Macy's, Inc.: Form 10-Q for the period ended Nov 2, 2024

For purposes of the following discussion, all references to "third quarter of 2024" and "third quarter of 2023" are to the Company's 13-week fiscal periods ended November 2, 2024 and October 28, 2023, respectively. References to "2024" and "2023" are to the Company's 39-week fiscal periods ended November 2, 2024 and October 28, 2023, respectively.

The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes included elsewhere in this report, as well as the financial and other information included in the 2023 10-K. The following discussion contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed below and elsewhere in this report (particularly in "Risk Factors" and in "Forward-Looking Statements") and in the 2023 10-K (particularly in "Risk Factors" and in "Forward-Looking Statements"). This discussion includes Non-GAAP financial measures. For information about these measures, see the disclosure under the caption "Important Information Regarding Non-GAAP Financial Measures".

Quarterly Overview

The Company continues to view fiscal 2024 as a transition and investment year as it implements its new strategy, A Bold New Chapter, which is designed to return the Company to enterprise growth, unlock shareholder value, improve the omni-channel experience and better serve its customers. During the third quarter of 2024, the Company continued to make progress on its three-year Bold New Chapter strategy, as follows:

• .Strengthen the Macy's nameplate
• Rationalize store base: At the end of fiscal 2023, the Company announced it had identified approximately 150 underproductive Macy's locations for closure through fiscal 2026 (collectively, the "non-go-forward" locations), which will allow for monetization of these non-go-forward locations and prioritization of investments in the approximately 350 remaining Macy's locations (collectively, the "go-forward" locations) where the Company believes it has the most opportunity to improve square footage productivity. For the non-go-forward Macy's locations and distribution centers, the Company is thoughtfully and strategically approaching monetization to execute accretive deals and is encouraged by the pace and quality of deal activity to date. As a result, the Company now expects to close approximately 65 locations in fiscal 2024 versus its original expectations of roughly 50.
• Launch of First 50 Locations: The First 50 locations are a key component of the Macy's Bold New Chapter growth strategy as they are an early indicator for go-forward Macy's nameplate growth and ultimately the Macy's, Inc. go-forward business' ability to achieve comparable sales growth. They serve as pilots to test ideas with staffing initiatives, enhanced merchandising, visual presentation and eventing.

The First 50 achieved its third consecutive quarter of both comparable sales growth and improvement in Net Promoter Scores. Its Net Promoter Score improved approximately 400 basis points from the third quarter of 2023. The Company has been testing staffing in women's shoes and/or handbags in roughly 100 additional go-forward Macy's locations this fall. Compared to total Macy’s locations that are not in the First 50 or did not receive additional staffing, year-over-year women’s shoes and handbags sales outperformed by roughly 600 and 700 basis points, respectively.

• Revitalize assortment: The Company's focus on offering new product across categories is gaining traction. In the third quarter of 2024, Macy's reduced exposure to less-relevant brands, and expanded offerings in brands to which its customers are responding. Macy's is providing compelling fashion and value in its women's apparel private brands, including Charter Club and Style & Co. Additionally, fragrance continues to be a standout in performance during the third quarter of 2024.
• Rollout of additional Macy's small format stores: The Company opened six Macy's small format locations during the third quarter of 2024, bringing the total Macy's small format location count to 24.
• Grow digital: Digital continues to serve as both a gateway to the Macy's nameplate and a source of commerce and omni engagement. Macy's digital visits increased 0.4% while the conversion rate decreased 20 basis points compared to the third quarter of 2023.
• .Accelerate luxury growth
• The Company continues its plans to expand its luxury store footprint by approximately 20% through fiscal 2026.
• Bloomingdale's: Bloomingdale's returned to positive comparable sales in the third quarter of 2024, supported by continued strength in advanced contemporary apparel, as well as beauty and digital. Net Promoter Scores improved 70 basis points compared to the third quarter of 2023 and remain a strength for the Bloomingdale's nameplate.The Company expects to open approximately 15 additional small format (Bloomie's and Bloomingdale's the Outlet) locations through fiscal 2026. Two Bloomingdale's the Outlet locations opened in the third quarter of 2024, bringing the total Bloomingdale's small format count to 26.
• Bluemercury: Bluemercury achieved its 15th consecutive quarter of comparable sales growth driven by continued strength in skincare and the expansion of key brand partners both in skincare and fragrances. It opened eight new locations and completed four remodels in the third quarter of 2024. The new and remodeled stores elevate Bluemercury's service model, spa integration and product mix and continued to outperform the total Bluemercury fleet in the third quarter of 2024.
• .Simplify and modernize end-to-end operations
• The Company is actively advancing on solutions to reduce organizational complexity and generate cost savings to fund growth investments. During the third quarter of 2024, the Company realized lower fulfillment costs, optimized cash flow generation and improved Net Promoter Scores for product availability due to the continued focus on creating a more efficient fulfillment network. The Company is also phasing out legacy technology across the organization to deliver an improved customer experience.

