A survey by ChannelNews reveals that several leading distributors as well as consumer electronics vendors of goods to Dick Smith have not been paid for weeks.
Insiders are telling us that Dick Smith warehouses are full of “junk” house brand stock that the mass retailer is struggling to clear, Panasonic has confirmed that the Company has been put on credit hold and all future sales are on a cash only basis.
We have also been told that Dick Smith has a $250M lease expose and that landlords are now concerned that the Company is set to start closing stores or that they could fail altogether.
A Deutsche Bank analyst wrote in a report yesterday that ‘The sheer size of the inventory impairment suggests the problem is much worse than we feared. With this being the second downgrade in a month and with the credit metrics tightening, DSH is likely to experience significant downward pressure in the short-term. Of more interest to us is the potential impact on the broader consumer electronics sector.
We are reminded of the events of 2011-12 when the failure of WOW Sight & Sound and the closure of 70 Dick Smith stores by Woolworths drove significant industry margin pressure.
Fund managers say the company, which has net debt of $40 million, is struggling to pay suppliers and could become insolvent if sales fail to rebound over Christmas.
“If I were a supplier I’d be getting worried,” said Forager Funds Management co-founder Stephen Johnson. “It’s priced like a distressed stock.”
ChannelNews has asked Dick Smith management about their trading issues on several occasions.
Neil Merola, the former Myer executive and now Marketing Director at Dick Smith, when asked about the high level of inventory in Dick Smith warehouses several weeks ago, told ChannelNews that the Company whose shares slumped to $0.28 cents yesterday after starting the year at $2.29 that the Company had seen the pending fall in the dollar and had “deliberately” gone out and acquired stock from overseas Companies.
When we put it to him that sales and profits were down and that there was friction in management ranks concerning the high level of inventory he said “Who is feeding you this bullshit, it’s all rubbish”.
He also denied that there was friction in the buying team over the high level of house brand stock being shipped into stores from the Companies Hong Kong buying group which is run by a relative of Dick Smith CEO Nick Aboud.
Yesterday calls to trade insurance Companies were running hot as distributors who have millions of dollars’ worth of exposure to the embattled retailer made inquiries.
Heavily exposed at Dick Smith are brands such as ASUS, Toshiba and HP, Lenovo chose not to do business with Dick Smith in favour of relationships with Officeworks, Harvey Norman and JB Hi Fi.
Acer started cutting back their exposure to Dick Smith several months ago due to marketing demands that Dick Smith were making on vendors.
A NSW based distributor of accessories and consumer electronic goods said “We are exposed. We have not been paid for eight weeks despite several calls to the Company”.
Another NSW based vendor of PC accessories said that after several weeks of calling Dick Smith they finally got a “partial payment”.
During the past two month ChannelNews has exclusively revealed that several senior merchandising directors, a general manager and three buyers have quit the Company. We were also the first media Company to raise questions about inventory levels and falling sales.
Now there are calls for Dick Smith CEO Nick Aboud to quite, as questions are raised about the actual performance of Dick Smith stores during the period that Anchorage Capital were spruiking Company for their share listing.
When Woolworths sold consumer electronics group Dick Smith in 2012 to Anchorage Capital for $94 million, Woolworths had previously invested millions in marketing, their store network. They introduced a new look, a new branding but despite this the consumer electronics chain failed to deliver increased sales, or profits.
At the time Woolworths said that their Dick Smith business had been on a downward trend for five years, largely due to structural changes as consumers shifted to lower-margin products.
Then miraculously in a space of only a few months and under the management of Nick Aboud and Marketing Director Neil Merola the stores were suddenly performing. A deal was struck with David Jones, which has since been terminated, new Move stores were announced and stock was suddenly flowing through the Dick Smith store network.
At the time Woolworths was accused of selling it for a “peppercorn” after its new owners packaged it up 15 months later and listed it on the ASX with a value of $520 million.
As soon as the money from the float has been pocketed by the likes of Aboud, Merola and Phil Cave the Chairman of Anchorage Capital things started to slide sideways.
Stores traffic was suddenly down while several stores across Australia were being quietly shut down. Then earlier this year as the problems at Dick Smith started to become visible, senior management started to quite.
Insiders have told ChannelNews that actual store sales were artificially inflated.
Now Dick Smith stock is being labelled a wipe-out as shareholders slashed its shares 57 per cent, pushing its market value to less than $70 million.
At 4.00pm last night shares in Dick Smith were at $0.28 after the Company finally came clean about the inventory levels that we had questioned management about several weeks ago.
The share crash was based on the company’s decision to make a $60 million non-cash impairment before it had completed an inventory review, which was interpreted as a portent of worse to come.
In a statement to the ASX – weeks after issuing a profit warning – the company said its October performance was disappointing, November was trading below expectations and stock holdings remain above management’s preferred levels.
To this end it effectively scrapped its profit guidance and said a further impairment may be required, depending on the Christmas trading.
What ChannelNews is suggesting is that the Australian Companies and Securities Commission step in to investigate whether information presented to the market prior to the float was accurate.
One of the fundamental roles of a retailer is managing inventory.
That Dick Smith has got its inventory so wrong raises questions as to why it was “so right” prior to the float and “so wrong” after the float when several people pocketed millions of dollars based on the perceived performance of the Company.
Fairfax Media wrote ‘In sharp contrast, the bloodbath at Dick Smith raises the question: would you let your mother buy from private equity? On the evidence of Dick Smith.
Anchorage Capital partners bought Dick Smith in 2012, beavered away for 15 months, tarting it up, to sell at a massive premium in December 2013 at $2.20 a share.
Private equity made a killing and investors who bought in the float have now seen hundreds of millions wiped off the value of the retailer.
The latest write-downs and an inability to confirm profit guidance paints a worrying picture for the company.
It comes a month after announcing a big-bang discounting and marketing war to help improve sales during the Christmas period.
“We’re going to drive top-line sales and cash conversion through this period and get momentum back in the business,”Dick Smith boss Nick Abboud told the market in October, just after cutting full-year profit guidance.
Now Abboud can’t confirm anything, leaving shareholders wondering what to do. It also raises questions about what is really going inside the company, and what has gone so horribly wrong.
