What is Channel Stuffing
Channel stuffing is a deceptive business practice used by a company to inflate its sales and earnings figures by deliberately sending retailers along its distribution channel more products than they are able to sell to the public. Channel stuffing typically would take place just before quarter-end or year-end so that management, fearful of bad consequences to their compensation, can 'make their numbers'.
BREAKING DOWN Channel Stuffing
By channel stuffing, distributors temporarily increase sales figures and related profit measures for a particular period. This activity also causes an artificial bump up of accounts receivables. However, unable to sell the excess products, retailers will send back the surplus goods instead of cash to the distributor, who then must readjust its accounts receivable (if it adheres to GAAP procedure) and ultimately its bottom line. In other words, stuffing always catches up with the company, because it cannot maintain sales at the rate it is stuffing. Channel stuffing is not confined to the wholesale and retail trade; it can take place in the industrial sector, high tech industry, and pharmaceutical industry as well. Valeant Pharmaceuticals is an egregious example of a company found guilty in 2016 of channel stuffing.
This fraudulent practice is usually done in an attempt to hit compensation targets, or to raise the value of the stock or prevent its fall upon release of quarterly or annual results.