Financial Case Analysis of Dick Smith Holdings: A Detailed Review

This report provides a comprehensive financial case analysis of Dick Smith Holdings, examining its journey from its inception in 1968 to its eventual liquidation in 2016. The study delves into the company's ownership history, its valuation at the time of its Initial Public Offering (IPO) and its acquisition by Anchorage Capital Partners. It critically assesses the financial irregularities, particularly in inventory management, that contributed to the company's downfall. The report also explores the ethical dilemmas faced by both Anchorage Capital Partners and the top-level management of Dick Smith Holdings, highlighting misrepresentations in financial reporting and the impact of these actions on investors. The analysis covers the role of the auditors, Deloitte, and concludes by emphasizing the significance of poor inventory management and misrepresentation of financial facts in the company's collapse. The case underscores the risks associated with rapid valuation increases, high debt levels, and questionable accounting practices, offering valuable insights into corporate governance and financial ethics.

Financial Case Analysis of Dick Smith Holdings
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Introduction
This report aims to provide a broad view on the case study of Dick Smith brand which was
liquidised on 25th July 2016 with a massive loss to the investors of the company (Chung, 2016).
Though, the company was again purchased by Kogan.com at the same time with an undisclosed
amount, it was speculated that the amount of the company in Australian security Exchange
(ASX) listing was false and hyped. In this context, the study describes a brief history of
ownership of the company Dick Smith brand. Furthermore, this research is focused on the
evaluation of two different situations of the DSH’s valuation related to when it was offered to the
public in the beginning and when the company was acquired by Anchorage Capital Partners from
Woolworths in 2012 (Chung, 2016). In addition to this, the study also elaborates ethical issue
faced by the top level management of the company when the company was listed in ASX in
2012 and by Anchorage Capital Partners pertaining to floating business.
A Brief summary of the Dick Smith brand
Dick Smith Company was commenced by Dick Smith in Atarmon, Sydney in 1968 under a
rented car park space (Ryan, 2015). The company mainly focused to install car radios as a small
business with just $610 as an initial capital. During 1970 to 80’s company was expanded by
various product lines and ranges with around 20 stores in Australia. In 1980, 60% of the
company’s shares holding by Dick Smith’s wife were sold to Woolworths. Moreover, remaining
40% of Dick Smith Company’s shares were fully owned by Woolworths in 1982 with a total
worth of $25 million Woolworths purchased the Dick Smith brands whole company (Dick
Smith- Annual Report, 2014). After that, Woolworths Company restructured Dick smith brand
but then, closed up to 100 stores of the company and later on sold the company to Anchorage
Capital Partner’s for $115 million. $20 millions were paid upfront by the company to purchase it
from Woolworths (Dick Smith- Annual Report, 2014). The company appointed Nick Abboud as
its chief executive in November, 2012. Besides that, it has been reported that just after a year,
Dick Smith listed its shares on ASX with a capital floating of $520 million in December, 2013.
In January 2016, company collapsed into voluntary administration in which McGrathNicol was
appointed by company’s board, whereas investors appoint Ferrier Hodgson as a receiver (West,
2016). In present Scenario, Dick Smith brand is being owned by Kagon.Com from May 2016
that sold its product online only.
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Assessment of the valuation of Dick Smith brand at the time of Initial Public Offering and
when acquired by Anchorage capital partners
At the time of acquisition from Woolworths in November 2016, Anchorage capital partners
purchased it by offering initial capital of $20 million and total amount of $115 million (Ong and
Janda, 2016). However, it has been analysed that cash of Anchorage’s was only $20 million with
no credits or loans from the market. In December 2013, the company floated Dick Smith
Holding’s shares in Australian security exchange with market capitalisation of $520.3. From the
Annual reports, it has also been realised that during this one year Dick Smith holding’s EBITDA
was increased from $23million to $74.4 million (Dick Smith- Annual Report, 2014). On the
contrary, it has also been examined that EBITDA growth was found on irregularities in inventory
management. The written of values from assets was not explained properly such as in November
2012, written off value of plant and equipment was $54 million, whereas inventory which was
booked as $312 million from $371 million having depreciation of $58 million (Anchorage
Capital Partner, 2016). On the other hand, non-current provisions were written down by $8
million and all these adjustments were stated as fair value. Within 7 months, the inventory was
declined by $171 million in 30th June, 2013. Due to plant and equipments written down in 2013,
depreciation in 2014 was only of $10 million. These adjustments and representation could be the
reason of growth in EBITDA in 2014 to $74.4 million swiftly (Dick Smith- Annual Report,
2014).
