The chief executive of collapsed electronics retailer Dick Smith has denied any involvement in buyers' practice of negotiating inflated prices with suppliers and buying unnecessary stocks in order to maximise rebates
At a NSW Supreme Court public examination on Thursday, Nick Abboud, the 46-year-old former CEO, denied directing his employees to focus on maximising rebates over buying stocks that actually sell.
"Absolutely not," he said.
However, one internal document noted Canon products were purchased in June 2014 to "close O&A;/rebate activity", which suggested the company bought the stock in order to obtain rebates. "O&A;" meant "over and above".
Another document showed a supplier offered to inflate Dick Smith's purchase price and pay the retailer back in rebates at the end of the year.
Mr Abboud said at least on one occasion he told a buyer not to enter into an arrangement where the company would negotiate at an inflated price with a supplier in order to get rebates.
The management and board of Dick Smith are facing allegation from bank lender-appointed receiver Ferrier Hodgson of deliberately buying too much stock to maximise up-front rebates and thus inflate short-term profits. The electronics retailer collapsed spectacularly in January, leaving a $260 million debt shortfall to creditors.
The company's reliance on rebates has emerged as one of the main culprits behind the company's collapse as buyers allegedly made purchasing decisions based on supplier terms rather than customer demand, leading to inventory blowout and poor product mix.
Pressure from the board
Mr Abboud however defended the company's practice of obtaining rebates, saying a "good buyer" would get support from the supplier to ensure it "sells through" to customers.
"Their position is as long as you buy, it's great, I've done my job. So [a good buyer says] hang on, we're not going to buy the stock, you actually have to promote the stock to sell it," he said.
He said using rebates to clear inventory was a better strategy than when it was under the leadership of previous owner Woolworths, where the retailer was left in charge of clearing the inventory.
When asked whether vendor rebates distorted the buying decisions by the company's employees, Mr Abboud said: "Their interest is buying the right stock. The outcome of that is, yes, do that which is great, but you have to sell out your product," in defence of supplier rebates.
He said vendor rebate remained a key strategy for the growth of Dick Smith. "It's part of the business," he said.
The board minutes show in late 2014 there was a significant pressure from the board to maximise the company's earnings. In May 2014 the company had to catch up on a 2.1 million shortfall as against the budgeted earnings before interest, taxes, depreciation and amortisation in just a month.
Then chairman Phil Cave said the EBITDA for the 2015 financial year should be at least 10 per cent on the previous year's result, the board minutes show.
Over-reliance on rebates
Mr Abboud had been a rising star at Myer when he was poached by private equity firm Anchorage to run the electronics retailer.
When the company collapsed Mr Abboud had no choice but to step down from the role and his 6.5 per cent personal stake in the company became worthless. He is currently not working.
Earlier on Thursday the examination revealed the management had concerns about the company's reliance on rebates leading to wrong purchasing decisions as early as September 2015, some four months before the company's collapse.
In an internal document, chief financial officer Michael Potts had wrote in September 2015: "over-reliance on O&A; rebates leading to wrong pricing and purchasing decisions."
When asked to explain his statement, Mr Potts said using the extra rebates limited the company's flexibility in setting price because it required the company to set normal and discount prices and the company was trying to move towards an everyday low price model.
When asked whether it led to wrong purchasing decisions, he said: "I don't recall".
The examination concludes on Friday.
