Three senior Target managers have quit and several more face disciplinary action after doing something “mind-blowingly stupid”.
They artificially boosted the retailer’s earnings by arranging rebates with 31 overseas’ suppliers for the first half of the 2016 financial year on the promise the retailer would pay higher prices in the second half.
That means Target was not on the cusp of a turnaround as first thought.
The troubled child of the Wesfarmers group, which includes discount retailer Kmart and supermarket chain Coles, reported an earnings before interest and tax (EBIT) of $74 million for the half, up from $70 million from a year ago.
However, its EBIT would have been $53 million if its wasn’t for the $21 million in income from the rebate arrangements, Wesfarmers confirmed on Monday after a two-week probe into Target.
Wesfarmers managing director Richard Goyder says less than 10 people were involved and it appears their motive was to prop up an earnings shortfall.
“What is so disappointing about this is that people have made the decision, probably through an implied pressure, to do something that was mind-blowingly stupid,” he told reporters.
“If we reported Target’s performance as $53 million rather than $74 million, we would have said `this is a disappointing financial outcome … but we still think there has been progress in terms of the quality of the business’.”
He said the company encouraged long-term sustainable growth over short-term gain and swift action was being taken against those involved.
Three senior Target employees have resigned over the scandal so far, including former Target managing director Stuart Machin, who quit on Friday.
Mr Machin had said he was not aware of the supplier arrangements but agreed to resign because it happened on his watch.
Wesfarmers, with its external auditors Ernst & Young, began investigating Target in March after the matter was brought to the attention of a new management team that took the helm after Wesfarmers’ restructured Kmart and Target into a single department store division.
The probe found Target struck rebates of $18.1 million with suppliers and several supply deals amounting to less than $3 million that did not comply with the group’s accounting policies.
The supply arrangement is expected to have a negligible impact on Target’s and Wesfarmers’ full-year results because any benefit recorded in the first half would be reversed in the second half due to higher product costs.
Target is also working with suppliers to unwind the arrangements.