Former Walmart District Manager Accuses Company of Widespread Inventory Manipulation
A Chicago Walmart on Black Friday. (Reuters/John Gress)
In 1996, Sylvester Johnson left his post as a commanding officer in the US Army and began a career managing logistics at Walmart’s corporate headquarters in Bentonville, Arkansas. Once there, he received a series of rapid promotions, eventually overseeing the HR management of over 26,000 employees in five states. He became friendly with Walmart executive Mike Duke, who became CEO in 2009. In 2002, Johnson received the Sam M. Walton Hero Award, a prestigious company distinction. In 2003, he moved to North Carolina where he oversaw eleven Walmart Supercenters. The company fired him in 2009 for allegedly giving orders to manipulate inventory counts, a claim Johnson denies.
Instead, Johnson believes he was ultimately terminated because he is black. He also alleges—in an interview with The Nation and in a federal discrimination lawsuit—that the company engaged in widespread inventory manipulation.
“We're talking about hiding tens or hundreds of millions of dollars in losses here—inflating the profits of a store, a district, a region, a division and ultimately the entire company,” Johnson told The Nation. In theory, such a practice could have artificially inflated the company’s profit margins and stock price, amounting to a form of federal securities fraud.
Johnson claims that during his tenure as a Walmart district manager he was pressured by the company’s high command to hide losses due to “shrinkage”—defined as lost or stolen inventory—in order for stores to appear more profitable than they really were. Throughout the course of over six hours of interviews with The Nation, Johnson maintained that top management set shrinkage targets for Walmart Supercenter stores under his supervision that were “not ethically attainable” and then used methods of “fear and intimidation” against him in an attempt to compel him to meet those targets. Shrinkage represents a loss to any firm’s bottom line. It is a major factor in retail profitability, costing US retailers an estimated $34 billion in losses annually, according to the National Retail Federation.
Johnson’s case, which goes to trial on April 22 in a North Carolina federal district court, seeks to prove that he was treated differently than his white counterparts. He argues that while white district managers were manipulating inventory counts to make their stores appear more profitable, he refused to engage in such a practice and was fired on false charges of doing so.
In recent years Walmart has faced a series of high-profile discrimination suits, including the largest class action discrimination case in American history, Wal-Mart v. Dukes, which was thrown out by the Supreme Court in 2011. In 2009, the company paid $17.5 million to settle a suit alleging the company had discriminated against African-American job applicants.
Walmart rejects Johnson’s allegations. “We conducted a thorough investigation and have detailed information outlining his misconduct, and, based on the facts, he was terminated for violating company policy,” company spokesperson Randy Hargrove told The Nation. “Walmart does not condone or tolerate discrimination of any type and that played no role in his dismissal.”
“Additionally, we have strict policies around inventory accounting, and the allegations Mr. Johnson have raised are completely false and unsubstantiated,” Hargrove added. “In addition to Mr. Johnson, more than a dozen associates in his market were disciplined for failing to report the direction he gave them.”
In June of 2008, a company executive named David Carmon took over as Walmart’s Regional Vice President for North and South Carolina. Johnson claims that, at the time, some stores in his district were losing about a million dollars in shrinkage annually. Carmon instructed him to cut his stores’ shrinkage rates in half—a target that Johnson felt was impossible to hit without resorting to unethical and illegal accounting practices. According to Johnson, Carmon warned of repercussions if Johnson’s shrinkage rate did not fall. “He threatened everybody that if you didn’t get your shrink down, you were going to be terminated,” said Johnson in a court deposition. Speaking to The Nation, Johnson said that Carmon used “tactics of fear and intimidation, and everyone looked the other way.”
Johnson says that recorded shrinkage rates reduced to incredible levels in regions that Carmon oversaw. Carmon left the company in 2010, according to his LinkedIn page, which touts his achievements in reducing Walmart’s shrinkage rates in the Carolinas: “I successfully led some of the company’s largest operating units through remarkable growth and expansion, delivering strong and sustainable financial results. Most notably, the North and South Carolina region responsible for $15.5B in sales has seen a $60M+ reduction in shrinkage loss…”
Johnson says that he didn’t “play ball” with Carmon’s orders. In October of 2008, Walmart began investigating claims that Johnson was giving unethical directives. The company terminated Johnson’s employment in January of 2009 on the grounds that he instructed his subordinates to manipulate inventory accounting—the very practice that Johnson claims he refused to engage in. The following year, he filed suit.
