Dick Smith: Where it all went wrong
- 14 July, 2016 12:07
Aggressive store expansion, buying too much inventory, strained supplier relationships and not generating enough sustainable profit, were some of the numerous triggers that led to Dick Smith’s spectacular demise, according to McGrathNicol’s creditor’s report.
Much of the retailer’s revenue growth was a result of store network growth and to facilitate this expansion, it was also rapidly growing inventory that placed a considerable increase on supplier commitments, which strained a lot of those relationships, McGrathNicol said.
“Inventory purchasing decisions and the rate of technological change meant that, in many cases, stores were not stocked with product that met customer demand, requiring additional commitments to be made,” the report said.
The retailer generated about 40 per cent of its revenue from office products in FY15, which also included Apple products. When Apple declined to extend further credit to the retailer, a trade finance facility was obtained from Macquarie Bank to help fund invoices particularly for popular Apple products.
“The position worsened throughout 2015, as available cash resources and borrowings were directed towards capital costs that had been incurred for store openings, associated inventory growth and payment of dividends,” the report said.
The retailer’s issues with obtaining favourable credit terms impacted stock levels, product mix and store presentation. Cash flow pressures also lead to banking covenants being breached that could not be remedied. And this all eventually led to a major inventory write down of about $60 million in November.
“Dick Smith was on restricted trading terms with many of its suppliers due to late payments, and had insufficient positive cash flow to purchase new and desirable (high-margin) stock. Its inability to purchase new stock put further pressure on profitability,” the report said.
The report detailed the retailer’s borrowings increased from $71 million to $127 million in the six-months ending December 31, due to significant payments associated with inventory growth, capex commitments and a dividend to shareholders.
It also incurred a net operating cash loss in a four month period from July to November 2015, of about $71.2 million, which was later reduced to $22.1 million as a result of the December 2015 clearance sale.
Despite a huge amount interest in purchasing the Dick Smith business, the report found that considerable losses during the first half of FY16 would have made it fairly difficult to recover the business; and major suppliers not providing new trading terms to the receivers while existing debt was outstanding led towards the inability to rectify product mix and fully stock stores with the right products. Ongoing trading losses would have also put employee entitlements at risk.
In the end, Kogan.com was the only purchaser, which bought the intellectual property and online business.
Outstanding employee entitlements have been paid, with about $2.1 million in historical underpayment issues that will be rectified this calendar year.
The report also revealed a shortfall to creditors in excess of $260 million.
Lenders will be repaid a proportion of what they’re owed, but unsecured creditor including gift card holders, and shareholders shouldn’t expect to see any return.
The retailer reported year-on-year revenue growth, which was underpinned by new stores and increased sales, however occupancy and rental expenses increased from $46 million in FY13 to $93 million in FY15.
A second creditor's meeting will be held on July 25, where the decision will be made to appoint liquidators to the business.
Administrators were appointed to the troubled retailer on January 4, and National Australia Bank and HSBC appointed James Stewart, Jim Sarantinos and Ryan Eagle of Ferrier Hodgson as receivers.
The retailer began operating in 1968 by Richard ‘Dick’ Smith originally as a radio repair business in Neutral Bay.
During Smith’s 13 year hold of the business, it broadened its offerings and was eventually acquired by Woolworths in two stages from 1981 to 1983, and was operating as a subsidiary for 31 years until 2012 when it was eventually sold to Anchorage Capital for $94 million.
During its period of control, Anchorage developed a new strategy for the retailer that involved growing the store network, developing an omni-channel offering (enabling customers to shop in-store, online, via the telephone and from mobile devices), enhancing the mobility product offering and increasing Dick Smith private label.
In October 2013, it listed on the Australian Stock Exchange, raising $345 million and offering a $2.20 per share. When administrators were appointed, the price bottomed down to $0.35.5 per share, had 394 stores and more than 3200 employees.