Comparable sales highlights for the third quarter of 2024 versus the third quarter of 2023 related to components of a Bold New Chapter strategy are as follows:

• Macy's, Inc. comparable sales declined 2.4% on an owned basis and declined 1.3% on an owned-plus-licensed-plus-marketplace basis.
• Macy's, Inc. go-forward business comparable sales, inclusive of go-forward locations and digital across nameplates, declined 2.0% on an owned basis and declined 0.9% on an owned-plus-licensed-plus-marketplace basis.
• Company's nameplate highlights include:
• Macy's comparable sales declined 3.0% on an owned basis and declined 2.2% on an owned-plus-licensed-plus-marketplace basis. Macy's go-forward business comparable sales, inclusive of Macy’s go-forward locations and digital, declined 2.6% on an owned basis and declined 1.8% on an owned-plus-licensed-plus-marketplace basis.
• First 50 locations comparable sales, included within go-forward locations comparable sales, increased 1.9% on an owned basis and on an owned-plus-licensed basis.
• Bloomingdale's comparable sales increased 1.0% on an owned basis and increased 3.2% on an owned-plus-licensed-plus-marketplace basis1.
• Bluemercury comparable sales increased 3.3% on an owned basis.

1 Bloomingdale's excludes one non-go-forward location.

Results of Operations

Comparison of the Third Quarter of 2024 and the Third Quarter of 2023

(dollars in millions, except per share figures)

(a) Gross margin is not directly comparable to the prior year given the change in inventory valuation method from LIFO RIM to LIFO cost on February 4, 2024. Gross margin is defined as net sales less cost of sales.

See pages 30 to 33 for reconciliations of the supplemental non-GAAP financial measures to their most comparable GAAP financial measure and for other important information.

Net sales for the third quarter of 2024 decreased $118 million, or 2.4%, compared to the third quarter of 2023. Sales growth during the third quarter of 2024 at Macy’s First 50 locations, Bloomingdale’s, and Bluemercury was offset primarily by weakness in Macy’s non-First 50 locations as well as its digital channel and cold weather categories.

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The decrease in other revenues included a $22 million decrease in credit card revenues due to higher net credit losses, which were in-line with the Company's expectations. Macy's Media Network grew $5 million, or 14% from the third quarter of 2023, driven by higher advertiser and campaign counts.

Gross margin rate and merchandise margin rate2 decreased 60 basis points and 70 basis points, respectively, in the third quarter of 2024 compared to the third quarter of 2023. The decrease in both gross margin and merchandise margin rates primarily reflected the Company's change in inventory valuation method and product mix, partially offset by efficiencies in the Company's fulfillment network and lower shipped sales volume.

SG&A expenses increased $24 million, or 1.2%, in the third quarter of 2024 compared to the third quarter of 2023 primarily due to strategic customer-facing investments, partially offset by a disciplined approach to cost controls. The increase in SG&A expenses as a percent to total revenue in the third quarter of 2024 was due to a decline in total revenue, mainly net sales, compared to the third quarter of 2023.

Asset sale gains in the third quarter of 2024 reflected the monetization of non-go-forward assets as part of the Company’s Bold New Chapter strategy. Asset sale gains reflect the acceleration of the monetization of certain non-go-forward assets into the third quarter from the fourth quarter.

Settlement accounting was not required in the third quarter of 2024. During the third quarter of 2023, the Company recognized a non-cash settlement charge of $7 million related to the pro-rata recognition of net actuarial losses associated with the Company's Pension Plan and are the result of an increase in lump sum distributions associated with the retiree distribution elections.

The decrease in net interest expense in the third quarter of 2024 compared to the third quarter of 2023 was primarily driven by an increase in interest income on investments.

