A Corporate Christmas Carol
A CHRISTMAS CAROL by Charles Dickens opens on a bleak, cold Christmas Eve. The protagonist, Ebenezer Scrooge, is visited by the ghost of his dead business partner, Jacob Marley. Marley, who is cursed to wander the earth in heavy chains, informs Scrooge that tonight he will be visited by three spirits; each will take him on a journey to show him the error of his ways. Scrooge is warned that if he does not listen, he will be cursed to carry his own chains. So like the spirits that visit Scrooge, let us a take a journey into two tales of Christmas corporate trickery.
Media Vision and the Christmas season channel stuffing
Media Vision Technology, Inc. (MVT) was a Bay Area technology company established in 1990. MVT made sound and video cards that allowed consumers to play video games on their PCs. The video game industry was growing rapidly at this point in time. The Sega Mega Drive was released in 1988 and the Super Nintendo followed in 1990.
MVT listed in 1992 pricing the stock at $15. The stock increased rapidly as investors sought exposure to this growing industry. Management boasted that demand for MVT’s products exceeded supply yet inventories and receivables grew.
In 1993, the company announced it would expand its operations into video games directly with the release of its first title, ‘Critical Path’. The game would launch in time for Christmas 1993 and management estimated that 200,000 copies may sell within 3 months. The top title within the industry at that time had sold only 150,000 copies after 9 months.
By now short interest in the company had grown. Some clever short sellers even contacted major retailers to understand their own sales estimates for the video game. They were surprised to hear that one major retailer was not stocking the title before Christmas.
December sales were excellent and by January 1994, the stock price had reached $46.50. Short sellers were bloodied but MVT could not sustain its rise. In May 1994, CEO Paul Jain stepped down and quickly became the subject of the longest-running fraud case in Silicon Valley history.
Many things are stuffed over the Christmas period with the most popular being turkeys and stockings. MVT however had opted for some ‘channel stuffing’ – a business practice in which a company inflates its sales by forcing more products through a distribution channel than the channel is capable of selling. MVT had not sold as many copies of Critical Path as it had stated. It had transferred them to retailers before Christmas and then received them as returns in January. This allowed the company to book higher sales and report lower inventories in the December quarter at the expense of future quarters when the returns were made.
It later emerged that the company had also capitalised their 1993 Christmas party.
MVT filed for bankruptcy by the following Christmas.
Dick Smiths and the good-for-nothing gift cards
Dick Smiths (ASX:DSH) was an Australian consumer electronics retailer that was purchased by private equity in 2012 and floated on the ASX only two years later with a market cap of $520 million.
As part of the acquisition process, the $371 million of inventory held by the company was marked down by $58 million. Private equity was able to do this due to the low price paid for the company as a whole. This meant that the inventory could be sold below cost to customers without it appearing as a loss in the financial statements.
In 2013, an extended clearance sale took place and the inventory balance fell by $140 million only a year later. This made sales and margins look very good in the short term. Some of this benefit extended into 2014 and after some further accounting magic by private equity, the company appeared to be destined for profitability. A forecast to this effect was prepared and it was time to float the company on the ASX.
No longer with the ability to sell stock below cost, DSH failed to snatch market share from competitors like The Good Guys and JB HiFi. DSH became stuck with inventory it couldn’t offload – a very large problem in consumer electronics where product obsolescence is rapid. By 2015 another clearance sale was needed but this time selling stock below cost would appear as a loss in the financial statements.
DSH put on its bravest face and traded through the 2015 Christmas period selling as many gift cards as consumers could purchase. DSH even offered discounted gift cards through its partners. Following this Christmas sales surge, DSH promptly entered voluntary administration. In January 2016, there were more than 45,000 gift cards with a value of $2.5m in circulation. The administrator declared that gift cards would no longer be redeemable, with card holders having to join the queue of DSH’s unsecured creditors. DSH failed to find a buyer and its shares and gift cards were worthless. A disappointing Christmas present indeed.
When Scrooge awoke on Christmas morning, he was a changed man and realised the error of his ways. He raced to the butcher and asked that the largest turkey they had be sent to the Cratchit family. Dickens does not tell us whether Scrooge capitalised the turkey but at least he did not instead send a large turkey gift card.
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