Dick Smith: The Latest Casualty in a Long Term Trend

Dick Smith [ASX:DSH] has entered into administration, having failed to refinance its outstanding debt.

This news probably won’t come as any great shock to stakeholders. Anyone following the retailer in recent months will know exactly why it’s in this position. Things turned for the worse late last year, and have only gotten worse since.

In November of last year, Dick Smith cut 20% of its inventory, or $60 million worth. Its 2014 blues extended right throughout the key Christmas trading period. Sales were down. Cash generation was poor. Not even generous discounts were enough to spur flagging sales. What might have been a festive reprieve proved the death knell in the end.

Dick Smith’s shares fell steeply throughout 2015, plunging by 83%. Most of this came as a result of profit downgrades in November.

Then, on Monday, Dick Smith announced it was halting trading of its shares. The expectation was that things were even worse than many imagined. Those fears were warranted.

The company entered administration this morning, casting doubt over its long term future.

With the company in receivership, the banks gave up on the troubled retailer. No longer were they willing to supply credit to support the company. Instead, they’ve decided to take the reins themselves.

And why not? If a business can’t meet sales targets during Christmas trade, when can it? Lenders are looking at Dick Smith, wondering how bad sales will get once the festive trade cools off.

Worse still, revenues are likely to fall further as we settle into the first quarter of the year. Lacking the funds to meet its debt obligations, you can see why lenders saw DSH’s position as untenable.

Because of this, lenders are calling on receivers to protect their interests. That’ll affect not only Dick Smith, but its customers as well. As the ABC reports:

The receivers…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 secured creditors of the company and may only get a small fraction of their money back.’

Of course, administration doesn’t spell the end of Dick Smith. But it could, and that’s the problem. Here’s what Forager Funds chief Steve Johnson said prior to the company going into administration:

This announcement is very negative. This could be the end of the road for Dick Smith. I wouldn’t be surprised if the company is not able to resume trading on Wednesday and instead seeks an extension of time to continue trying to re-finance its debt.

It didn’t get that extension. It got the repo men instead. And now, with receivers looking to take back money, the focus will be on ensuring that lenders are first in line. That means DSE’s principal lenders, NAB and HSBC, get first dibs.

Unfortunately for investors, they’re in a tough spot. Even a best case scenario might see them get only cents for every share they own in return. For anyone that bought into DSE when it was trading at $2.10 back in January 2014, that’s a bitter pill to swallow.

The competitive retail landscape is constantly changing

It’s never enjoyable watching an iconic brand like Dick Smith fall like it has. As a champion of Australian made products, many of us still have a soft spot for the retailer.

But it’s getting harder to defend brick and mortar traders in general.

As music retailers have found out all too well, technology is a disruptive beast. Digital consumption gutted a once thriving high street CD music business. And, relatively speaking, this happened in no time at all.

Electronics, which Dick Smith specialises in, are somewhat different. Unlike the death of music stores, DSH sells tangible, solid products. So the immediate threat to electronics retailers is less obvious.

But we’ve already gotten to the point where online shops can do a job as good as brick and mortar stores. The level of customer experience has evolved into something that matches the instore experience. Short of holding a product in your hands, there’s not much you can’t do online that you can’t in person.

Of course, Dick Smith is an online retailer as well. But the online landscape is much bigger, and far more competitive. They not only have to contend with the likes of JB Hi-Fi and Harvey Norman. Every one of these retailers faces pressure from international competition.

An advantage brick and mortar retailer’s hold is that people still enjoy shopping in person. But if we note this trend of online shopping is still relatively new, the future looks less certain. It seems like it’s been with us forever, but the timeframe is 10–15 years.

So what happens next? Well, local corner shops were first to go. The next step is the consolidation of the market in even fewer hands. At the same time, low cost international retailers are also carving out market share. Global retailers that have economies of scale which continually drive down costs.

And that’s before we even bring up the future of 3D printing, and what that could do to the retail sector…

In saying that, this process won’t happen overnight. A 2014 NAB report showed that online spending had increased by 12% that year to $16.2 billion. But to put that figure in perspective, online retail accounted for just 7% of sales. So there’s clearly a long way to go.

Shopping habits are still undergoing generational change. Every retailer, including the likes of JB and Harvey Norman, should be wary of what the future holds. Whether brick and mortar shops are sustainable in the long run remains to be seen. You can envisage a future where most of these retailers end up as online-only stores. In that world, you could easily see domestic retailers become extinct as they lose their one advantage over the likes of Amazon.

Maybe we’ll even get to a point where patents become all that matters. Where online retailers are surplus to requirement. Where Sony can send schematics to your 3D printer without the middlemen. Granted, we’re probably at least a few decades from reaching that point.

Or, perhaps, none of that will matter. Who knows?

For now, the electronics landscape in Australia could find itself with one less competitor. Maybe Dick Smith was just a fifth wheel that had to go. Neither JB Hi-Fi, nor Harvey Norman, is under threat of collapse. After all, both companies have seen share prices triple since 2012. Both are doing swift trade, at least compared to DSH anyway.

Alternatively, Dick Smith could survive. However it’s unlikely that it will ever prosper again. The carcass that receivers leave once they’re done with it may never regain its place.

Unfortunately, the market just isn’t big enough for so many retailers. That much is clear. But the long term trend of online distribution isn’t going away. Even though long standing Aussie vendors are adapting, it may not be enough in a future where global retailers dominate.

Mat Spasic,

Junior Analyst, Markets and Money

PS: Dick Smith wasn’t the only company that had a torrid 2015. The ASX lost 2.4% of its market cap last year. Unfortunately, 2016 may not provide any respite for investors. Markets and Money’s Vern Gowdie says we’re heading towards a much larger crash.

Vern is the award-winning Founder of the Gowdie Letter and Gowdie Family Wealth advisory services. He’s ranked as one of Australia’s Top 50 financial planners.

Vern wants to help you avoid this coming wealth destruction. His special report, ‘Five Fatal Stocks You Must Sell Now’, will show you how. In it, Vern shows you which five blue chip Aussie companies could destroy your portfolio…you almost certainly own one of them. To find out how to download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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