Former Myer Executives Probed Over Looming Dick Smith Rebate Scandal
Nick Aboud the former CEO of Dick Smith is just one of several former Myer executives that investigators want to question about the alleged rebate scandal that administrators of the failed retail group are now probing.
The former Myer executives all worked for Dick Smith when it collapsed with debts of over $400M
Questions are also being raised as to whether Aboud and several other former Myer executives who were poached to work at Dick Smith had used the questionable rebate practise at other retailers.
Aboud who was CEO of the group when it collapsed with debts of over $400M, was the key executive who urged vendors such as Acer, Samsung, HP and Sony to stump up additional rebate money.
It now emerges that the pending rebates were being book kept prior to the goods that the rebates were linked to were ever sold or in many cases supplied into Dick Smith stores.
Aboud who is the executive Anchorage poached from Myer, to initially buy the Dick Smith business from Woolworths is believed to have pulled together other former Myer executives to approach vendors in a move that is believed to have been used to prop up Dick Smith revenues.
Questions are also being asked as to whether the practise was initiated at Myer prior to Aboud joining Anchorage Capital and then Dick Smith.
In the weeks running up to the June 30th 2015 end of close off, Aboud, and former Marketing Director Neil Merola were asking suppliers to stump up millions. The list was endless and meetings often started early and ran late into the night.
Several vendors who relied on Dick Smith sales were targeted according to sources. Back in January sister publication SmartOffice and ChannelNews identified the problem that existed at the mass retailer.
We revealed how Dick Smith CEO Nick Aboud ran a blackboard at the Company’s NSW headquarters that listed how much additional money, buyers could extract from vendors for marketing activities, between May and June 2015.
The CEO of one major supplier was asked for an additional $2M in rebate dollars. Several suppliers were told that their products could be pulled from shelves if they did contribute additional support.
Back in June Marketing Director Neil Merola categorically denied that Dick Smith was trying to extract above average Channel dollars from vendors.
Dick Smith’s buyers pushed them to bring forward anything that could support earnings, such as rebates for advertising or discounts on stock, in the past year.
On 16 Jun 2015 I sent the following email to Neil Merola “We have been told by several vendors and we have had it confirmed by one of your buyers that Dick Smith is asking vendors to put up large sums of money to get their products ranged and marketed by Dick Smith, with the money having to be agreed by June 30th.
With one vendor you recently agreed terms and then your buyer came back and asked for an additional 20% margin or a “large payment” that has to be paid to Dick Smith by June 30th.
Several of your suppliers have told me the same story including both big brand and small brand vendors.
The last time I raised this with you. I was told that my facts were plain “wrong”.
We have now seen an email between Dick Smith and a major vendor. What I am doing is giving you an opportunity to comment.’
Merola came back claiming that our claims were “pure fiction”.
The AFR is claiming that the use of supplier rebates to boost earnings that contributed to the demise of Dick Smith Holdings started under former private equity owners Anchorage Capital Partners, insiders have claimed.
The AFR reported that Ferrier Hodgson have alleged that the retailer’s focus on maximising supplier rebates contributed to a build-up in inventories and slow moving stock, which eventually strained cash flows, leading to the company’s collapse in January 2015.
Ferrier Hodgson believes the focus on maximising rebates started “at least” by July 2014 and escalated in 2014 and 2015, leading to a blowout in inventories from $330 million in 2013 to $392 million by December 2014.
The company’s earnings before interest and tax surged from $10.9 million in 2013, the last year of Woolworths’ ownership, to $59 million in 2014, even though sales went backwards.
An Anchorage spokesman rejected any suggestion the treatment of rebates was wrong, saying the accounts in 2013 and 2014 were signed off by Deloitte and were in accordance with accounting standards.
According to letters sent by lawyers for Dick Smith’s receivers and bankers to Dick Smith directors and executives, Deloitte queried Dick Smith chief financial officer Michael Potts, about the use of rebates in September 2015.
Deloitte suggested that some ‘over and above’ rebates were a “contrivance” and that the invoice or unit price for the goods had been raised before the rebate was granted.
The CFO investigated Deloitte’s query and formed the view it had no substance. But Ferrier Hodgson alleges the investigation was inadequate and that this type of behaviour was occurring, yet Dick Smith had no controls in place to detect or prevent it.
The company was seen to be trading well until sales “fell off a cliff’ in October and November 2015, triggering a cash flow crisis and forcing the company to turn to its banks for support.
The cash flow problems were exacerbated by an article by Forager Funds Management, which described Dick Smith as ‘the greatest (legal) private equity heist of all time.” Suppliers such as Apple and Samsung pulled their credit terms, contributing to the squeeze on cash.
Chairman Rob Murray, who took the chair from Anchorage Capital Partners managing director Phil Cave in February, told the AFR that Dick Smith’s current non-executive directors were looking forward to co-operating fully with any investigation into the company.
“It is disappointing that correspondence from the receivers’ lawyers, which is deeply flawed in many respects, has been leaked to the media,” Mr Murray said.
“I am confident that we were diligent and compliant at all times in exercising our duties as company directors,” he said.
A spokesman for Mr Cave said earlier this week that he too would co-operate fully with the investigation.
In its submission to a Senate inquiry in March, Anchorage Capital Partners claimed that it sold its controlling interest “more than two years before Dick Smith fell into financial difficulty” and had left Dick Smith in a strong financial position when it severed ties in February 2015.