Case Study: Applied Corporate Finance (FIN342) - Dick Smith Group

This assignment presents a detailed analysis of the financial performance of Dick Smith Group (DSG) for the six-month period leading up to its voluntary administration in January 2016. The analysis reveals a consistent pattern of net losses, particularly exacerbated in November and December 2015 due to significant inventory obsolescence and heavy discounting. The report highlights key financial indicators such as declining sales, negative gross profits in certain months, and substantial EBITDA losses. A significant impairment charge on inventory further contributed to the company's financial distress, ultimately leading to the appointment of administrators. The case study utilizes data from administrator reports and other publicly available information to provide a comprehensive understanding of the factors contributing to DSG's financial collapse.

Applied Corporate Finance
(FIN342)
Assignment2
Total marks: 100
Personal ID: [Enteryour PersonalID]
I have read the Assignment Guide in the ‘General assessment information’ and have applied the
word count principles to my work.
My word count for this assignment is: [Enter your word count] words
Your assignment should be loaded into KapLearn by 11.30 pm on the due date.
All times are based on AEDT/AEST time zones.
Refer to ‘Time remaining’ on the ‘Assignment’ page in KapLearn to ensure you submit
your assignment by the specified due date and time.
Checklist
 I have completed my assignment using Word.
 I have completed my assignment using Calibri, Arial, Times New Roman or Verdana fonts.
 I have added my Personal ID on this page.
 I have added my word count on this page.
 I have added my Personal ID in front of the filename in the footer on the second page.
 I have saved the file to be uploaded as PersonalID_FIN342_AS2_v3A2.
 Each question of my assignment is within the word limit guidelines for that question as per the
‘General assessment information’ (Assessment Assignment General assessment information).
 My assignment file size is no larger than 2 MB.
 If tables were required, they are visible as text, not as links or images.
 I have not removed the marking grid from the footer.
 I have submitted my assignment as per the instructions in KapLearn.

Marker feedback
Comment on overall performance:
For marker use only.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 2 © Kaplan Higher Education

Instructions to students
• This assignment covers all topics of this subject and accounts for 50% of your final grade.
• There are three (3) questions in this assignment. You should answer all questions.
• The overall word limit for the assignment is 4500 words. Marks will only be awarded for answers up
to the word limit (plus 10%) for each question. Any material written after this will not be counted
towards your mark for that question. Headings, quotes and references within the body of the answer
are included in the word count. Numerical tables, calculations, and reference lists are not included.
For more information on word counts and their rationale, go to Assessment  Assignment
General assessment information.
• Your report should be concise and specific and should contain only the relevant information as specified
in each question. You may set out your report in point form where appropriate.
• Ensure you answer the question asked (i.e. take note of the specific requirements of the question).
• The emphasis of this assignment is on evaluating and analysing financial and other data and information.
• Further research is required beyond the information contained in the subject materials and textbook.
• Important note: Do not approach anyone associated with Dick Smith Group of Companies (‘DSG’)
directly for information. Refer to the details provided regarding recommended information sources in
the introduction to this assignment. You may also use other information sources identified through your
independent research.
• Refer to the Criteria-based Marking Guide for guidelines on what is expected for each question.
• The ‘General assessment information’ section in KapLearn contains information about format and
presentation, word limits, citations and referencing, collusion, plagiarism and other policies,
useful resources, submitting your assignment and accessing your results.
• Answers are to be in your own words. Reference and cite all your sources (within the text of your
answer) when quoting or using material from external sources. Include a reference list at the end ofyour
assignment. Refer to the ‘Referencing and Citations Guide’ available from the ‘Library Learning Hub’ in
KapLearn for further information on referencing.
• Indicative weightings are noted beside each question. Use these weightings to assist you with your
allocation of time and resources. The weightings indicate the relative importance of each question.
• State all assumptions used in providing your answer.
• Requests for special consideration or information pertaining to special consideration written in the body
ofthe assignment will not be considered by the marker. Refer to the ‘special consideration’ section of
the Assessment Policy on Kaplan’s website for more information.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 3 © Kaplan Higher Education

Learning outcomes (LO) mapping Marks
1. Discuss the objectives and processes of corporate financial management and apply them in
a practical setting. 0
2. Evaluate corporate financial management strategies. 40
3. Propose the key financial issues surrounding the creation of shareholder value. 20
4. Integrate the key theories that inform the fundraising and capital structure management
process. 10
5. Compare the roles of the key stakeholders and decision makers in a corporation’s financial
management. 30
Total marks 100
Criteria-based Marking Guide
The Criteria-based Marking Guide, provided at the end of each question, is designed to assist students to
understand what is expected of them in each question and to let them know how their performance will be
judged. It provides advice about the criteria used in the marking of the question and what discriminates
between an excellent, satisfactory and unsatisfactory answer.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 4 © Kaplan Higher Education

