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Dick Smith shortfall more than $260m; poor decisions key in failure

Dick Smith creditors are out of pocket to the tune of more than AU$260 million according to an official report into the collapse of the business, which says lays much of the blame for the demise on poor management.

The report by administrators McGrathNicol notes poor inventory purchasing decisions, dubious expansion plans and an inability to obtain favourable credit terms all contributed to the company’s downfall.

Ultimately, Dick Smith Group failed because it was unable to make scheduled payments without breaching the terms of its bank facilities.

The report, released ahead of the second shareholders meeting later this month, says Dick Smith was losing market share in a highly competitive market.

“Revenue growth was based on store growth and commercial sales at low margins,” the report notes. Dick Smith’s store network was ‘much larger’ than those of its competitors, leaving the company with a higher cost base and considerable exposure to, and reliance on, the rapidly moving office and computer products market.

The report says the company’s expansion plan required ‘considerable’ financial commitment and utilities all cash resources, along with requiring ‘considerable’ supplier commitment and bank borrowings.

Inventory decisions weren’t consistent with consumer demand, leaving DSG with a considerable level of obsolete and inactive stock, requiring a major write down, and clearnace sales didn’t generate the required sales or margin to alleviate the cash pressure.

An inability to obtain favourable credit terms impacted on stock levels, product mix and store presentation, and ultimately the cash flow pressures lead to banking covenants being breached that could not be remedied, McGrathNicol says.

The administrators say the majority of outstanding employee entitlements have been paid, but note that $2.1 million in historical underpayment issues, are still to be paid.

While the banks will be repaid a proportion of the A$140 million they are owed, McGrathNicol says they are likely to suffer ‘a significant shortfall’, with that shortfall dependent on recoveries that can be made by the receivers and the settlement of security interests with trade creditors.

Unsecured creditors – which include gift card holders – are not expected to see any return on their investments, ‘unless very significant recoveries are made in the liquidation process’.

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