Former Dick Smith boss Nick Abboud spruiked an ill-fated expansion into whitegoods by claiming the retailer's "connected" appliances would mean "you can lie in bed and boil the kettle", according to one former board member.
Former non-executive director Jamie Tomlinson, who joined Dick Smith in April 2015, has blamed management incompetence for the retailer's failure, saying a "number of surprises" from the moment he joined the company "eroded" his trust in Abboud, and to a lesser extent chief financial officer Michael Potts.
On 20 December 2015, a few weeks before Dick Smith went into voluntary administration, Tomlinson emailed chairman Rob Murray discussing the search to "build a bench" of executives who could step up to the CEO role.
"It is all way too late," he wrote. "I think Nick should go soon, within three months, and Michael to follow after the new CEO is in place. Nick has no credibility with suppliers, shareholders, some management and me."
Giving evidence before the Supreme Court on Wednesday, where he appeared to answer questions from receivers Ferrier Hodgson about the collapse of the company, Tomlinson painted a picture of a CEO who was "out of his depth", presented major strategic decisions as a "fait accompli" to the board, and was prone to "gilding the lily" about the poor health of the business.
"Clearly there is a lot of frustration and emotion in the language I've chosen [in the email], but it was the amalgam of a whole range of issues which I had observed in my time on the board and I felt they were coming to a head, and the only way to deal with that was to change the leadership," he told the court.
Mr Tomlinson said "poor strategy", "leadership issues" and a "breach of trust" ultimately led to the failure of the business.
"It was an issue of competence, not dishonesty or deceit," he said. "My trust in [Abboud] eroded. When we got to the pointy end in December and dealing with the banks, they I think experienced a similar emotional response dealing with this management team.
"I think they formed a view that the management team were just not up to it, and I think they lost faith in the competency of the CEO and to some extent the CFO."
Mr Tomlinson stressed that the business "didn't need to fail".
"It wasn't insolvent, it didn't breach accounting standards, and in my view the banks acted with reckless disregard for the wider interests of all stakeholders," he told the court.
"At the heart of that was a lack of trust in management."
Tomlinson recalled the board meeting in May, when Abboud informed directors that the company was setting aside 10 per cent of floor space in 100 stores to move into appliances to compete with the likes of Harvey Norman.
"I said to myself, I can't see how Dick Smith has any competitive advantage in appliances," he said.
"I was told, appliances are going to move to 'connect'. I asked what that meant, and I clearly remember because it made me laugh. Nick said to me, 'It means you can lie in bed and boil the kettle.'
"I said, suppose someone wants to do that - I'm sure Harvey Norman would be able to respond more quickly, and also boil the kettle from your iPhone. There was an example of a strategy initiated by management and presented to the board as a fait accompli.
"It led to me starting to question the efficacy of the strategic footprint the business was trying to operate in."
Tomlinson told the court he began his own investigations into the health of the business, including a crash course in supplier rebates and store visits to assess the inventory, where he became concerned at the "extent of investment in private label which was untested with consumers".
"I had some questions for the commercial rationale for such a strategy," he said.
"We were purchasing everything from batteries and cables [to] asking consumers to trade off a branded TV for Dick Smith TV.
"I thought it was a leap of faith. Ultimately it failed because we ended up with a lot of poor inventory. I myself wouldn't by a Dick Smith TV. I also observed products like phone brands and the like - I just don't know who was going to buy them."
Tomlinson told the court another poor decision by Mr Abboud was to stop promoting Apple products, "which I think annoyed Apple quite a bit". "I don't think that was necessarily clever because Apple drives foot traffic inside," he said.
In the same December email, he wrote to Mr Murray: "I also note from my own investigation that Abboud is the instigator of the reliance on the O&A drug, an addiction that started in the second half of FY14 and stepped up in FY15 when the inventory build-up began."
In its report into the company's failure, liquidator McGrathNicol found that as sales fell, Dick Smith increasingly made purchasing decisions based on the level of so-called "over and above" rebates the company could earn from suppliers rather than customer demand.
That led to a build-up in unsaleable and outdated inventory, which had to be liquidated in the peak Christmas period, leading to intense margin pressure that ultimately impacted the company's ability to pay its debts.
Tomlinson said by October, he had "formed a view the business was making choices around inventory which weren't necessarily driven by consumer demand".
"I can recall one particular point when I realised the business was receiving rebates on private label, [which I thought was] highly unusual," he told the court.
"In my experience private label purchases are initiated by a company like Dick Smith who specify the product and then negotiate with a factory to produce the product. For that arrangement to be constructed in a way that provided for marketing support and other rebates I thought was unusual."
Prior to Tomlinson joining the board, he was CFO of alcohol company Lion Nathan. In March 2015, when he was in early discussions to join Dick Smith, his former Lion Nathan boss and then Dick Smith chairman Mr Murray said there were "no horrible skeletons in the cupboard".
"But you will find classic retail challenges of extended lease liabilities and reliance on over-and-above supplier rebates," Mr Murray wrote in an email. "We are onto both of these things and manage it as well or better than any retailer."
A day earlier, Murray had informed Mr Tomlinson that Bill Wavish had confirmed his desire to step down from the board at the end of that month. Mr Wavish, who gave evidence on Tuesday, represented private equity firm Anchorage Capital Partners on the Dick Smith board.
Anchorage bought Dick Smith from Woolworths for $20 million in late 2012 and made $500 million after floating it on the stock exchange nine months later.
"He will leave a hole in terms of his enormous retail knowledge," Murray wrote. "In behaviour and leadership terms, this is candidly a blessing."
Tomlinson told the court he had "never met Mr Wavish [but] I know he's a very capable man".
"But it was explained to me that he was a man of a very strong personality, that at the board meetings he tended to dominate conversations, and at audit committee meetings in particular he would run those in a manner that was very clear he was in control," he said.
On Tuesday, Wavish defended Dick Smith's controversial policy of "maximising" supplier rebates, which he developed with Mr Abboud and Mr Potts.
Dick Smith collapsed in January 2016 with around $400 million in debt, including $140 million to lenders HSBC and Westpac.
Ferrier Hodgson is questioning the group of 10 former directors and managers using powers under sections 586A and 597B of the Corporations Act. The Australian Securities and Investments Commission is also conducting its own investigation into the collapse.
Evidence obtained under oath during the hearings may be used to determine whether there is a case for criminal charges to be brought.
Abboud will appear later this month. Others summonsed include former chairman Murray, who is also chairman of retail wholesaler Metcash, and Anchorage boss Phillip Cave.