Daily : At The Moment News
6 January 2016
Global equity markets moved between small gains and losses overnight, as stock markets consolidated after
the rout in the Chinese market on the first trading day of the year. Closer to home, the news yesterday was
dominated by the announcement that Dick Smith was being placed into receivership. We believe the
electronic goods section of the retail sector is set to continue to struggle in 2016. Higher costs of imported
goods from a lower AUD and lower margins from increased competition and industry discounting are key
reasons for our negative view. In today’s daily we reiterate our views on the retail sector, and look at what
happened to retailer Dick Smith.
Demise of Dick
What Happened
Dick Smith was placed into a trading halt on Monday and yesterday announced that they had entered
voluntary administration and were subsequently placed into receivership by its banks. Dick Smith has been
experiencing problems for some time, with the company reporting disappointing sales and issuing profit
warnings over the course of the past 6 months. Lack of cash flow generation and a poor Christmas trading
period were the final straw which resulted in Dick’s major lenders finally pulling the plug on the
electronics retailer.
What now?
The company will continue to operate its retail stores for the time being. It is possible that a private investor
or a competitor see value in the remaining assets of the company and decide to buy the remains of the company.
Who Else is at Risk
If further write-down sales are undertaken by the company to sell its existing inventory, believes it
is likely to put pressure on Harvey Norman and JB HiFi, Dick Smith’s direct competitors. This increased
price competition will lead to lower sales margins and lower profits for the industry and consequently
remains cautious on electronic retailers as a sector. Further, our view is for the Aussie Dollar to move lower,
and a lower Aussie Dollar directly translates to higher costs for retailers that import their goods from
overseas. Furthermore, competition amongst retailers in the small appliances category has been
intensifying as the incumbent players look for growth in a slowing cycle.
Retail Sector – We Remain Selective
A ‘Spending Spree’ is a key theme of our portfolios and we believe that the low cash rates with drive
economic growth within the sector. As a result we hold a number of Australian consumer facing stocks in
our portfolio. While we are positive on the retail sector, we remain selective as picking retailers we
believe will outperform such as Myers, which has had a strong share price run of late.
Chart of the Moment:
Dick Smith’s share price plunged 82% over 2015 which was largely due to profit downgrades in October and
November. In an attempt to spur sales growth, the retailer slashed the value of its inventories by $60
million, or some 20 per cent in November. Unfortunately this was not enough to alter the course of Dick’s
demise. Dick Smith’s management said in a statement that sales and cash generation in December were
below management expectations, and it did not expect to be able to secure new funding quickly enough to
restock its stores over the next 4-6 weeks.
Dick Smith shares opened on the market at $2.20 when it was floated by private equity firm Anchorage
Capital Partners in December 2013, valuing the company at $520 million. Anchorage bought the business
from Woolworths for about $20 million in cash upfront just a year earlier – in total the private equity firm
ended up paying around $115 million. At close of business on the 31st December 2015 the company value
had sunken to $84 million.
Five Things Markets Will be Watching this Week
1) How global equity markets will trade in the first week of the year, and particularly whether they
can reverse recent losses.
2) Chinese manufacturing data has recovered somewhat of late, and further data will be released
early this week.
3) US employment data will be released later in the week, and the market will look for continued
strength to support further interest rate hikes by the US Fed.
4) The Oil price – whether the free-fall in the oil price will halt or reverse will be important for both
energy stocks and market sentiment more generally
5) Dairy prices will be released early in the week, with a recovery important for several agricultural
stocks held in our portfolio.