2 Merchandise margin is defined as net sales less cost of sales less net delivery expense.

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The income tax expense of $7 million, or 20.0% of pretax income, for the third quarter of 2024 and $2 million, or 4.7% of pretax income, for third quarter of 2023, reflect a different effective tax rate as compared to the Company’s federal income tax statutory rate of 21%. The income tax effective rates for the third quarter of 2024 and the third quarter of 2023 were primarily impacted by the recognition of return-to-provision adjustments associated with the filings of the Company’s 2023 and 2022 U.S. Federal income tax returns during each respective period, as well as the effect of state and local taxes.

Comparison of the 39 Weeks Ended November 2, 2024 and October 28, 2023

(dollars in millions, except per share figures)

(a) Gross margin is not directly comparable to the prior year given the change in inventory valuation method from LIFO RIM to LIFO cost on February 4, 2024. Gross margin is defined as net sales less cost of sales.

See pages 30 to 33 for reconciliations of the supplemental non-GAAP financial measures to their most comparable GAAP financial measure and for other important information.

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Net sales for 2024 decreased $447 million, or 3.0%, compared to 2023. Net sales were impacted by ongoing macroeconomic conditions. Macy's experienced strong performance in the First 50 locations, which benefited from various initiatives including, but not limited to, enhanced merchandising through elevated product rollouts across top markets and new brands and staffing initiatives.

The decrease in other revenues was driven by a $62 million decrease in credit card revenues. This decrease was primarily driven by higher net credit losses as compared to 2023. Macy's Media Network grew $17 million, or 18%, compared to 2023, due to increased vendor engagement and higher advertiser and campaign counts.

Gross margin rate and merchandise margin rate increased 40 basis points 20 basis points, respectively, in 2024 compared to 2023. The increase in gross margin rate is primarily due to lower year-over-year discounting and favorable shortage due to the Company's asset protection work, slightly offset by the Company's change in inventory valuation method. Delivery expense as a percent of net sales reflects efficiencies in the Company's fulfillment network and lower shipped sales volume.

SG&A expenses decreased 0.4% in 2024 compared to 2023 due to the Company's appropriate cost controls while it protected customer-facing investments, particularly in First 50 locations. The increase in SG&A expenses as a percent to total revenue in 2024 was due to a decline in total revenue compared to 2023.

Asset sale gains in 2024 relate to the monetization of non-go-forward assets as part of the Company’s Bold New Chapter strategy while asset sale gains in 2023 mainly related to the sale of a distribution center.

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Settlement accounting was not required the 39 weeks ended November 2, 2024. During 2023, the Company recognized a non-cash settlement charge of $129 million associated primarily with the transfer of fully funded pension obligations for certain retirees and beneficiaries through the purchase of a group annuity contract with an insurance company, which occurred in the second quarter of 2023.

The decrease in net interest expense in 2024 compared to 2023 was primarily driven by an increase in interest income on investments.

Income tax expense increased $37 million in 2024 compared to 2023 due to higher income before income taxes. Additionally, the effective tax rates in 2024 and 2023 were 26.6% and 22.4%, respectively, and reflect a different effective tax rate as compared to the Company’s Federal income tax statutory rate of 21% primarily due to the recognition of return-to-provision adjustments associated with the filings of the Company’s 2023 and 2022 U.S. Federal income tax returns during each respective period, as well as the effect of state and local taxes.

Liquidity and Capital Resources

The Company's principal sources of liquidity are cash from operations, cash on hand and the ABL Credit Facility (as defined below). Material contractual obligations arising in the normal course of business primarily consist of long-term debt and related interest payments, lease obligations, merchandise purchase obligations, retirement plan benefits, and self-insurance reserves. The Company believes that, assuming no change in its current business plan, its available cash, together with expected future cash generated from operations, the amount available under the ABL Credit Facility, and credit available in the market, will be sufficient to satisfy its anticipated needs for working capital, capital expenditures, and cash dividends for at least the next twelve months and the foreseeable future thereafter.

Merchandise purchase obligations represent future merchandise payables for inventory purchased from various suppliers through contractual arrangements and are expected to be funded through cash from operations.

Capital Allocation

The Company's capital allocation goals include maintaining a healthy balance sheet and investment-grade credit metrics, followed by investing in growth initiatives and returning capital to shareholders through predictable dividends and share repurchases with excess cash.

