Longtime financial executive and former Walmart U.S. CFO Michael Fung is helping discounter 99 Cents Only modernize inventory systems that have resulted in a series of accounting issues.
Fung, 62, retired from Walmart in early 2012, but was called back into service this past January by the private equity owners of 99 Cents Only. Fung was named interim chief administrative officer at the company to oversee finance, information technology and real estate. In addition, 99 Cents Only board member and former Food Lion president and CEO Richard Anicetti was named interim CEO.
The timing of their appointments is noteworthy because about the time Fung left Walmart after 11 years in various finance roles, including CFO of Walmart U.S. for six year, 99 Cents only was being taken private for $22 a share by an unconventional mix of investors. The buyout partners included a group led by the Los Angeles-Based private equity firm Ares Management LLC, the Canada Pension Plan Investment Board and members of the company’s senior management team that included CEO Eric Schiffer, his father-in-law and founder David Gold and his son and president and COO Jeff Golf.
However, earlier this year Fung and Anicetti were brought in, Schiffer and the Golds departed and the reason why became apparent last week when the company disclosed in a filing with the Securities and Exchange Commission that is was unable to file its annual report on form 10-K in a timely manner for the fiscal year ended March 30.
At issue were a range of inventory valuation issues that caused the company to overstate the value of inventories by as much as $20 million, according to the filing. The company said it was unable to resolve the matter without unreasonable effort or expense and thus the reason for the delay.
To avoid future problems, 99 Cents Only is in the process of upgrading its systems for accounting for merchandise inventories, including implementation of an SAP system that will for the first time track inventory at each retail store on a perpetual basis by stock keeping unit. The SAP implementation process will begin in fiscal 2014, with all stores expected to be included by the end of fiscal 2015. Walmart implemented an SAP system during Fung’s tenure with the company.
In another development related to the changeover in management, beginning in the fourth quarter of fiscal 2013 the company also changed how it estimates its excess and obsolete inventory so that reserves include items that are at least 12 months old and are not expected to sell above cost within 12 months as opposed to the earlier method that involved a 24 month period. As a result of the change in estimates, the company expects to record a non-recurring charge to cost of sales and corresponding reduction in inventory of approximately $10 million in the fourth quarter of fiscal 2013.