Dick Smith Business Case Study

The essay provides a comprehensive analysis of the rise and fall of Dick Smith's business, detailing its initial success, subsequent acquisition by Woolworths, and eventual decline under Anchorage Capital. It examines the financial mismanagement, inadequate cash flows, and strategic failures that led to the company's downfall, offering insights into the importance of sound management practices and financial oversight in business operations.

Assessment task 1: Individual
essay
DICKSMITH

Introduction of Dick Smith
In the year 1968 Dick Smith started a small business in Sydney for installing car radios with an
initial invested capital of $610. The business grew exponentially and by the end of 1980 ,
Entrepreneur Dick Smith had about 20 stores. These stores expended their product range to
include many items such as electronics goods and kits. In the year 1980, one of Australia’s
largest company Woolworths decided to acquire a 60% stake in the Dick Smith operated stores.
Two years later Dick Smith personally exited the business by selling the remaining stocks to
Woolworth for about $ 25 million.
In the Fiscal year 2012 the company announced restructuring of the Dick smith business and
decided to close approximately 100 stores. Finally, Anchorage capital paid approximately $115
million to Woolworth to acquire the Dick smith business. Anchorage paid $20 million as an
upfront pay of the $115 million. In about a years’ time by December 2013 the anchorage capital
decided to float the Dick Smith business in the ASX. The market valuation of the business was
estimated to be $520 million at that time.
However, within two years’ time (November 2015) the business was seen experiencing
dwindling sales figures and cash flows and decided to write down 1/5th of the stock amounting to
over $60mn. Stock prices of the company declined over 80% in December 2015 and the
company decided to undertake a massive stock clearance sale in December 2015. In the month of
January, the company was pressed into voluntary administration. At that time the company was
operating a total of 393 stores of which nearly 353 stores were designated as Dick Smith stores.

Literature Review
Dick Smith started the business on the basis of a hobby electronic store which can do
individual things and charge different prices. The initial model was to service individual
customers and not sell standard electronic equipment because the business was based on a large-
scale capital. The business grew and made profits because of its uniqueness of serving customers
unique needs. that’s how it succeeded in bring the consumers. But once the company was taken
over by the Woolworths hey greatly modified the business model to expand the business further
alienating the personal touch. However, the Dick smith store never did good business under
Woolworths supervision and the company divested the division because it was very unlike the
Woolworth business (Belverd E. Needles, 2012, 11TH EDITION). The business of Dick Smith
grew under Anchorage initially but were greatly burdened by increasing debts and finance costs.
The Company (Dick Smith) that was acquired by Anchorage was for finding the most
opportune time to offload the same and make profit. With that view Anchorages nominees ran
the company but did not proceed to change the firm’s capital structure form a predominantly
debt oriented structure. The debts kept on increasing. The level of debt in the capital structure in
2013 was 55% and the same increased to 63% in 2014 and 67% in 2015 (Dick Smith annual
report, 2015). Equity was divested to accommodate more debts because the cash flows generated
were less than adequate to run the firm. Increasingly the firm’s operations were run through
using more of the short and long-term debts. in the early parts of 2015 the debt -equity ratio
reached 2:1, and this is when the management found it really difficult to manage the business as
it became almost impossible to get more debt financing. Current liabilities could not be serviced
as per schedule of the inability to get more debts. Two bankers of the company (one being
HSBC) declined to lend more and decided to wait until the last quarter of 2015 for the firm’s
management to take steps to increase cash flows and failing which new credit lines were
completely stopped by December 2015. At that time the acid test ratio of the company was
only .3 which showed how dismal the cash flows of the firm were (Carl S Warren, 2011).

In 2012, Anchorage capital paid $115 to acquire Dick Smith business form Woolworth
and decided to list the stocks in the ASX. The stock of Dick smith started impressively at $1.9
per share as the company was packaged impressively. It traded at the same value of a year before
reaching $2.14. it reached a high of $ 2.2 in the month of January 2015. However soon after
trouble started to take uncontrollable proportions and stock prices crashed. In September 2015,
the stock was trading for about $.59 when the cash flows became untenable for the company
management and inventory was written down by over $60 million. Soon the company’s stock
fell over to reach a lowly $.35 in January 2016 and ASX decided to halt trading of the stock in
the same month (Tony Boyd , 2016).
One of the immediate causes of failure of the Dick smith business was the inadequate
cash flows generated in 2105 operations. The cash flows suddenly started to dry up in 2015 after
impressive shows in the previous two years. while the company had a net cash flow form
Operation amounting to $117,621,000 in 2013, the same declined by over 50% to $52,177,000 in
2014 and suddenly turned negative at ($3,940,000) in the fiscal year 2015.
While the net cash provided from operations were much larger in 2013 and 2014 the cash
flows from operations suddenly became negative in 2105. One of the reason is the sudden
increase in the amount of taxes paid and the other is significant increases in payments made to
suppliers etc. Simply said the company was not generating enough cash to run the business.
Also, the fiancé costs became larger in both 2014 and 2015 (Dick Smith annual report, 2015).
The problems of Dick smith operations initially began as a far as November 2015 as the
company intended to write down more than $60 of inventory form the books and the market
showed a knee jerk reaction as share prices tumbled. Because the firm was only less than 3 years
old and not large by any means the stock write down was seen as fishy. Because of this investor
confidence in the management of the firm tanked and resulted in more than 80% devaluation of
the forms shares.
However, after a lot of investigation it was revealed that the Anchorage Capital which
brought the dick smith stores form Woolworth cooked up the books in 2012 itself. In the books
of Woolworth the Dick smith inventory was shown at a market valuation of $246 million but
after take over the same was valued at $371 million (presumably at market price) and the same