The Company ended the third quarter of 2024 with a cash and cash equivalents balance of $315 million, a decrease of $49 million from $364 million at the end of the third quarter of 2023. The Company is party to an ABL Credit Facility with certain financial institutions providing for a $3,000 million asset-based credit facility.

Operating Activities

The net cash used by operating activities in the current year versus net cash provided by operating activities in the prior year was primarily driven by lower earnings when including non-cash adjustments.

Investing Activities

The Company's capital expenditures were $649 million in 2024 compared to $749 million in 2023. Capital expenditures in the current year are primarily focused on digital and technology investments as well as omni-channel capabilities.

Financing Activities

Dividends

The Company paid dividends totaling $144 million and $135 million in 2024 and 2023, respectively.

On October 25, 2024, the Company announced that its Board of Directors declared a regular quarterly dividend of 17.37 cents per share on its common stock, which will be paid on January 2, 2025, to Macy's shareholders of record at the close of business on December 13, 2024. Subsequent dividends will be subject to approval of the Board of Directors, which will depend on market and other conditions.

Stock Repurchases

On February 22, 2022, the Board of Directors authorized a new $2,000 million share repurchase program, which does not have an expiration date. During the first quarter of 2023, the Company repurchased approximately 1.4 million shares of its common stock at an average cost of $17.57 per share on the open market under its share repurchase program. The Company did not repurchase any shares of its common stock during 2024. As of November 2, 2024, $1,375 million remained available under the authorization. Repurchases may be made from time to time in the open market or through privately negotiated transactions in accordance with applicable securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, on terms determined by the Company. During the first quarter of 2023, the Company also withheld approximately $12 million of shares for tax purposes associated with the issuance of certain stock awards.

Debt Transactions

On September 18, 2024, Macy’s Retail Holdings, LLC (“MRH”), a direct, wholly owned subsidiary of Macy’s, Inc., completed a tender offer in which $221 million aggregate principal amount of certain senior notes and debentures were tendered for early settlement and purchased by MRH. The total cash cost for the tender offer was $225 million and was funded with cash on hand. The Company recognized $1 million of losses on early retirement of debt on the Consolidated Statements of Income during the third quarter of 2024.

As of November 2, 2024 and October 28, 2023, the Company had $144 million and $138 million of standby letters of credit outstanding under its ABL Credit Facility, respectively, which reduced the available borrowing capacity to $2,856 million and $2,862 million, respectively. The Company had $86 million and $160 million outstanding borrowings under the ABL Credit Facility as of November 2, 2024 and October 28, 2023, respectively.

Contractual Obligations

As of November 2, 2024, other than the financing transactions discussed in Note 4 to the accompanying Consolidated Financial Statements, there were no material changes to the Company's contractual obligations and commitments outside the ordinary course of business since February 3, 2024, as reported in the Company's 2023 Form 10-K.

Guarantor Summarized Financial Information

The Company had $2,786 million aggregate principal amount of senior unsecured notes and senior unsecured debentures (collectively the "Unsecured Notes") outstanding as of both November 2, 2024 and February 3, 2024 with maturities ranging from 2025 to 2043. The Unsecured Notes constitute debt obligations of Macy's Retail Holdings, LLC ("MRH" or "Subsidiary Issuer"), a 100%-owned subsidiary of Macy's, Inc. ("Parent" and together with the "Subsidiary Issuer," the "Obligor Group"), and are fully and unconditionally guaranteed on a senior unsecured basis by Parent. The Unsecured Notes rank equally in right of payment with all of the Company's existing and future senior unsecured obligations, senior to any of the Company's future subordinated indebtedness, and are structurally subordinated to all existing and future obligations of each of the Company's subsidiaries that do not guarantee the Unsecured Notes. Holders of the Company's secured indebtedness, including any borrowings under the ABL Credit Facility, will have a priority claim on the assets that secure such secured indebtedness; therefore, the Unsecured Notes and the related guarantees are effectively subordinated to all of the Subsidiary Issuer's and Parent and their subsidiaries’ existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness.

The following tables include combined financial information of the Obligor Group. Investments in subsidiaries of $9,837 million and $9,423 million as of November 2, 2024 and February 3, 2024, respectively, have been excluded from the Summarized Balance Sheets. Equity in earnings of non-Guarantor subsidiaries of $344 million and $1,138 million for the 13 and 39 weeks ended November 2, 2024, respectively, have been excluded from the Summarized Statement of Operations. The combined financial information of the Obligor Group is presented on a combined basis with intercompany balances and transactions within the Obligor Group eliminated.

