Channel Stuffing

What Is Channel Stuffing?

Channel stuffing is a misleading business practice utilized by a company to expand its sales and earnings figures by deliberately sending retailers along its distribution channel a larger number of products than they are able to sell to the public. Channel stuffing regularly would occur just before quarter-end or year-end so management, unfortunate of terrible results to their compensation, can "make their numbers."

How Channel Stuffing Works

Channel stuffing alludes to the practice of a company delivering more goods to distributors and retailers along the distribution channel than end-clients are probably going to buy in a reasonable time span. This is generally accomplished by offering lucrative incentives, including deep discounts, rebates, and extended payment terms, to convince distributors and retailers to buy amounts in excess of their current requirements.

Normally, distributors hold the right to return any unsold inventory which calls into question whether a last sale has really happened. "Stuffing" the distribution channel is disapproved of by the Securities and Exchange Commission (SEC) as a practice utilized by companies to accelerate revenue recognition to arrive at short-term revenue and earnings targets, and in that capacity, deluding to investors.

By channel stuffing, distributors briefly increase sales figures and related profit measures for a specific period. This activity additionally causes an artificial knock up of accounts receivables. Be that as it may, unable to sell the excess products, retailers will send back the surplus goods rather than cash to the distributor, who then should readjust its accounts receivable (assuming it sticks to GAAP methodology) and eventually its primary concern.

At the end of the day, stuffing generally finds the company, since it can't keep up with sales at the rate it is stuffing. Channel stuffing isn't confined to the wholesale and retail exchange; it can happen in the industrial sector, high tech industry, and the drug industry too. Valeant Pharmaceuticals is a grievous illustration of a company found blameworthy in 2016 of channel stuffing.

Channel stuffing allegations have additionally been exacted against the automobile industry, which sends too numerous new cars to showrooms than demand warrants to swell sales figures.

This fraudulent practice is typically finished trying to hit compensation targets or to raise the value of the stock or forestall its endless supply of quarterly or annual outcomes.

An Example of Channel Stuffing

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

Court reports uncover the accompanying:

For quite some time Bristol-Myers beguiled the market into accepting that it was meeting its financial projections and market expectations, when, as a matter of fact, the company was making its numbers principally through channel-stuffing and manipulative accounting gadgets. Serious sanctions are important to hold Bristol-Myers accountable for its violative coduct, and stop Bristol-Myers and other public companies from participating in comparable schemes.

Bristol-Myers expanded its outcomes essentially by stuffing its distribution channels with excess inventory close to the furthest limit of each and every quarter in sums adequate to meet its targets by making drug sales to its wholesalers ahead of demand. Because of its channel-stuffing, Bristol-Myers tangibly downplayed its accruals for rebates due to Medicaid and certain of its prime sellers, customers of its wholesalers that purchased large amounts of drug products from those wholesalers.

As well as paying its extravagant fine, in March 003, Bristol-Myers restatedpior financial statements and unveiled its channel-stuffing activities and ill-advised accounting.

Highlights

• Channel stuffing alludes to the practice of a company delivering more goods to distributors and retailers along the distribution channel than end-clients are probably going to buy in a reasonable time span.
• By channel stuffing, distributors briefly increase sales figures and related profit measures for a specific period.
• Regulators disapprove of the practice and consider it misleading. At times, legal action can be brought to the culpable company.