Unhappy Returns

August 4th, 2005
By Suzanne Kapner
NY Post

A Home Depot store allegedly defrauded vendors by inflating what it charged them to cover the cost of defective or damaged merchandise, according to a former employee.

Michael Davis, 38, who worked at a Home Depot store in Aspen Hill, Md., for five years, until his termination in March, outlined a practice of deception in a series of telephone interviews, and a complaint filed late last month with the United States Department of Labor.

According to Davis and his lawyer Mark Schwartz, Home Depot pressured employees to fraudulently inflate the amount of money — known as chargebacks — that stores collected from vendors to cover the cost of faulty merchandise.

Two current Home Depot employees corroborated Davis' account of the alleged fraud, but spoke on the condition their identities be kept secret to protect their jobs.

Home Depot denied any wrongdoing. "Our return to vendor practices are subject to contracts that vary by vendor, and we have a zero tolerance policy for any activity that violates those contracts," the company said in a statement.

The allegations against Home Depot, a $73 billion retailing giant that is based in Atlanta, come amid heightened scrutiny of the often-murky practice of retail chargebacks. Saks Inc. and Federated Department Stores are among retailers coming under fire for similar practices.

At Home Depot, Davis was in charge of cataloguing defective or damaged merchandise that consumers had returned to the store and tallying vendor chargebacks.

"I was instructed to process false claims," Davis wrote in his complaint.

For instance, Davis said, Philips Lighting Company, a unit of Royal Philips Electronics, allowed the Home Depot store in Aspen Hill to receive credit for $1,000 of damaged or defective light bulbs a month, sight unseen. Should the chargebacks exceed that amount, Philips would send a representative to the store to inspect the goods.

Davis said he was instructed to charge Philips slightly less than the $1,000 ceiling each month, even if the actual defects or damages totaled far less than that amount.

Moreover, added one of the employees who spoke on condition of anonymity, sometimes Home Depot didn't even have $1,000 worth of Philips light bulbs in stock. "The damages," this person said, "could exceed the physical amount of inventory in the stores."

Michael Goldmacher, a Philips spokesman, declined to comment.

By early 2002, according to Davis, the Aspen Hill store was processing roughly $35,000 to $40,000 in chargebacks a week. But, Davis said, management pushed employees to collect even more money from suppliers.

A copy of an internal memo obtained by The Post, dated April 19, 2002 that was e-mailed to all store managers from Larry Mercer, who was then vice president of operations, but is no longer with the company, discussed "missed RTV dollars."

The memo pinpointed specific categories, such as the electrical and flooring departments, that had the greatest opportunity to boost chargebacks, and estimated that on a company- wide scale Home Depot was missing out on more than $59 million in credits.

Davis said that Home Depot store managers pressured suppliers who complained about excessive chargebacks by threatening to cut back orders of their products.

The vendors, Davis said, tended to acquiesce, given the sheer size of Home Depot, which has annual revenue that is more than double that of the Lowes Companies, its closest competitor.

Half a dozen vendors contacted for this story either declined to comment on their relationship with Home Depot or said they were happy with the arrangement.

Inflating the amount of damaged goods helps to offset shrinkage, which is the amount of inventory lost to theft, thereby boosting store profitability. Since bonuses are tied to store profits, there was a direct incentive to manipulate the numbers, Davis said.

Davis said he repeatedly discussed his concerns with Charlotte Camacho, the human resources representative at the store, who urged him not to do anything unethical, but also told him "to do what is best for the store."

Camacho was on maternity leave and not immediately available for comment.

Davis said he was eventually transferred to the night shift in retaliation. When both his parents fell ill in early 2005, Davis said he filled out a form to qualify for time off under the Family and Medical Leave Act.

But when Home Depot fired him later that year, his poor attendance was cited as the reason. When he reminded his supervisor that he had received permission for the leave of absence, he was told that his personnel file had been misplaced and there was no record of the paperwork.