Summarized Balance Sheets

(in millions)

ASSETS

(a) Includes net amounts due to non-Guarantor subsidiaries of $5,188 million and $6,784 million as of November 2, 2024 and February 3, 2024, respectively.

Summarized Statement of Operations

(in millions)

(a) Income pertains to transactions with ABL Borrower, a non-Guarantor subsidiary.

(b) Includes $124 million and $373 million of dividend income from non-Guarantor subsidiaries for the 13 and 39 weeks ended November 2, 2024, respectively.

Important Information Regarding Non-GAAP Financial Measures

The Company reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP). However, management believes that certain non-GAAP financial measures provide users of the Company's financial information with additional useful information in evaluating operating performance. Management believes that providing supplemental changes in comparable sales on an owned-plus-licensed basis and an owned-plus-licensed-plus-marketplace basis, which includes the impact of growth in comparable sales of departments licensed to third parties and marketplace sales, as applicable, assists in evaluating the Company's ability to generate sales growth, whether through owned businesses, departments licensed to third parties or marketplace sales, on a comparable basis, and in evaluating the impact of changes in the manner in which certain departments are operated. Earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP financial measure which the Company believes provides meaningful information about its operational efficiency by excluding the impact of changes in tax law and structure, debt levels and capital investment. In addition, management believes that excluding certain items that are not associated with the Company's core operations and that may vary substantially in frequency and magnitude from period-to-period from net income (loss), diluted earnings (loss) per share and EBITDA provide useful supplemental measures that assist in evaluating the Company's ability to generate earnings and leverage sales, respectively, and to more readily compare these metrics between past and future periods. Management also believes that EBITDA and Adjusted EBITDA are frequently used by investors and securities analysts in their evaluations of companies, and that such supplemental measures facilitate comparisons between companies that have different capital and financing structures and/or tax rates. The Company uses certain non-GAAP financial measures as performance measures for components of executive compensation.

Non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, the Company's financial results prepared in accordance with GAAP. Certain of the items that may be excluded or included in non-GAAP financial measures may be significant items that could impact the Company's financial position, results of operations or cash flows and should therefore be considered in assessing the Company's actual and future financial condition and performance. Additionally, the amounts received by the Company on account of sales of departments licensed to third parties and marketplace sales are limited to commissions received on such sales. The methods used by the Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies.

Changes in Comparable Sales

The following is a tabular reconciliation of the non-GAAP financial measure of changes in comparable sales on an owned-plus-licensed-plus-marketplace basis, to GAAP comparable sales (i.e., on an owned basis), which the Company believes to be the most directly comparable GAAP financial measure.

(a) Bloomingdale's excludes one non-go-forward location.

31

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Notes:

(1) Represents the period-to-period percentage change in net sales from stores in operation for one full fiscal year for the 13 and 39 weeks ended November 2, 2024 and October 28, 2023. Such calculation includes all digital sales and excludes commissions from departments licensed to third parties and marketplace. Stores impacted by a natural disaster or undergoing significant expansion or shrinkage remain in the comparable sales calculation unless the store, or material portion of the store, is closed for a significant period of time. Definitions and calculations of comparable sales may differ among companies in the retail industry.

(2) Represents the impact of including the sales of departments licensed to third parties occurring in stores in operation throughout the year presented and the immediately preceding year and all online sales, including marketplace sales, in the calculation of comparable sales. Macy’s and Bloomingdale’s license third parties to operate certain departments in their stores and online, including Macy’s and Bloomingdale’s digital Marketplace, and receive commissions from these third parties based on a percentage of their net sales, while Bluemercury does not participate in licensed or marketplace businesses. In its financial statements prepared in conformity with GAAP, the Company includes these commissions (rather than sales of the departments licensed to third parties and marketplace) in its net sales. The Company does not, however, include any amounts in respect of licensed department or marketplace sales (or any commissions earned on such sales) in its comparable sales in accordance with GAAP (i.e., on an owned basis). The amounts of commissions earned on sales of departments licensed to third parties and from the digital marketplace are not material to its net sales for the periods presented.

