Saks: Excessive chargebacks

As you may recall, Saks was sued by vendors over excessive chargebacks. Saks was amending invoices with spurious charges until it got so bad that the Securities and Exchange Commission took them to court. A settlement was announced yesterday. Back in 2005, Saks fired three executives for what was described as kickbacks. The giddiness with which department stores are known to levy chargebacks is just one reason I don’t recommend selling to them. Additionally, as I wrote before:

I doubt that consumers are aware just how much chargebacks have limited their clothing choices. With the current system of department store fees and penalties leveled against manufacturers, wholesale pricing has to be higher to cover the arbitrary discounts that stores take for themselves. For example, it’s common to offer discounts of 2 to 8 percent on invoices paid within 10 to 30 days but stores are paying in 5 to 6 months and taking the discount anyway. While it seems that the number of manufacturers who have sued their customers seems to be increasing, it’s difficult to know the exact figures as retailers are settling out of court with non-disclosure a condition of settlement. The situation for many manufacturers has been to see their invoices reduced by half.

WWD says:

The settlement follows a disclosure by the retailer in March 2005 that an internal investigation found “improper collections of vendor markdown allowances” at its Saks Fifth Avenue division.

Still, their problems aren’t over yet. In addition to the lawsuits below, the US Attorney’s office is continuing to investigate.

Saks’ disclosure also spawned a lawsuit by International Design Concepts Inc. against Saks and SFA over allegedly improper vendor allowances in May 2005. IDC is the assignee of assets of Apparel Group International, the licensee of Oscar de la Renta for the “Oscar de la Renta” trademarks that AGI used in connection with the women’s sportswear bridge collection at SFA. AGI is no longer in operation, according to court papers filed in the 2005 lawsuit, which alleged that it was “forced out of business by the actions of the Saks defendants.”

Donald Kreindler of Phillips Nizer LLP, attorney for IDC, said he was “not at all surprised” by the SEC lawsuit against Saks. Meanwhile, the IDC lawsuit “may come up for trial as early as November,” Kreindler said.

A separate lawsuit against Saks by Onward Kashiyama, involving markdowns and also filed in 2005, has been settled.

When an internal audit was completed in August 2005, Saks said its SFA division, known as Saks Fifth Avenue Enterprises, owed vendors $26 million for markdown allowances during the 1999-2003 fiscal years, and another $8.2 million during the 1996-1998 fiscal years. In addition, vendors were to be paid interest at the rate of 7.25 percent annually, totaling about $14 million for the improperly collected markdown allowances. In total Saks paid $48.2 million back to vendors.

If Saks -and they aren’t the only ones- can do this to established vendors, it’s not any prettier for the little guy.

Read more at Saks Settles With SEC (gated)

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  1. J C Sprowls says:

    I think this goes hand-in-hand with Return Policies. At least, we should all be thinking how we plan to handle chargebacks and returns.

    More opinion on my part – and, I’m being a hard-nosed business guy on this point. While I agree with being serviceable and easy-to-work-with, I also believe in keeping my doors open and staff employed. There’s no way I (or, any company) would be able to survive if we tolerate chargebacks or unpaid invoices for a prolonged period of time.

    As I mentioned on the Return Policy article, I believe in owning my mistakes. That said, if I infringe a Retailer’s policy that we discussed then I will agree to accept a chargeback because that’s my mistake. On the other hand, I will drop or refuse a relationship that is too burdensome to manage.

    Let’s say a Retailer adjusts their invoice or takes a discount without my permission. I don’t need to adjust the invoice in my accounting system if I do not agree with their assessment.

    Depending on the tolerance of that open invoice (meaning how much is outstanding), I may permit a 2nd order and carry the unpaid balance forward. Otherwise, I would terminate the account and sell the invoice to a collections agent after it has aged 60 days.

    If the first invoice is paid within tolerance and the outstanding balance is not paid in full by the end of the grace period, the Retailer’s account will be terminated and the combined invoice will be sold at 60 days of age.

    I will not reinstate any account until the open balance plus interest and collections fees were paid. And, then, the Retailer would have to prepay the first order after their account is reinstated.

    If an account is terminated a second time, it has proven itself too burdensome to manage and will no longer be reinstated. It’s less expensive to locate one or several accounts to replace the deadbeat.

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