When things began to fall apart at Uchumi

Uchumi Supermarkets CEO Julius Kipng’etich

‘Passionate’ was the word Catherine Ngahu said best described the emotions among Uchumi Supermarkets’ shareholders when the retailer held its annual general meeting last week.

Each of the shareholders who spoke at the meeting shared the frustration of encountering empty shelves every time they shopped at the outlets owned by the listed retail chain they have invested in.

Still, they kept going back to the same stores in the hope that stocks had been replenished. Often, the shelves were still empty, but they kept the faith, they said.

“That should never happen again,” Ms Ngahu said, trying to pacify the already angry and disappointed shareholders-cum-customers of Uchumi.

Worse news

It was the first formal meeting Ngahu, a former business lecturer at the University of Nairobi and the founder of SBO Research, and the re-constituted board of directors were having with investors.

The meeting held at Laico Regency in Nairobi was obviously going to be a difficult one, especially as it was coming after the retailer reported Sh3.4 billion in losses and closed 13 branches — including two in Kenya — only a year after being granted nearly Sh900 million by these same shareholders.

And as the investors would find out later following an exclusive in The Standard, the proceeds from the additional capital injection — which came from a successful rights issue — did not even end up in the business.

Worse news was yet to come.

Apart from the turnaround plans mooted by the present executive team, led by former Kenya Wildlife Service boss Julius Kipng’etich, virtually all other news in the meeting was devastating.

It was announced no dividend would be paid in the financial year ended June 2015 due to the massive loss, with the executives pointing out that the previously reported profits had been grossly overstated.

The rains had begun pounding Uchumi at least three years before, but the former management, which was led by Jonathan Ciano, had found a way to pad earnings and understate expenses.

Essentially, the Sh0.30 paid out in dividends per share in 2014 may have possibly been paid out from borrowed funds.

Uchumi reported Sh364 million in net earnings for the year ended June 2014. But on Wednesday, the new CEO told shareholders they had been duped.

More than Sh1 billion in losses had been cleverly concealed, prompting the need for a restatement of accounts.

“We have had to write off more than a billion shillings concealed from previous years,” Dr Kipng’etich said.

This write off in the last financial year ballooned the losses in an already disappointing year. Total net losses for the 2015 financial year jumped to Sh3.4 billion.

Further, London-based investment bank Exotix had last year written in a research note that Uchumi’s past managers had factored in the revaluation of property gains in the retailer’s income statement.

Without the gains from the revaluation of properties owned by the retailer, including two prime premises in Nairobi, Uchumi would have been in loss-making territory from 2013.

Second crisis

“After stripping out the revaluations, we calculate that Uchumi would have reported a Sh123 million loss in 2013 against the Sh357 million profit it reported, and a Sh336 million loss in 2014 compared to the Sh384 million profit it declared,” Exotix said in a report published mid last year, at the height of a second crisis at the retailer. The first crisis saw it placed under receivership in 2006.

Around the time Exotix was releasing its report, new investors Jamii Bora Bank, which acquired a near 15 per cent stake, were taking firmer control of the retailer. Mr Ciano was kicked out and the exit of the entire board was engineered.

According to globally accepted financial reporting guidelines, gains made from revaluation of properties for companies whose business is not dealing in such fixed assets, should not be treated as ordinary revenue. But that is what Uchumi’s earlier reports indicated, helping pad profits by over Sh1 billion.

Typically, such gains should only be noted after declared profits or losses as other comprehensive income.

Further, the retailer had put up for sale unspecified assets in 2014, which the management immediately recorded in its books as owed amounts of Sh330 million, even though the sales had not been completed.

Of this amount, Sh20 million was booked as gains on the sale of assets and recorded under retained earnings. The bigger impact of this transaction was to overstate the liquidity of the business, even when it was obviously in distress.

The actual disposal of the property was executed the following year, Kipng’etich now says, indicating the previous accounting banked on a miracle somewhere along the way to help cover up the financial distress.

And there was a lot more hidden.

At the height of Uchumi’s troubles, which were countered by false assurances by the existing management, suppliers were busy cutting deliveries over unpaid supplies. Some even moved to court to compel the retailer to pay overdue debts.

Simple trick

It was not until a crisis meeting was called around the time that Ciano was kicked out that it was found that while the firm’s books indicated the amounts owed to suppliers had been settled, no such payments had been made.

A simple trick was employed to do this. Uchumi drew payment cheques in favour of the respective suppliers and registered them in its payment vouchers as collected.

Such cheques would then be destroyed or locked up in safes, with auditors duped into thinking payments had been made and debts settled.

“As of 30 June 2014, the company had unpresented cheques amounting to Sh746 million reflected in the bank reconciliation. The board has recommended these be reversed since it is not possible to ascertain whether they had been released to the suppliers at year end,” Uchumi said in its latest annual report.

At some point, suppliers stood accused of demanding multiple payments for deliveries, as available records showed their dues had been settled.

As almost every single aspect of the business was not adding up, a forensic audit was commissioned, with the new shareholders, Jamii Bora, demanding a clearer understanding of the status of their investment.

And from this, another shocker was delivered: the audit could not trace where the Sh900 million raised in late 2014 was invested or banked after the rights issue closed.

The forensic audit unearthed the scale of rot in the retailer, where resources were plundered in a ‘free for all’ grab.

“The money was wired to Uganda and Tanzania, but it did not reflect in either country’s stocks,” Kipng’etich said on the sidelines of the meeting, adding that criminal proceedings would be brought against the former managers as that loss of funds amounted to “outright theft”.

The criminal charges would be in addition to a civil case where the management and directors are being accused of having failed in their duty to act in the interest of shareholders.

Among the failures of the past management and board are that some of the top officials doubled as major suppliers, and they opened branches that could not be justified.

One such branch is in the dusty town of Gulu in Northern Uganda. Analysts have expressed concern that even branches in bigger towns were not in the best locations.

Uchumi has since closed its subsidiaries in Uganda and Tanzania, as they never returned a profit. The retailer has written off more than Sh1.5 billion in investments in the two countries, hoping that by filing for bankruptcy in both jurisdictions, the potential losses will be capped at the value of assets therein.

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