Dick Smith rebate policy inherited from the Woolworths days

Receivers Ferrier Hodgson claim Dick Smith Electronics’ reliance on rebates skewed buying practices.

Phil Cave, Anchorage Capital managing director leaves Sydney’s Supreme Court. Picture: Britta Campion

Private equity firm Anchorage Capital partners says it inherited its controversial rebates strategy for Dick Smith Electronics from former owner Woolworths but was worried that it lacked the same buying power as the retail giant.

Anchorage managing partner and former Dick Smith chairman Phil Cave told the Supreme Court of NSW that one of the main concerns in buying the business was that it would be under stress from not being able to generate the same level of rebates. “The policy started in Woolworths’ time. Woolworths’ position was to maximise rebates. We continued with that … We saw the policy of maxing rebates as a good position and healthy position for the ­business.”

Receivers and managers Ferrier Hodgson have alleged that Dick Smith Electronics’ reliance on rebates — cash and other incentives from suppliers — to deliver profits skewed management’s buying practices and led to the build-up of an unsustainable inventory.

Former director and retail guru Bill Wavish previously told the liquidator’s examination that he was the architect of the strategy to maximise rebates and that companies who did not do so put themselves in peril.

Dick Smith was sold by Woolworths to Anchorage in 2012 for $115 million and floated by the same private equity firm in November 2013 at a value of $520m. Dick Smith collapsed in January with liabilities of more than $400m.

Rob Murray, who succeeded Mr Cave as chairman in February 2015, said last week that the company’s reliance on rebates was “inherently a vulnerable model’’.

But Mr Cave told an examination by Dick Smith liquidator McGrath Nicol that the accounting policy for rebates was checked by auditors Deloitte, who also reviewed practices every six months, including stock turnover, write-offs and obsolescence.

He said rebates could include an equipment maker such as HP covering the staffing costs of displaying and selling a particular product or range in a Dick Smith store. Responsibility for rebates was split within the company as executives in the buying operations were responsible for obtaining rebates but the finance team was responsible for deciding how they were reported in the accounts. But Mr Cave said that while profitability was a key performance indicator for management and rebates could help with that, they were also judged against stock turnover. ”So if they had high rebates but low stock turn they would not be meeting their KPIs,” Mr Cave said.

He told the court that the company had a target inventory holding of $200m but that this increased to $250m as the company expanded the number of stores, including its Move mobile business and an airport store business. The court heard that while there was room for the inventory level to increase above the $250m target level during the peak Christmas-New Year period, the board became concerned in January 2014 when the stock level ballooned by $100m.

Mr Cave told the court that the board was concerned the stock levels were so high at a time when they should be falling.

He said the management team had slashed inventory from $360m when the business was acquired in 2012 to $160-$170m just seven months later.

The hearing continues today.