three years, likely due to a desire to make the company's financials look better. To prevent similar incidents in the future, Macy's should implement stricter internal controls, such as regular audits and increased scrutiny of financial reporting. Additionally, the company should ensure that its accounting software is equipped to detect and flag suspicious activities.

The delayed earnings report and lowered profit outlook for Macy's have understandably shaken investor confidence. The discovery of accounting irregularities, involving an employee hiding up to $154 million in expenses, raises concerns about the company's internal controls and financial reporting accuracy. To rebuild trust, Macy's should take the following steps:

1. Transparency and Communication: Macy's must provide detailed information about the investigation's findings, the employee's actions, and the measures taken to prevent similar incidents in the future. Regular updates will help maintain transparency and rebuild investor confidence.
2. Strengthen Internal Controls: Macy's should enhance its internal controls and auditing processes to ensure such incidents do not recur. This may involve investing in advanced accounting software, increasing the frequency of internal audits, and providing additional training for employees.
3. Independent Oversight: Appointing an independent committee or external auditors to oversee the investigation and recommend improvements will demonstrate Macy's commitment to transparency and accountability.
4. Meet or Exceed Expectations: Macy's must focus on delivering strong financial performance in the coming quarters. Meeting or exceeding earnings expectations will help restore investor confidence in the company's financial health and management's ability to navigate challenges.

By taking these steps, Macy's can work to rebuild investor trust and demonstrate its commitment to ethical business practices and strong financial management.