stood at $58million higher. However, anchorage valued the stocks at $312 million on listing and
the same amounted to overvaluing the stocks by $66 million over what was valued by
Woolworth (BAKER & CORTRELL, 2011).
The book was also cooked up by Anchorage while reporting the value of the plant and
equipment. While the Woolworth financial statements showed the plant and equipment at $51mn
, the same was revalued by Anchorage at $65 million- thereby increasing values by over $14
million.
Deloitte Sydney was the lead auditor for both Woolworth and Anchorage and it appeared prima
facie that the book of anchorage was cooked up to show approximately $80mn value in excess of
what should have been reported. The transactions remained in the books prior to the company’s
listing in ASX and is being seen as an attempt by Anchorage to boost the listing price of the
stock and the same mistakes were allowed to remain in the book till the inventory was decided to
be written off in November 2015 (Carl S. Warren, 2012).
Prior to its listing the Dick Smith’s business was growing, demand was steady and
Expansion plans were in place. the failure of the frim occurred in an environment when the firm
was growing sizably because of bad planning and massive failure in sourcing inventory at
reasonable prices.
The environment in the beginning of 2013 was such that the company’s management was
looking for expanding rapidly even if the cost of expansion was too high and management was
thinking in the line of revenue growth and enough profitability to cover the higher costs.
however the expansion was rapid and unplanned/unchecked and performance suffered because
the profit margin could not be maintained. The management could not plan for a business model
which sustains itself and that would eventually turn the business into believing that it can avail
more debts to tide over tight situations and payoff when the situation is corrected.
Whole of the company’s available surpluses of 21012-2014 was used to fund the
expansion and debts increased manifold. However the problem that caused major changes in the
cash flows was the very fact that the company’s management had already bought too much
stocks which were bad and customer preferences lied somewhere else and these stocks were
procured at much higher prices which resulted in the eventual write down of $60mn in 2015. By

the end of 2015 the company went for a clearance sale to free the stores of such items but
unfortunately by then the company’s stores would have been set in motion strong sales and better
margins. As sales declined and cash was not available for payment the management did not have
any option but to declare closure.
The Dick Smith Business in the mid of 2103 was having a very good sales growth and
offered big profits. However, it had actually very little inventory. Thus, Anchorage tried to sell
the company before it is too late. 80% of the stocks were sold in its ASX listing which valued the
company at $520mn. Comparing the same with what anchorage paid for its made little sense
(Carl S Warren, 2011). Anchorage capital actually paid only $20 million to Woolworth at the
time of its acquisition and promised to pay the balance of $95mn in a years time. It sold the
company to the public by listing the company – for $520 million and made huge amount of
profit. The venture capital firm also sold the balance 20% of the stocks 10 months after 10
months of the initial listing. When Dick smith went into administration the company was
actually worth less than 15% of the market valuation when the company was first listed (Elliott
& Elliott, 2017).
The situation was not funny for any of the 3300 employees of the company. It was their
personal disaster. They were suddenly been jobless and must have felt sorry the way the
company’s affairs were being handled by the management of the company led by Nick Abboud.
The employees lost their livelihood and all the companies local suppliers lost a big client. Many
jobs would also have been lost at the supplier’s end and the same is unreported. Distribution
chain jobs were also affected. The gift cards which were issued by the company prior to going
into liquidation proceedings suddenly became worthless in the market. Families of the
employees which in the base of their jobs have already taken home mortgages were probably
hounded by the mortgage banks for recovery. There were widespread fear among shareholders of
the company , many of them became depressed and lost millions of their savings and hard earned
life earnings (Weiss, 2014).
Conclusion

Dick Smith’s management were grossly negligent in not scouring for a permanent solution to the
liquidity inadequacy and firm increasing costs. The Current liabilities Owings to suppliers and
wages etc) were difficult to be paid and the management went for more loans from lenders to fill
the gap. As the level of stocks dropped and the company did not have enough cash to procure
more stocks unless it paid the suppliers in time- the management faced a do or die situation
which they failed. The company might have been saved if the wrong doings in evaluating the
inventory would have been rectified years ago and thus the company would have been in a better
position ( as it would have been less valued and better managed because lack of stocks would
have led to lesser debts and lending by banks in the first place.

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