Big, old-school retailers have their problems. Just ask turnaround kid JCPenney
Marginal profitability wasn't the only problem for Saks
As you can guess, this is a sticking point between suppliers and retailers and -- depending on the power of a retailer and the ethical wherewithal of those charged with collecting the allowances -- it's an area ripe for many kinds of unseemly behavior. Imagine you need to make numbers for the quarter -- or to get your bonus. Why not lean on that outfit that sold you a load of now-impossible-to-sell Michael Jackson-brand kids denim? "Don't want to give us a few hundred thousand bucks back? Fine. We'll see how much Jacko-wear we're buying next spring, bucko.."
And once you get the dough, how do you account for it? Add it back to revenue? Subtract it from cost of goods sold? Your answer might depend on the metrics by which your performance is evaluated. You get the idea. FYI, the official answer appears to be that it should offset cost of goods sold.
Saks didn't get into details of its particular problem, but it acknowledged $20 million in vendor allowances "improperly collected" from 1999 to 2003. It previously looked into the issue in 2002. But today, when the other shoe dropped, it landed squarely on a few executives. Saks took a strong line, asking three of its top suits to hand in their keys to the executive washroom and more.
Saks Fifth Avenue Chief Administrative Officer Donald Watros was asked to resign and forfeit vested options. Brian Martin, who was general counsel at the time of the 2002 investigation, and Chief Accounting Officer Donald Wright were also asked to resign. Saks also promised to compensate vendors who'd been victimized by the shakedown.
This may not clear up the ongoing SEC investigation, or the separate inquiry from the U.S. District Attorney, but it should ease the minds of investors, who have seen other executives do ill but escape the consequences.
For related Foolishness:
- The real shopping action in the department store scene might be outside the mall.
- Don't marginalize the problems at Saks. Wait. Do.
- Last year, things looked good.