Dick Smith LIVE: Former Chair Rob Murray Contemplated Sacking Abboud, Potts
Former Dick Smith chair Rob Murray has said he had contemplated sacking CEO Nick Abboud and CFO Michael Potts following meetings around overstock issues in November 2015.
Murray is currently being cross examined in the NSW Supreme Court hearing into the failed retailer’s collapse. He previously served as global CEO of Lion, and CEO of Nestle in Oceania, before coming to Dick Smith.
Murray was shown a Deloitte report to the Finance and Audit Committee from early 2015.
He said he agreed with Deloitte’s advice that a more consistent methodology was needed for calculating inventory obsolescence provisioning.
He was shown minutes from a Board meeting on 26 October 2015.
He said he had been “shocked” to find out about the $56 million overstock and deteriorating trade conditions just before the AGM.
He was asked about a disagreement he saw between CEO Nick Abboud and CFO Michael Potts regarding overstock. He said he had been concerned at the time about the quality and saleability of the overstock inventory.
He said the Board followed up with Potts and Abboud on an inventory analysis they requested which was not forthcoming.
He was shown Board papers from November 24, 2015, and confirmed he did not believe the report from Potts and Abboud was on the agenda at the meeting. Minutes from the meeting confirmed that the analysis was not supplied, and Murray said he could not recall the reason Potts and Abboud gave but that he was frustrated at not receiving it.
He was shown an email from himself to Jamie Tomlinson in which he mentioned speaking with Abboud.
He said that Abboud had seen inventory as an opportunity for the business, and he had tried to steer Abboud away from the idea. Tomlinson responded that Abboud was having an “external consultant” doing the analysis, which Murray told the court was “like a bomb being dropped”.
Murray said the consultant had contacted management in early September, which had been a shock to him. Minutes from a November 27 meeting showed Abboud and Potts making a “presentation” regarding the analysis, with a report to come in the following two days.
He said he had been “shocked and disappointed” with the inventory figure presented (around $180 million), and that management had engaged consultants without informing him. He agreed that he and Tomlinson had lost confidence in Abboud and Potts at this point, and that the two would likely be replaced.
The court saw minutes from a November 29 Board meeting at which Chris Borg discussed clearing overstock. At the meeting, Murray heard that $180 million of inventory needed to be “right-sized” by taking a provision. Murray agreed with barristers that clearing the excess stock would have required a significant provision.
Murray had expressed concern at the time that Wavish’s departure from the Board would leave “a hole” in the terms of retail knowledge, but at the time it was a “blessing” in behavioural terms. He agreed that Wavish had taken a lot of experience off the Board with his departure, leaving Abboud and Potts with the most retail experience. Murray told the court that the loss of confidence in Abboud was due to information being “selectively disclosed” to the Board. He noted that the Board had not appreciated the time pressure of deciding on a methodology for clearing the stock before the market opened the following day.
He said that, if he had known Agile Consulting was planning to pitch on assisting with a stock clearance in addition to developing a methodology, there would have been “questions asked” by the Board. He agreed that the Board was placed in a “difficult position”, and said it had been briefed too late – that it was not how he would have briefed a Board as CEO.
The court saw passages from Murray’s affidavit regarding O&A rebates.
Murray said he had seen O&A rebates as something “every retailer did”, and he was not surprised these conversations were happening when he joined the business. He acknowledged that his understanding of O&A rebates developed over time. He confirmed that suppliers would consider the amount of money customers spent when negotiating O&A rebates. Murray told the court that there was a strong belief that Dick Smith was not “getting its fair share” of O&A rebates within the company, and that it wanted to get the best share of rebates it possibly good. He described it as “the dance” between all retailers and suppliers. He said that if the rebates were taken away from retailers they would be in “significant trouble”.
Murray told the court that he could see the inherent vulnerability of the business model – being asked to sign up for long leases, making long commitments, employing a lot of people. He said he did not think it was any coincidence that, since the Dick Smith collapse, leading bankruptcies were among retailers. He denied that he understood the strategy as “maximising O&A rebates”, and did not see the logic of “distorting” the business model around O&A rebates as any gains would be short-lived.
He said that buyers could not just go out and buy anything they wanted, and that there were controls in place. He said dealing with these controls was the province of management. Murray also mentioned that he wanted Deloitte to look into rebates in an audit.
When asked about how much inventory he felt the company should have when he joined, he said his belief was always that the company should have the minimum amount to satisfy consumer demand. He said he never saw a difference in his head that financial months were different from calendar months – that “a month was a month was a month” – and acknowledged it was an oversight on his part.
He confirmed that at the time he joined he believed the company’s facility with Westpac was around $82 million, which would need to grow as the company expanded.
He was shown a table from a Board meeting regarding the transfer of rebates to gross profit.
He said he was told that some rebates were used to offset marketing costs, which Deloitte told him at the time was in line with accounting standards. He did not recall off the top of his head how much had been transferred to gross profit at the time of the paper.
He was shown a table that showed inventory increasing at the time, and said he believed the company was not meeting its sales forecasts. He said he was told that the company was increasing its inventory for Christmas, and described Abboud as an “optimist” for believing this would be an opportunity. He said he did not investigate whether the company was paying its creditors at the time, and had assumed it was.
Papers from another Board meeting in late 2014 again showed rebate transfers to gross profit, and increase in inventory. Murray noted that he asked why inventory was increasing, and was told that the company was expecting a successful Christmas.
He said he was comforted by the strong view that this represented an opportunity, particularly as expressed by Abboud. He said he saw the central issue at the time as the business’s ability to make sales and meet forecasts. He said he did not have concerns about how the company was paying creditors and that he would have expected to be told if there were issues.
The court then saw papers from a February 2015 in which inventory levels did not change according to projections. He said he remembered “long and heated discussions” within the Board about the company’s inability to hit forecasts and about inventory levels. He said it was clear and obvious to him at the time that sales figures needed to improve.
He noted that inventory was not a problem if you could turn it into sales. He was asked if the issues surrounding sales forecasts had caused him to be concerned about cashflow, and he said they had not. He confirmed that there was a discussion about reducing inventory at that meeting, and that he thought the business needed to do better at predicting sales and hitting those targets.
He said that the information he had at the time supported payment of a dividend.
He was then shown papers from a March board meeting, his first as Chair.
He said Westpac at the time was supportive of the business, even though Dick Smith was operating beyond its facility limit. He noted that the business was growing at the time, opening stores including a $15m outlet at Sydney airport. He said inventory had not come down as predicted, but that payables performance had improved. He said the sales had concerned him, and noted that Abboud was “an optimistic person”, though he was not critically concerned, feeling he could give Abboud wise counsel and temper his enthusiasm.
Shown balance sheets from an April Board meeting, he noted that inventory and payables were coming down but that he was still concerned. Despite this the Board did support paying the dividend.
The May Board meeting again saw inventory and payables, as well as bank debt, above projections. He was asked if he was concerned by this time about the reliability of the company’s cash flow projection, and said he viewed the following six weeks as an important part of the business. He recalled a conversation with Abboud about bringing it to a “landing point” by the end of June, and sought reassurance that Abboud’s February plans were realistic. He was concerned about the negative cash flow projection, he said.