Two years ago Dick Smith Holdings Ltd (Dick Smith) was floated on the Australian Stock Exchange in an IPO at $2.20 per share that raised $500 million for the vendors. Fast forward to 5th January 2016 and Dick Smith has had Ferrier Hodgson appointed as receivers and managers by its bankers. The company is now for sale and the equity valued at nil.
What could have gone wrong?
Five possible causes of the sinking of Dick Smith:
- Over leveraged. The company had total equity of only $130m at 30th June 2015 supporting $70m bank loans and $230m trade creditors. Back in June 2015 the share price was $2.20 per share, why was no equity raised to strengthen the balance sheet?
- Poor management. Clearly there has been an inability to manage the business.
- Poor inventory management. The inventory was valued at $293m at 30th June 2015 but by November 2015 needed to be written down by $60m. Isn’t inventory management a key skill for a retailer?
- Expanded too fast. Up to 393 stores at 30th June 2015.
- Lack of focus. Expanding into new product categories and home brand electronics. Who buys home brand electronics?
It is a sad day when an iconic retailer such as Dick Smith fails. There are lessons for all businesses from the sinking of Dick Smith.