Dick Smith enters receivership due to bad sales, banking woes


Electronics retailer Dick Smith has gone into receivership, with Ferrier Hodgson appointed to run the firm following a failure to secure adequate funding to support the business.

Dick Smith employs around 3,300 people across 393 stores in Australia and New Zealand, leaving those jobs at risk if a buyer for the business cannot be found.

The firm’s management said sales and cash generation were below expectations in the key December trading period, continuing a poor run in the later part of 2015.

Dick Smith said that, while confident in the long-term viability of the company, the directors were unable to secure support from the company’s bankers to provide finance for restocking to see it through the next month to six weeks.

That caused them to appoint McGrathNicol as administrators to run the firm while restructuring or sale options are explored.

However, after the appointment of administrators, Dick Smith’s lenders appointed receivers to run the firm and protect their financial interests.

The receivers – James Stewart, Jim Sarantinos and Ryan Eagle from Ferrier Hodgson – say that Dick Smith stores will continue to operate as usual while they evaluate restructuring or selling the group, or parts of it.

“Dick Smith is one of the best known brands associated with consumer electronics in Australia and New Zealand,” Mr Stewart said in a statement.

“We are immediately calling for expressions of interest for a sale of the business as a going concern.”

However, he also said that any outstanding gift vouchers held by customers will not be honoured and deposits will not be refunded.

Instead, consumers in those situations will have to stand in line with other unsecured creditors of the company and may only get a small fraction of their money back.

The first creditors’ meeting will be held next Thursday, January 14, at the Wesley Centre in Sydney.

The company had halted trade in its shares on Monday as the company sought to refinance its debt.

They last traded on December 31, 2015 at 35.5 cents.

Poor Christmas sales the final straw

Shares in Dick Smith plunged 83 per cent over 2015, largely due to profit downgrades in October and November.

In November, the retailer slashed the value of its inventories by $60 million, or some 20 per cent.

An analyst at financial firm IG, Evan Lucas, said the company’s cash flow problems have not improved since then.

“Clearly their syndicate loan leads, being NAB and HSBC, saw the numbers and were not impressed with what they saw and called in their loan, which net debt sits around $40 million for Dick Smith,” said Mr Lucas.

“It’s a very sad situation for shareholders, it obviously means they won’t be able to get out of the company and they may only get cents back in the share.”

Dick Smith shares opened on the market at $2.20 when it was floated by private equity firm Anchorage Capital Partners in December 2013, valuing the company at $520 million.

Anchorage bought the business from Woolworths for about $20 million in cash upfront just a year earlier – in total the private equity firm ended up paying around $115 million.

Dick Smith Electronics was started by its namesake as a car radio installation business on Sydney’s North Shore in 1968.

Australian retail giant Woolworths took a majority stake in the business in 1980 and full ownership two years later as the electronics chain expanded nationally, before selling it to Anchorage in 2012.

Dick Smith: What went wrong?
Private equity group Anchorage Capital bought Dick Smith from Woolworths in 2012 for an initial payment of just $20m.

Anchorage then “dressed the company up to look good for just one thing – to persuade people to buy shares,” according to analysts from Forager Funds Management.

Anchorage “wrote down the value of the inventory, took provisions for future onerous lease payments, wrote down the value of the plant and equipment and liquidated a lot of the inventory as quickly as they possibly could to throw off cash,” according to Forager’s Steve Johnson.

The cash was then used by Anchorage to effectively make Dick Smith ‘buy itself’.

The writedowns inflated profits, a key factor in enticing investors into the company.

For example: a stock item that may have been bought for $100 may have been in the books at $60 after the writedowns, which meant an extra $40 profit on every sale.

The writedown of plant and equipment lowered depreciation charges, also boosting the bottom line.

“But when they liquidated all that inventory to pay for the purchase price, they didn’t replace it,” according to Forager’s Steve Johnson.

“And the new owners of the business, since it’s been listed on the stock market, have had to put in a lot more money to fund the increase in inventory.”


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