Dick Smith’s demise due to flawed strategy: report

dicksmith

Electronics retailer Dick Smith bought stock for supplier rebates rather than what customers wanted as part of a flawed strategy that contributed to its demise, its administrators say.

Six months after stepping in to salvage as much as possible from the failed business, administrator McGrathNicol said there will be a shortfall to creditors of more than $260 million.

The report attributed the following factors as central to the rapid demise of the electronics retailer.

  • All of the company’s cash reserves were spent on new stores, and the expansion was then funded with bank borrowings
  • The retailer was also losing market share, with its revenue growth driven by new stores and sales at low margins
  • Its range of products was not consisent with what consumers wanted, leaving a considerable amount of obsolete and inactive stock
  • Clearance sales failed to generate sufficient revenue
  • The company’s inability to obtain favourable credit terms also impacted on its stock levels, product range and presentation of its stores
  • Cash flow pressures eventually led to the breach of its banking covenants

“The collapse was made all the more significant given its speed and scale, just a couple of years after the successful public ASX listing of Dick Smith, as well as the time of year, just following the Christmas period,” Joe Hayes, from administrators, McGrathNicol.

“The receivers advised that the losses the business had sustained during 2015, the challenges in obtaining supplier support, the inventory mix in stores, and the low-margin, competitive environment meant potential purchasers did not see value in the network,” Hayes said.

The administrator’s report, released on Wednesday, said employee entitlements have been paid in full to more than 3300 former Dick Smith staff.

It estimated that $101.6 million at best can be recovered from the sale of stock and other assets.

Administrators also believe Dick Smith may have been insolvent at least by December 23, 2015.

The board admitted on January 4, 2016 that the company would likely become insolvent, and appointed voluntary administrators.

In the report to creditors, McGrathNicol said the company enjoyed a successful share market float in late 2013 as it projected strong growth and financial results, underpinned by an expansion plan and new lines of business.

Given this environment, management was too focused on store expansion and revenue at the expense of sustainable growth.

Management continued to expand the Dick Smith store network despite falling same store sales, a sign they were losing customers and market share, it said.

A key factor behind the sales decline was “making purchasing decisions based on rebates instead of customer demand,” the administrators said.

This caused a build-up of stock and by October 2015, Dick Smith had $180 million in “inactive” inventory, which led to a significant financial writedown.

“In our view, there was insufficient analysis performed on comparable sales and the investment case to support continued store expansion,” McGrathNicol said.

Administrator Joe Hayes said it was too early to draw conclusions regarding the involvement of Dick Smith’s board and management.

This comes ahead of 10 directors and managers facing a public examination in the NSW Supreme Court in September over their role in Dick Smith’s collapse, including former CEO Nick Abboud and former chairman Rob Murray.

Murray is facing a call from the Australian Shareholders’ Association to quit his current role as IGA supplier Metcash’s chairman, however Metcash says it is confident in Murray’s ability to fulfill the role.

Administrators will meet with creditors on July 25 in Sydney.

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