It has also been noticed that loans and borrowings of Dick Smith Holding in 2015 was increases
with $70.5 million which was not presented in 2014 accounting books. Apart from this
representation which was related to scrutiny and high level of debt, all the representation in the
books of 2015 was normal and convincing (Ong and Janda, 2016). At the same time, when the
case was examined closely, company did not indicate a sound business practice as debt ratio was
recorded as 67% in year end of 2015 which is very risky and elevated. In 2015 ending, Dick
Smith Holdings was not able to arrange its short-term debts due to dearth of working capital
which was 1.23:1 (Dick Smith- Annual Report, 2014). In addition to this, inventory turnover
ratio was examined as 2.9:10 which was not increased with a significant rate from 2014. The
company was dysfunction due to no long service leave was granted in the year ending 2015.
Meanwhile, announcement of failure in the operation and continuous breakdown of prices on
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November 2015 was made by top level management of the company, which added rapid decline
in the prices of share in ASX due to Non-cash impairment in the inventory (Dick Smith- Annual
Report, 2014). This whole incident above, further affected the share prices and performance of
the company in the market at the end of the financial year 2015.
In the context of initial public offering, company’s profit and loss accounts were not audited and
DSE source has also been added in the books to manipulate some of the values in the books. The
company’s financial accounting recordings were not been audited from 2010-14 that created
suspicion in the authorised and validity of the accounts (Chung, 2016). Therefore, it can be
inferred that the dick smith company was not being operated with proper accounting standards
and valid evidences to prove the true and fair view of the accounts recording in the last years of
financial company 2015.
Ethical dilemmas of Anchorage Capital Partners and top level management of the
company
Anchorage Capital Partner is a private equity firm situated in Australia which focuses on
turnovers. The company took over Dick Smith brand from Woolworths in 2012 for $115 million
as a total payment (The conversation, 2016). Dick smith holdings shares were floated in
Australian security exchange worth $520 million. It has been analysed that the company had
presented various illogical book recordings that created suspicion among stakeholders and
investors. Some of the transactions such as writing off of $58 million from inventory as a fair
value adjustment and over increase in EBITDA from $23.4 million to $74.4 million in the end of
the financial year created some serious doubt on the fair and true view of the financial
accounting in books of Dick Smith Holding (Anchorage Capital Partner, 2016). Amidst of all,
anchorage capital partner is a profit earning company that is aimed to increase shareholder’s
profit in any investment. Not only has the company its own shareholders but also in order to float
a medium or small sized businesses, it is allowed to buy-ins and buyout that equity shares as a
way of operation (The conversation, 2016). Furthermore, it has been seen that these private
owned company deducts its asset strictly to increase the profit of the company.
Moreover, in case of directors and senior executives of Dick Smith holdings in which statement
was made in the 2014- 2015 report and accounts that they are highly satisfied with the
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operational performance of the company and hope for the new investments which can enhance
the future aspects of the company (Underhill, 2016). It can be analysed that directors, senior
executives and other top management of the company were agreed to the financial record of the
company as well as that explained it satisfied with the near future growth expectations. Likewise,
it was stated in the Initial Public Offerings prospectus that in order to achieve a declination in the
inventory, a sum of $2.5 million was spent by the company, which is not customary. It has also
determined from the books of past financial information that financial recording of the company
was also not authenticated as various figures was not clear and does not have any apt source. An
unaudited P&L statement from 2010 to 2014 was also derived from unaudited accounts of DSE
(Anchorage Capital Partner, 2016). Some of the major setbacks were writing off plant and
equipments and exclusion of inventory impairment (Underhill, 2016). All of the above
recordings were found in restructuring provisions, impairment losses and under acquisition
balance sheet (Boyd, 2016). The information given in the annual reports were intended to
influence the view of investor by presenting affirmative impression of the company.
In this process of liquidation of Dick Smith brand, Deloitte has played an imperative role as an
accounts auditor. The company claims that its annual reports of 2015 were based on true and fair
view statement which was compiled by the accounting standards. On the other hand, there was
no information provided related to the future events and upcoming planning of the company.
