Channel Stuffing Definition

What Is Channel Stuffing ?

Channel thrust is a deceptive business practice used by a party to inflate its sales and earnings figures by intentionally sending retailers along its distribution transmit more products than they are able to sell to the public. Channel stuffing typically would take position just before quarter-end or year-end so that management, fearful of bad consequences to their recompense, can “ make their numbers. ”

Key Takeaways

  • Channel stuffing refers to the practice of a company shipping more goods to distributors and retailers along the distribution channel than end-users are likely to buy in a reasonable time period.
  • By channel stuffing, distributors temporarily increase sales figures and related profit measures for a particular period.
  • Regulators frown on the practice and consider it deceptive. In some cases, legal action can be brought to the offending company.

How Channel Stuffing Works

Channel stuffing refers to the drill of a company shipping more goods to distributors and retailers along the distribution channel than end-users are probable to buy in a reasonable time period. This is normally achieved by offering lucrative incentives, including deep discounts, rebates, and extended payment terms, to persuade distributors and retailers to buy quantities in excess of their current needs .

normally, distributors retain the right to return any unsold stock which calls into wonder whether a final sale has actually occurred. “ Stuffing ” the distribution channel is frowned upon by the Securities and Exchange Commission ( SEC ) as a practice used by companies to accelerate tax income recognition to reach short-run gross and earnings targets, and as such, misleading to investors .

By channel stuffing, distributors temporarily increase sales figures and relate profit measures for a particular period. This activity besides causes an artificial demote up of accounts receivables. however, ineffective to sell the surfeit products, retailers will send bet on the excess goods alternatively of cash to the allocator, who then must readjust its accounts receivable ( if it adheres to GAAP procedure ) and ultimately its bottom line .

In other words, stuffing constantly catches up with the company, because it can not maintain sales at the pace it is stuffing. Channel stuffing is not confined to the wholesale and retail barter ; it can take place in the industrial sector, high technical school industry, and the pharmaceutical industry american samoa well. Valeant Pharmaceuticals is an crying example of a company found guilty in 2016 of channel stuff .

Channel stuffing accusations have besides been levied against the car industry, which sends excessively many new cars to dealerships than demand warrants in order to inflate sales figures .

This deceitful practice is normally done in an attack to hit compensation targets or to raise the prize of the stock or prevent its twilight upon release of quarterly or annual results.

An example of Channel Stuffing

In August of 2004, pharmaceutical company Bristol-Meyers Squibb ( NYSE : BMY ) agreed to pay $ 150 million to settle a channel stuffing lawsuit by the SEC .

Court documents reveal the succeed :

For two years Bristol-Myers deceived the market into believing that it was meeting its financial projections and market expectations, when, in fact, the company was making its numbers primarily through channel-stuffing and manipulative accounting devices. Severe sanctions are necessary to hold Bristol-Myers accountable for its violative coduct, and deter Bristol-Myers and other public companies from engaging in similar schemes. 

Bristol-Myers inflated its results primarily by stuffing its distribution channels with excess inventory near the end of every quarter in amounts sufficient to meet its targets by making pharmaceutical sales to its wholesalers ahead of demand. As a result of its channel-stuffing, Bristol-Myers materially understated its accruals for rebates due to Medicaid and certain of its prime vendors, customers of its wholesalers that purchased large quantities of pharmaceutical products from those wholesalers.

In addition to paying its multi-million dollar fine, in March 003, Bristol-Myers restatedpior fiscal statements and disclosed its channel-stuffing activities and improper accounting.

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