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Samsonite CEO resigns as short seller jolts luggage maker
[HONG KONG] Samsonite International SA's chief executive officer, Ramesh Tainwala, stepped down after a short seller accused the world's largest branded-luggage maker of accounting lapses and poor corporate governance. The company's shares jumped the most in five years.
Mr Tainwala is stepping down effective immediately, Samsonite said in a statement Friday.
While the CEO cited personal reasons, Samsonite said the resignation was in the company's best interest after the board reviewed the short-seller allegations that Tainwala falsified educational credentials. Samsonite said Kyle Francis Gendreau, chief financial officer, succeeds Tainwala as CEO.
The company also released a detailed response to the short seller, Blue Orca Capital LLC, repeating that the report is "one-sided and misleading" and the "conclusions drawn in the report about the company and its financial results are incorrect."
Samsonite's shares jumped more than 15 per cent early Friday in Hong Kong as trading resumed after a week-long halt. The Mansfield, Massachusetts-based company's stock plunged 21 per cent on Thursday and Friday last week after the report was issued, erasing US$1.3 billion in market capitalization.
Blue Orca, founded by former Glaucus Research Group research director Soren Aandahl, accused Mr Tainwala of fraudulently claiming to hold a doctoral degree in business. It questioned related-party transactions between Samsonite and Indian entities controlled by Mr Tainwala and his family, and a revolving door of auditors at the luggage maker's South Asia unit.
The short seller also alleged Samsonite concealed slowing growth with debt-funded acquisitions, including its 2016 purchase of Tumi Holdings, and inflated profit margins with questionable accounting linked to its takeovers.
"The company's board of directors stands behind its track record of transparency and corporate governance," Samsonite said in the statement. "The company's consolidated financial statements and the related notes to the consolidated financial statements, which are audited by KPMG LLP, are in accordance with International Financial Reporting Standards."
The company said its accounting associated with the acquisitions of Tumi, and Tumi's distribution network in certain markets in Asia, conforms with international accounting standards, and operating margins accurately reflect the strong underlying performance of the business.
Mr Tainwala's departure from the dominant player in the US$19 billion luggage market claims a CEO who has helped the company grow through acquisitions since taking over in 2014. Samsonite's shares almost doubled over the past two years, driven by a spate of deals including the US$1.8 billion purchase of Tumi.
Mr Tainwala, 59, started off as a commodities trader before getting into the luggage business as a maker of the plastic sheets that are molded into suitcases. His ties as a supplier to Samsonite led to a joint venture in the late 1990s to manufacture international-quality luggage in India. Mr Tainwala subsequently rose within the ranks at Samsonite, becoming head of Asia-Pacific by 2011 and CEO in 2014.
Samsonite chairman Timothy Parker supported Mr Tainwala as recently as last week, saying in a statement, "I have full confidence in Ramesh's capabilities as CEO."
A week after Blue Orca's report, Samsonite offered a point-by-point rebuttal to the short-seller's allegations.
Here is a breakdown of the issues.
Samsonite inflated Tumi's balance of payables to US$139 million at the time of acquisition, so that it could artificially inflate margins Blue Orca has confused "trade payables" with "trade and other payables" in the financial statements.
The latter includes accrued expenses and other payables, which add up to US$138.7 million as of Aug 1, 2016.
Samsonite may be holding a growing balance of stale inventory, as its 2017 financial statements show a carrying amount of inventories at net realizable value of US$180.8 million in 2016 and $229.6 million in 2017. These figures given in its 2017 financial statements were incorrect.
The accurate values should have been US$73.6 million for 2016 and $100.9 million for 2017. The inaccurate figures do not impact company's profitability or financial position Abhishri, a luggage manufacturer owned by Mr Tainwala's family, also buys products from Samsonite's Chinese suppliers as a middle-man. If Abhishri sources from the same Chinese suppliers as Samsonite, they are sourcing raw materials or components used to manufacture products.
Abhishri does not act as a middle man for Samsonite. Bagzone, a retailer owned by the Tainwala family, gets better credit terms from Samsonite than others as it disclosed a receivable balance that exceeds sales Bagzone's receivables are largely reflective of the additional investment Bagzone put into growing the footprint of its retail distribution network in India, which has resulted in increased sales for Samsonite India.
Samsonite India has had 3 auditors in 3 years, which is a "red flag" The auditor used by Samsonite Group in India has not changed.
The changes which Blue Orca identified were for Samsonite India's statutory accounts filed with the Indian government, which are separate from the Samsonite Group's accounts. These changes were due to Samsonite India's preferred auditor leaving one firm to join another.