Macy's tightens financial controls after employee covered up what became a $151 million mistake

NEW YORK (AP) — Macy's said Wednesday that it has tightened internal financial accounting measures after completing a probe of a rogue employee who hid $151 million in delivery expenses over a span of nearly three years.

A probe into the coverup forced Macy’s to postpone the release of its full third-quarter earnings report late last month.

The intention of the employee was to cover up the mistake and not to steal the money, Chairman and CEO Tony Spring said on a call following the earnings report.

The employee told investigators that an error was initially made in accounting for small parcel delivery expenses, and then the person intentionally made errors to hide the mistake, according to source close to the probe but wanted to remain anonymous because of the private nature of the information.

While the company said Wednesday that former employee's obfuscation would have no material impact on company finances, it had to revise years of financial statements. Additional details of the probe were aired as the company's third quarter results and mixed outlook sent shares down by as much as 11% Wednesday.

Macy's reported falling profit and sales with the department store chain wrestling with cautious spending by customers, rising competition and sluggish demand for cold-weather goods. The New York retailer raised sales expectations for the year Wednesday, but lowered profit projections.

Shares did recover in late-day trading, and were down 2% to $16.33.

Spring said on a call that its internal investigation found that the employee, who acted alone and is no longer with the company, “did not pursue these acts for personal gain. ”

“Integrity is paramount at Macy’s Inc. and we promote a culture of ethical conduct,” Spring told industry analysts. “When discovered, we moved quickly to investigate and address the issue.”

The incident occurred during a rough operating environment for Macy's, whose shares have fallen more than 20% over the past year. Activist investor Barington Capital Group this week asked Macy's to develop a real estate subsidiary, reduce spending, and explore strategic options for Bloomingdale’s and Bluemercury chains, among other things.

Barington follows a number of attempts by other large investors that have attempted to revive the storied retailer.

In July, the retailer cut off monthslong buyout talks with two investment firms, saying the bid was inadequate and the financing was not certain. Macy’s said Arkhouse Management and Brigade Capital Management failed to provide it with additional information by its June deadline, including the highest price they would be willing to pay. Macy’s named two directors to its board backed by Arkhouse in April, ending the takeover attempt and a push by the investment firms to replace most of its board.

Spring, after taking over in February, announced a plan to close 150 stores, while upgrading another 350.

At the first 50 stores that Macy’s has upgraded, same store sales rose 1.9%. Macy’s is attempting to find a formula to reinvigorate sales. In the past year it has tested different tactics in dozens of stores, like more salespeople in fitting room areas and shoe departments. The so-called “First 50” strategy is also implementing more visual displays at the first stores to be overhauled.

It is also expanding its Bluemercury and Bloomingdale’s stores.

Macy's earned $28 million, or 10 cents per share, for the three-month period ended Nov. 2. That compares with $41 million, or 15 cents per share in the year-ago period.

Adjusted earnings was 4 cents per share, beating analysts projections by a penny, according to FactSet.

The company had already posted sales results late last month of $4.74 billion, slightly above the $4.72 billion Wall Street was expecting.

Comparable store sales fell 1.3%, better than the decline of 3.3% during the previous quarter.

Macy’s stores had a 2.2% comparable sales decline while Bloomingdale’s had a 2% increase. Same-store sales at Bluemercury rose 3.3%.

Sales of cold weather items have been challenging because of unseasonably warm weather, the company said. It will be hard to make up for those losses because the season between Thanksgiving and Christmas is five days shorter than last year, Macy's said.

The company now expects earnings per share to be $2.25 per share to $2.50 per share for the year, down from its previous estimate of $2.34 to $2.69. But it projected sales of $22.3 billion to $22.5 billion for the year, up from its previous forecast of $22.1 billion to $22.4 billion.

“We are encouraged by the consistent sales growth in our Macy’s First 50 locations and the strong performance of Bloomingdale’s and Bluemercury," Spring said. “Quarter-to-date, comparable sales continue to trend ahead of third quarter levels across the portfolio.”