According to Johnson, the practice of manipulating inventory counts extended beyond just the regions Carmon supervised. Johnson says he reviewed the shrinkage rates of over 400 Walmart stores around the country and was astonished at what he saw: impossibly low inventory loss rates to the point that stores would commonly display a negative rate of shrinkage, known as on “overage.” An overage occurs when records show quantities of inventory on hand greater than what was shipped to the store—a sign of either accounting or shipping errors, or deliberate fraud.
“It was a standard practice to look at [the shrink rates of] other stores because everyone competes with each other,” Johnson said. “When you see these overages in there that clearly should be investigated but the regional VP is saying ‘this is exactly what we're looking for,’ or ‘outstanding job,’ it is a point of concern,” Johnson said. “I think there is an unspoken culture at Walmart that a store is allowed to have excessive overages if it makes that store and the company look more profitable.”
“This could conceivably be done in some systems,” says Stephen A. Smith, a professor at Santa Clara University and co-editor of the book, Retail Supply Chain Management. “Walmart is famous for having really good information technology systems so that makes it hard to imagine, but maybe someone found a way to do it.”
So far, Johnson’s legal team has obtained documents detailing shrinkage rates in Walmart stores in North and South Carolina. But Walmart has refused his request to hand over similar documents across a broader region. Johnson argues that such documents are essential to prove whether the company indeed manipulated inventory counts on a large scale.
After reviewing the available documents, Peter Bell, a certified public accountant in Charlotte, North Carolina, and Johnson’s expert witness, stated that “the documents that were produced to me lead me to the conclusion that Walmart may be manipulating its accounting records—the evidence of which, if true, would necessarily mean that Walmart is engaging in a form of accounting fraud."
“These overages appear to be excessive,” wrote Bell in an affidavit filed in the case. “The overages are not explained and appear not to have been investigated in any way. Indeed, left unexamined or unadjusted, these excessive overages distort the financial reporting of these stores such that net profit is artificially inflated, and accounting fraud is strongly suggested.”
Such practices are illegal because a company’s inflated profit margin misleads investors, according to Robert Weisberg, a professor at Stanford Law. “If a publicly traded company issues any kind of official statement that is misleading to the marketplace and the assets of the company are distorted or inflated—maybe something involving inventory—that’s securities fraud.”
In late March, Walmart demanded that Bell’s testimony be thrown out, claiming that his findings were “non-committal speculation disguised as an opinion,” and that his expert witness statement lifted descriptions of retail accounting from textbooks without properly citing sources. The issue of inventory manipulation, Walmart’s lawyers also say, is tangential to any problem of racial discrimination. “Even if Bell had an admissible opinion, that would do nothing to help [Johnson] prove what he ultimately must—that Walmart terminated him because of his race.” Walmart is being represented in this case by the law firm of Littler Mendelson.
“You could make your profitability look better by doing things like not reporting shrinkage, that’s true,” says Paul Huppertz, Partner at the Progress Group, a distribution and logistics consultancy. “But I struggle to understand how long you do that before you run into major bookkeeping issues.”
Huppertz says that consistent errors in inventory recording would make it difficult for any large company to keep its supply chain working efficiently. He has never heard of a company obscuring shrinkage loss to appear more profitable.
Neither has Steven Platt, director of the Platt Retail Institute, a Chicago-based consulting firm that publishes The Journal of Retail Analytics. "Have I ever heard of this sort of fraud? No. Is it possible? Sure," Platt says. "All the hundreds of stores and all the employees involved would require a fairly massive cover-up. But Walmart has been accused of certain labor practices on a fairly massive scale in the past, and those turned out, I believe, to have been true."
Johnson will not say whether he believes the whole of Walmart is pervaded by discriminatory attitudes. But he will recount the scene at Walmart’s semi-annual conferences that gather district managers, known in the company as Market Managers, from all across the country. Because there were so few black managers at these gatherings, Johnson says that a common line among them became “What’s the count this time?” Johnson recalled that, often times, out of the roughly 350 Market Mangers in a meeting hall, about thirteen were African American.
Before moving to North Carolina, Johnson says that, from conversations with colleagues in Bentonville, he’d heard the company had particularly fraught issues with race issues in the Carolinas. Yet he didn’t fear making the move. “I grew up in the heart of Dixie—Rosebud, Alabama—and I came out to this area having been highly successful,” Johnson said. “When I got to the Carolina’s, I fell off a cliff.”
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