This excerpt taken from the NICH 10-Q filed Jul 15, 2008.
Apparel industry practices regarding chargebacks and allowances may increase volatility in our results of operations.
The retail apparel industry has traditionally employed a system of chargebacks and allowances on its suppliers, seeking credits or discounts on product which they cannot sell or sell at prices that are discounted below their expected selling price. In certain of our agreements with our retail customers we provide assurances of cooperation with the retailer to help them try to achieve gross margin targets, but we do not provide gross margin guarantees or purchase price protection. We have historically worked with our retail customers, including the acceptance of chargebacks and allowances where we believe that the product sale or customer relationship merit such cooperation.
In connection with the preparation of our financial statements, we establish a reserve against sales, accruing for anticipated retailer chargebacks and allowances. Management establishes this reserve based on the terms of purchase agreements and our historical experience. In difficult economic times, retailers have additional incentive to improve their operating margins by increasing the amount of chargebacks or allowances. The consolidation in the retail industry has also increased retailers leverage in negotiations with their suppliers. As a result, we are aware of increasingly aggressive chargeback practices among certain retailers. This trend has resulted in lawsuits that have been filed against certain department store retailers claiming that those retailers fraudulently deducted chargebacks against invoices owing to suppliers.
Uncertainty related to possible chargebacks and allowances makes it more difficult for our management to accurately estimate reserves and therefore increases the potential for significant changes in revenues and gross margin from one reporting period to the next. Disagreements with any retailer over their chargeback and allowance practices may impact our ongoing business relationship with that retailer.