EBITDA and Adjusted EBITDA

The following is a tabular reconciliation of the non-GAAP financial measure EBITDA and Adjusted EBITDA to GAAP net income, which the Company believes to be the most directly comparable GAAP measure.

1 Refer to the tables on page 34 for a reconciliation of the revised historical Non-GAAP financial measures due to the immaterial error identified in the current period as disclosed further in Note 8 to the Consolidated Financial Statements.

Adjusted Net Income and Adjusted Diluted Earnings Per Share

The following is a tabular reconciliation of the non-GAAP financial measures adjusted net income to GAAP net income and adjusted diluted earnings per share to GAAP diluted earnings per share, which the Company believes to be the most directly comparable GAAP measures.

(millions, except per share figures)

1 Refer to the tables on page 34 for a reconciliation of the revised historical Non-GAAP financial measures due to the immaterial error identified in the current period as disclosed further in Note 8 to the Consolidated Financial Statements.

Reconciliation of Revised Non-GAAP Financial Measures

(millions, except per share figures)

34

Critical Accounting Estimates

Commencing in fiscal 2024, the Company no longer considers merchandise inventories be a critical accounting estimate due to the change in inventory valuation method from LIFO RIM to LIFO cost. Certain operational management judgments and estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, do not impact inventory valuation under LIFO cost to the same extent as they previously did under LIFO RIM.

There have been no material changes to the Company's market risk as described in the Company's 2023 10-K. For a discussion of the Company's exposure to market risk, refer to the Company's market risk disclosures set forth in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of the 2023 10-K.

Disclosure Controls and Procedures

Disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), are the Company's controls and other procedures that are designed to ensure that information required to be disclosed in the Company's reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud due to inherent limitations of internal controls. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

The Company's Chief Executive Officer and Chief Financial Officer have carried out, as of November 2, 2024, with the participation of the Company's management, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of November 2, 2024 and prior periods, the Company's disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by the Company in reports the Company files under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, solely due to the material weakness described below.

In light of the material weakness described below, management performed additional analysis and other procedures to ensure that our consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP).

Material Weakness in Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). The Company’s management, with participation of the CEO and CFO, under the oversight of our Board of Directors, re-evaluated the effectiveness of the Company’s internal control over financial reporting as of February 3, 2024 using the framework in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of February 3, 2024 due to the material weakness in internal control over financial reporting, described below.

Internal control over financial reporting includes those policies and processes that:

1. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets.

2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles accepted in the U.S., and that our receipts and expenditures are being made only with proper authorizations of our management and directors.

3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

In the course of preparing the Company's financial statements for the interim period ended November 2, 2024, management identified a material weakness in its internal controls over financial reporting related to the design of existing internal control activities involving manual journal entries over delivery expense and certain other non-merchandise expenses, and the reconciliation of the related accrued liabilities. 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. This material weakness resulted in errors that were revised in our consolidated financial statements as more fully detailed in Note 8 to the Consolidated Financial Statements and related financial information included in this Form 10-Q.

The material weakness was the result of deficiencies in the design of controls over delivery expense and certain other non-merchandise expenses, and the related accrued liabilities, whereby the design of the controls did not consider the potential for employee circumvention of these controls. The design of these controls included failures to obtain, or generate and use, relevant, quality information to support the functioning of these controls, including validation of the reliability of the information.

Plan for Remediation of the Material Weakness

The Company is committed to addressing the material weakness and has begun to implement changes designed to improve its internal control over financial reporting and to remediate the material weakness, including:

• Re-evaluating the risk of employee circumvention of controls, including risks surrounding the completeness of delivery expense and certain other non-merchandise expenses and the related accrued liabilities;
• Re-designing process level control activities that are responsive to the risk of employee circumvention of controls.
• Evaluating information supporting the functioning of control activities to ensure it reflects relevant, quality information that supports the operating effectiveness of controls around manual journal entries for delivery expense and certain other non-merchandise expenses and the reconciliation of the related accrued liabilities, including validation of the reliability of the information.

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 described above.

Changes in Internal Control over Financial Reporting

From time to time adoption of new accounting pronouncements, major organizational restructuring and realignment occurs for which the Company reviews its internal control over financial reporting. As a result of this review, there were no changes in the Company's internal control over financial reporting that occurred during the Company's most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

There have been no material changes to the Risk Factors described in Part I, Item 1A."Risk Factors" in the Company's 2023 Form 10-K.