Substantially, after three days of all the statement shown in the annual reports subsidiaries
holdings and perpetual limited were being ceased (Boyd, 2016). Not only this, National
Australian Bank and HSBC Bank of Australia with major shareholders AMP were being ceased
from shareholders in Dick Smith Holdings. Thus, suspicion over the auditors and top level
management was considered strong and opportune. The company that claimed to be clean and
with a true and fair view of books had recorded $338,000, for the audit service of $103,927.
Conclusion
From the above discussion, it can be inferred that Dick Smith Holding case has many folds that
provides a clear view on the poor inventory management and some misrepresentation of
financial accounting values that led the company’s dissolution in 2015. The company has a
doubtful case even after, liquidation with the present owner of the company that is Kagon.com
which has an online retailing in technology. It has been absorbed that company suddenly hyped
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its share prices within a year to $520 million from $115 million only in ASX. Poor inventory
management and creating loans and borrowing as well as writing of assets with huge amount,
unhinged the position of the company. In addition to this, it has also been concluded that as a
profit earning organisation Anchorage capital partner cut off the assets to show profit to its
shareholders. Top level management and auditors of the company were also involved in the
misrepresentation of the figures as per their statement in the annual reports. Therefore, it can be
said that Dick smith case was focused on the poor inventory management and misrepresentation
of facts that led to the liquidation of the company.
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References
Anchorage Capital Partner. 2016. Senate economics references committee inquiry in relation to
the causes and consequences of the collapse of listed retailers in Australia [Online] Available at:
https://www.google.de/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=0ahUKEwjP6NLAuPrVAh
VNL1AKHeOlC1oQFghCMAQ&url=http%3A%2F%2Fwww.aph.gov.au
%2FDocumentStore.ashx%3Fid%3Dfd49fc87-6bc3-460c-81fc-293c5a92edc5%26subId
%3D410892&usg=AFQjCNFNELD2mWphtkCrcXWvqTsSSTUMgg [Accessed on: 28 August
2017].
Anchorage Capital Partners. 2017. [Online] Available at:
http://www.anchoragecapital.com.au/news/ [Accessed on: 28 August 2017].
Boyd, T. 2016. Dick Smith collapses a case study in electronics retailing. [Online] Available at:
http://www.afr.com/brand/chanticleer/dick-smith-collapse-a-case-study-in-electronics-retailing-
20160713-gq54s0# [Accessed on: 28 August 2017].
Chung, J. 2016. Dick Smith blasts private equity firm behind retailer’s stock market float.
[Online] Available at: http://www.news.com.au/finance/business/retail/dick-smith-blasts-private-
equity-firm-behind-retailers-stock-market-float/news-story/
41a067495cc4bef5c8109bce7a97ae50 [Accessed on: 28 August 2017].
Dick Smith- Annual Report. 2014. [Online] Available at:
http://corpdocs.msci.com/Annual/ar_2014_317027.pdf [Accessed on: 28 August 2017].
Ong, T and Janda, M. 2016. Dick Smith enters receivership due to bad sales, banking woes.
[Online] Available at: http://www.abc.net.au/news/2016-01-05/dick-smith-enters-voluntary-
administration/7067798 [Accessed on: 28 August 2017].
Ryan, M. 2015. Dick Smith is the Greatest Private Equity Heist of All Time. [Online] Available
at: https://foragerfunds.com/bristlemouth/dick-smith-is-the-greatest-private-equity-heist-of-all-
time/ [Accessed on: 28 August 2017].
The conversation. 2016. How private equity won while other Dick Smith investors got burnt
[Online] Available at: https://theconversation.com/how-private-equity-won-while-other-dick-
smith-investors-got-burnt-52805 [Accessed on: 28 August 2017].
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Underhill, J. 2016. Anchorage hyped Dick Smith IPO with 'gold talk'. [Online] Available at:
https://www.nbr.co.nz/article/anchorage-capital-hyped-dick-smith-ipo-gold-talk-b-183462
[Accessed on: 28 August 2017].
West, M. 2016. Dick Smith float looks like window dressing. [Online] Available at:
http://www.smh.com.au/business/retail/dick-smith-float-looks-like-window-dressing-20160205-
gmmg88.html [Accessed on: 28 August 2017].
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