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O&A rebates are what Dick Smith referenced as negotiated rebates outside of normal trading terms with suppliers.
Retailers usually improve their profitability through obtaining as much supplier support as possible. There were often a number of rebates offered by suppliers such as volume and warehouse rebates, all of which had an effect of reducing the purchase price and cost of goods sold (COGS).
It was revealed that these types of O&A rebates were often agreed to ‘informally’ and were either orally agreed to or via email, and up until late 2014, the retailer’s director of property, procurement, supply chain, commercial and financial services John Skellern kept a record of them on a whiteboard in his office.
Eventually a copy of his whiteboard was made into a excel spreadsheet, but that information was never integrated with the company's stock management system, AS400, which was inherited from its time under Woolworths ownership.
Warning bells
According to documents submitted to Potts by Deloitte, in 2014, key risk areas were pointed out, including rebates and vendor allowances, stock obsolescence provision and AASB 102 costing.
Warning bells were sounded out to senior management over the retailer’s policy behind its O&A rebates, eventually leading it to becoming overstocked. In one instance, O&A rebates for the FY15 half year were A$33.1 million.
More issues were also disclosed in court documents in the ways in which these O&A rebates were transferred to ‘gross profit’ along with inventory and delaying payments to suppliers such as Samsung and Synnex, which in some instances put DSH's accounts on hold. At its worst, based off information held in the retailer's AS400 system, there were 8,463 delayed payments in September 2015, worth A$43.3 million at an average of 28 days late.
“The difficulty is that Abboud and Potts either did not accept those warnings or took inadequate steps to address them. It is unclear how many of the systems of control identified by the plaintiffs would have addressed that problem,” Justice Ball said.
“It seems plausible that the emphasis on obtaining O&A rebates, and the buying practices that emphasis created, was a substantial cause of DSH becoming overstocked.”
Debts spiral
During a board meeting in April 2015, one particular board member, Jamie Tomlinson, realised both ‘Abboud and Potts were out of their depth’ when Tomlinson noticed in board papers that cash and cash equivalents were negative A$101 million, more than the A$82 million limit of its Westpac facility at the time.
According to court documents, Potts explained that he arranged an extension to the Westpac overdraft facility to a maximum of A$50 million, which had not been brought up with the board despite the fact there was a delegation which stated that board approval was required to change existing debt facilities.
The issue surrounding the A$60 million impairment write down was also brought to light, with Tomlinson saying the board was placed in an ‘impossible position’ as the board was “briefed too late and didn’t have the final report of the consultants or adequate time to consider the information that had been given,” according to court documents.
The receiver's report made it clear the business was in a “very distressed state,” impacted by aggressive stock clearance in December 2015, a reduction in stock flow by suppliers pre-receivership where credit terms were reduced or switched off, disruption to supply arrangements consequent upon receivership and adverse media impacted by gift vouchers.
As the attempt to sell Dick Smith was unsuccessful, the receivers appointed Hilco Merchant Australia to close the stores and sell all remaining stock. In their report in May 2016, Hilco sold A$137 million in stock in Australia and NZ$22.4 million in New Zealand. There was A$8 million in faulty inventory, A$1.2 million in accessories that were in the process of being sold and a remaining A$348,000 in shrinkage.
The latest court action follows on from a class action settlement in March to the tune of A$25 million.
The cases were launched after the collapse of the retailer in early 2016, along with the closure of its stores, which followed closely on from a A$60 million inventory write-down revealed in late 2015.
It should be noted that online retailer Kogan.com purchased the Dick Smith online retail business in 2016, taking over from June that year. The online business is unrelated to Dick Smith Holdings, the entity at the centre of the class actions.
