Three lessons from the collapse of Dick Smith

The collapse of electronics retail chain Dick Smith has sent shockwaves through the retail industry.

Dick Smith announced to the market yesterday morning it had appointed McGrathNicol as voluntary administrators “with considerable regret”.

A syndicate of the company’s lenders subsequently appointed Ferrier Hodgson partners James Stewart, Jim Sarantinos and Ryan Eagle as receivers and managers of the company.

Dick Smith’s 393 retail outlets in Australia and New Zealand are continuing to trade but Ferrier Hodgson said yesterday the receivers will not accept outstanding gift vouchers or refund deposits, a move which has angered affected customers.

While it may be some time until the full story behind the collapse emerges, there are several lessons SMEs can learn from the situation.

1. Inventory management is essential

Dick Smith’s inventory problems started to become apparent in the second half of 2015 and at the end of November, the company revealed it would write down the value of its inventories by 20% or $60 million.

“Frankly we bought inventory in anticipation of certain sales levels – we didn’t achieve that sales level and that’s part of what we’re clearing up today,” a spokesperson for the company said at the time.

The write-down was quickly followed by what Dick Smith labeled a “mammoth” clearance sale, with prices on old stock slashed by as much as 70%.

However, the pre-Christmas sale appears not to have hit the mark, with Dick Smith chairman Rob Murray saying in a statement yesterday “sales and cash generation in December were below management expectations, continuing a trend experienced during 2015”.

“The company explored alternative funding, however, the directors formed the view that any success in obtaining alternative funding would not have been sufficiently timely to support short-term funding requirements and allow the company to order required inventory during the next four to six weeks.”

So on one hand, Dick Smith had struggled to clear out excess old inventory and on the other, had difficulties securing finance to purchase new stock.

While the receivers have not yet provided details about the cause of the company’s dire financial straits, apart from saying the company had become “cash constrained in recent times”, the actions of the company’s lenders also indicate large amounts of debt are in play.

Dick Smith is estimated to owe $140 million to the banks and approximately $200 million to creditors, according to Fairfax. 

2. Private equity floats are not always what they seem

The role of private equity group Anchorage Capital in Dick Smith’s recent history provides important context to the retailer’s collapse and shows that private equity floats may not always be what they seem.

Anchorage purchased the Dick Smith business from Woolworths for $115 million in November 2012, paying just $20 million upfront, and floated the company on the Australian Securities Exchange in December 2013 with a market valuation of $520 million.

Speaking at an event in September 2014, Dick Smith chief executive Nick Abboud and then chairman Phil Cave, managing director of Anchorage Capital, said they undertook 170 “turnaround” programs in a space of just nine months, which all centered on improving the company’s cash flow.

After the nine months, they said the focus turned to growth and profitability and that was when the decision was made to take the company public.

Dick Smith Holdings debuted on the ASX with an initial price of $2.20 in December 2013 but prior to entering a trading halt on Monday, the company’s shares were trading at just 35.5 cents.

It’s led many, including the retailer’s founder Dick Smith, to claim the company’s initial public offering was dramatically over-valued. In an interview with Fairfax, Smith labeled the valuation “clearly ridiculous”.

Smith sold the business to Woolworths in 1982 for $25 million. He said “most people” would know the $520 million float was “impossible” considering how the relatively small price Anchorage paid for the company.

“You can’t have that type of gain in a short time,” he said.

3. Customer service matters in a competitive market

With just a handful of prominent players, the consumer electronics market in Australia is a competitive arena and in that environment, customer service matters.

Dick Smith came under fire in December from angry customers on Facebook who claimed online orders had not been delivered for weeks and customer service representatives had hung up the phone on those who had rang to complain.

While all retailers no doubt would receive higher volume of customer complaints during busy trading periods, especially if they are running a company-wide sale, it was clear some shoppers were not impressed.

Brian Walker, retail expert and chief executive of the Retail Doctor Group, told SmartCompany at the time it was important for Dick Smith to be “getting the basics and fundamentals right”.

“Dick Smith has faced significant enquiries by the market due to the downgrading of its share value,” Walker said.

“The brand cannot afford too many other bumps on its journey.”