Former Dick Smith CEO Nick Abboud. Photo / David Swift
Former Dick Smith CEO Nick Abboud. Photo / David Swift
Dick Smith's former chief executive has rejected suggestions the company was buying too much stock in the lead-up to its collapse, describing an inventory build-up as "like buying Easter eggs in January".
Giving evidence in the NSW Supreme Court on Friday on the final day of public hearings brought byreceivers Ferrier Hodgson, Nick Abboud responded to allegations that by October 2015 the company was holding nearly 12 years worth of supply in private label batteries.
"With private label from China the lead time into Australia is approximately six months," he said. "You can't bring in three months' worth of inventory because you'll sell out. The batteries that were quoted at 12 years, that assumed the lowest months of trading.
"It's like a supermarket receiving Easter eggs in January but Easter's not until April. By the time you get to the end of Christmas, most of those were sold - you can't just look at a point in time."
On 7 July 2015, head of merchandise planning Chris Borg raised concerns that the business at that time had $33 million worth of stock aged 12 months or older, up from $14 million at the same time a year earlier.
The court heard that included a large range of private label phone accessories, seasonal items such as Christmas trees, $2.3 million worth of cameras, and tens of thousands of dollars worth of obsolete games such as FIFA 13 - which had since been superseded by FIFA 14 and even FIFA 15.
Abboud said he considered rising levels of aged stock as "an opportunity". "There's approximately $330 million [worth of inventory] at this stage [so aged stock is] approximately 10 per cent," he said.
"In a retail business that is actually considered a good result. Where you see an opportunity in a certain category coming up to an event such as back to uni or back to school, [you] give that category the opportunity to do well."
A month earlier in June, the court heard Borg had warned that sales of private label products were down 12 per cent compared with the previous year, 2 per cent on May and 4 per cent on April.
It's like a supermarket receiving Easter eggs in January but Easter's not until April. By the time you get to the end of Christmas, most of those were sold - you can't just look at a point in time.
"That could just be a promotional timing," Mr Abboud said. "The year before there could have been 50 per cent off HDMI cables. That's just stating the data but you can't look at it in isolation."
Dick Smith collapsed in January 2016 with $400 million in debts, including $140 million to lenders HSBC and Westpac.
The court heard that company's cashflow problems in 2014 and 2015 saw it repeatedly seeking to delay payments to suppliers. In March 2015, Samsung put Dick Smith on supply hold due to unpaid debts, with Sony following suit in December, citing unpaid invoices dating back to August.
Similarly, distribution company Synnex, which provided Apple iPads, halted supply in November due to unpaid invoices. Mr Abboud said he didn't recall Samsung or Sony cutting off supply, and said the Synnex halt was due to a contract dispute.
APPLE DUMPED FOR REBATE VENDORS
The court also heard that Dick Smith stopped buying millions of dollars worth of key Apple stock and shifted the money to suppliers from which it could obtain so-called "over-and-above" rebates.
O & A rebates were payments made by suppliers back to Dick Smith that would be attached to stock purchases and recorded as an increase in profits or a reduction in marketing expenses.
Such payments are common in retail companies, which rely on supplier support in the form of rebates as a normal part of doing business.
But in its report into the company's failure, not presented to court, liquidator McGrathNicol said Dick Smith's declining performance appeared to have led to management "making decisions on what stock to buy (and at what volumes) based on the rebate attached to the stock, rather than customer demand".
In an 18 January 2015 email,Borg outlined plans for closing a $14.9 million "[advertising subsidy] and O & A gap" for the second half.
The email provided to the court described "$8 million of purchases moved from Apple to ad subsidy and O & A-attracting vendors, delivering $800,000 of O & A".
"I could not tell you what was executed from that email," Mr Abboud said.
Asked whether, by that stage, the company had a policy of buying stock to obtain rebates, Abboud said the Dick Smith "had a focus on driving sales and selling the marketing assets at the time of buying the inventory".
Abboud was pressed on why such a shift would have been made, taking into account his evidence on Thursday that by 2014 Apple had become one of the company's most important suppliers.
"In the simulation that Borg put through, there was an over-assumption around Apple inventory," he said. "This is normal practice in reviewing the allocation, this is phase one of many different simulations that occurred in the business at that time."
