Business Failure of Dick Smith: Reasons, Impact and Lessons

Running head: ACCOUNTING FOR MANAGERS
Accounting for Managers
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Author’s Note

1ACCOUNTING FOR MANAGERS
Assessment Task 1: Individual Essay on Business Failure of Dick Smith
Introduction
Over the time span of last 10-15 years, many companies have faced insolvency and
gone into liquidation due to certain financial difficulties and other reasons. It is an essential
aspect to understand the key reasons behind the business failure so that effective strategies
can be made for reviving the business conditions. The objective of this essay is to discuss
about the key aspects of Dicks Smith which was known for being one of the major retailers in
Australia. The undertaken aspects about Dick Smith in this essay are the company’s history,
success drivers, and reasons for collapse, lessons and others.
History of Dick Smith
In the year of 1968, a young electronics technician named Dick Smith founded the
brand named Dick Smith with an investment of $610. In the initial days, the company
focused on the installation and service of car radio; and then, the company opened the
business of ‘Dick Smith Wholesale’. By 1980, the company grown to 20 stores and
Woolworths Limited purchased 60% of the working shares of Dick Smith by paying AUD25
million(dicksmith.com.au, 2019). In the year 2012, the ownership of Dick Smith shifted from
Woolworths Limited to Anchorage Capital Partners through a consideration of AUD20
million (dicksmith.com.au, 2019). Therefore, it can be seen from the above discussion that
Dick Smith had a history of shifting ownership from one company to another company.
Lastly, Kogan.Com acquired the business operations of Dick Smith in the year of 2016 that
includes the acquisition of intellectual property, online services and brand names
(dicksmith.com.au, 2019).

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Success Drivers and Financial Milestones
Before the incident of business failure and liquidation, Dick Smith was famous for its
business successes and major financial milestones as well as achievements. The main success
driver of the business of Dick Smith was the introduction of new lines of businesses along
with the major expansion plans. Due to this, the company was able in expanding its business
operations from installation and services of radios to the electronic retail and wholesale
business. The management of the company strongly focused on profitability through the
increase in revenue which would led to the generation of major profits (dicksmith.com.au,
2019). These success drivers helped the company in fast expansion of the stores all over
Australia. Positive financial results helped the company in its expansion. For instance, Dick
Smith was able in achieving year-on-year revenue growth from 2013 to 2015 along with
steady gross margin. All these aspects together helped the company in gaining major
financial and non-financial success over the years (dicksmith.com.au, 2019).
Major structural Changes
The acquisitions of Dick Smith by Woolworths Limited and Anchorage Capital
Partners need to be mentioned when discussing about the major structural changes in the
company. Throughout the period from 1981 to 1983, Woolworths Limited acquired 100%
ownership of Dick Smith through two acquisition stages (theconversation.com, 2019).
Woolworths Limited continued to operate the business of Dick Smith for 31 years. In January
2012, as a result of a strategic review undertaken by Woolworth Limited, it took the decision
of closing 100 of its Dick Smith stores along with selling the outstanding of the business
(theconversation.com, 2019). During 2012, as a result of a sale campaign undertaken by Dick
Smith, Anchorage Capital Partners Pty Limited purchased the business of Dick Smith. On
November 26 2012, 100% ownership of DSE Holdings and subsidiaries from Woolworths

3ACCOUNTING FOR MANAGERS
Limited was acquired by Dick Smith sub-Holdings. At the time of this transaction,
Anchorage Capital Partners owned 98% ownership of Dick Smith and LMA Investments Pty
Limited owned rest of the 2%. Dick Smith received a payment of $94 million from
Anchorage Capital Limited due to its acquisition (nbr.co.nz, 2019). In addition, Woolworths
Limited was paid by $21 million for working capital adjustments which made the total deal
worth $115 million. On October 25 2013, Anchorage Capital Partners incorporated Dick
Smith as an Australian Public Company with the aim to raise capital by initial public
offerings of its shares. It was possible to source $418.2 million from this initial public
offering (mcgrathnicol.com, 2019).
Reasons for the Collapse
There were certain reasons responsible for the business failure of Dick Smith. The
management of Dick Smith used earnings management as a strategy for deliberately
manipulate the earnings figures which was aligned with the pre-determined targets
(businessinsider.com.au, 2019). More precisely, certain actions of the management of Dick
Smith were responsible for its failure and ineffective inventory management was one of those
(news.com.au, 2019). The issues related to inventory of Dick Smith started to appear during
the second-half of 2015 when the management indicates writing down their inventory values
by 20% (businessinsider.com.au, 2019). This inventory was bought by the company in
accordance with the estimation of a certain level of sales, but they failed to attain this level of
sales; and therefore, a clearance sale was declared by Dick Smith through decreasing the
value of stock by 70% for clearing the inventory and this was the situation when rebate came
into the picture. For Dick Smith, rebates acted like a drug. The company required rebates
from the suppliers for generating cash flow which is considered as a company’s life blood,
bur due to the decline in the company’s performance as a result of decrease in sales, Dick
Smith used rebates excessively for getting rid of low profitability level (afr.com, 2019). The