Case Study: Dick Smith Group
This assignment gives you the opportunity to apply the material covered in ‘Applied Corporate Finance’
(FIN342) to an Australian company that has had a mixed history of success and failure in the Australian
marketplace.
The Dick Smith Group of companies (‘DSG’) has had a high profile in the financial press since late 2015.
Hence, it represents a good case study to use to analyse a number of corporate financial management
issues relevant to this subject.
Dick Smith Holdings Limited (ASX Code: DSH) is the holding company of the Dick Smith Group (‘DSG’) that
consists of 11 wholly owned subsidiaries. DSH is the ASX code for Dick Smith Group of Companies (DSG).
In this assignment, Dick Smith,DSG and DSH are used interchangeably to mean the same entity. DSG
operated the consumer electronics retail stores and an online consumer electronics retail business
throughout Australia and New Zealand, operating from more than 390 locations with at least 3,000
employees. The majority of the network was branded as ‘Dick Smith’ stores but also incorporated ‘Move’
bannered stores, ‘Electronics Powered by Dick Smith’ outlets in David Jones stores, and commercial and
online businesses.
The company was founded in 1968 by Mr Dick Smith and owned by him and his wife until 1982.
Woolworths Limited purchased Dick Smith Electronics in 1982 and then sold the company to Anchorage
Capital Partners in 2012, which floated DSG on the Australian Securities Exchange (ASX) in 2013.The IPO
was successful and the share price remained stable at near the offer price of AUD2.20 per share.
In 2015, concerns emerged about trading performance, inventory management and buyer rebates and
their collective impact on cash flow.The share price weakened dramatically.
By December 2015, the share price had fallen 80%. On 4 January 2016, DSH (and associated entities)
was placed into voluntary administration by the Board. Subsequently, a syndicate of lenders appointed
Ferrier Hodgson as receiversand managers.The online operations and Dick Smith brand were sold to Kogan
(May 2016) and the remainder of the business was liquidated.
Recommended information sources
The following information sources may assist you:
• DSG prospectus, annual reports and financial statements — available for download from the DatAnalysis
Premium database in KapLearn under ‘Library’ using the stock code ‘DSH’.
Note: Where there is conflicting data within different reports use the later reports.
• DSG investor communications and presentations — available for download from the DatAnalysis
Premium database in KapLearn under ‘Library’ using the stock code ‘DSH’.
• Other articles and reports on Dick Smith Group of Companies available online.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 5 © Kaplan Higher Education

Question 1 Analysis of financial performance (20marks | word limit: 700 words)
Analyse the financial performance of DSG for the six-month period from 30 June 2015 and comment on key
factors that led to the voluntary appointment of administrators on 04 January 2016.(20marks)
Criteria-based Marking Guide for Question 1
Excellent Satisfactory Unsatisfactory
• rigorous analysis of financial
performance data
• measures of financial
performance addressed and are
all relevant, appropriate and
accurate
• analysis and data presented in a
clear and logical manner
• adheres to word limit
requirements
• reasonable analysis of financial
performance data
• measures of financial
performance addressed and are
mostly relevant, appropriate and
accurate
• analysis and data presented in a
reader-friendly manner
• inadequate analysis of financial
performance data
• little or no specific measures of
financial performance addressed;
or measures not
relevant/appropriate/accurate
• poorly presented information
• not attempted
(Range: 20marks) (Range: 15–20marks) (Range: 10–14marks) (Range: 0–9 marks)
Insert your answertoQuestion 1below this line
According to the report produced by the administrator of Dick Smith Group, McGrathNicol, in July 2015
sales of DSG was 97.2 million dollars. Gross profit in the month was 17.1 million dollars. Net profit after tax
was – 1.3 million dollars (net loss).
In August 2015, sales of DSG were $ 93.9 million; gross profit was $ 17 million; and net profit after tax was
- .3 million dollars (McGrathNicol, 2016).
In September 2015, sales of DSG were $ 131.1 million; gross profit was $ 37.2 million; and net profit after
tax was $ 1.6 million.
In October 2015, sales of DSG were $ 89 million; gross profit was $14.8 million; and net profit after tax was -
$3.4 million (net loss).
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 6 © Kaplan Higher Education

In November 2015, sales of DSG were $85.2 million; gross profit was – 46.4 million; net profit after tax was
– 42.8 million dollars.
In December 2015, sales of DSG were $ 200.1 million dollars; gross profit was 13.8 million; net profit after
tax was – 70.5 million dollars.
It can be seen that DSG posted net loss in each month in the six month period after June 2015. The month
of November 2015 was particularly bad. In this month it was unable to post gross profit. This means that
the cost of sales was more than the revenue from the sales. This happened because the company had to
give huge discounts to clear its obsolete inventory. Heavy discounts were given in both November 2015 and
December 2015 to clear the inventory. Total loss reported by the company in the months of November and
December, 2015 was $113 million.
EBITDA (Earnings before interest, taxes, Depreciation, and Amortization) losses in the six month period
were $114 million.
Inventory of the company had become so obsolete that an impairment charge of $60 million had to be
taken on the value of the inventory.
Net cash inflow in the six month period after June 2015 was $ 1.7 million. So the company was able to
generate positive net cash inflows in the six month period even after the losses.
Cash & cash equivalents of DSG on 31st December 2015 stood at $31.2 million. Total debt that was due to
mature over the next one year stood at $ 20.2 million.
Key factors that led to voluntary appointment of administrators on 4th January 2016 were:
1. Very low cash flow generated by operations.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 7 © Kaplan Higher Education

2. Insufficient cash balance to purchase new stock.
3. Delays in payment to operational suppliers.
4. Onerous lease obligations.
5. Obsolete inventory of stock.
End of answers to Question 1
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 8 © Kaplan Higher Education

Question 2 Analysis of strategic issues (30 marks | word limit: 1400 words)
(a) Critically analyse the expansion strategy of DSG. (500 words)(10 marks)
(b) Summarise the reasons why DSG failed. (900 words)(20 marks)
Criteria based marking guide for Question 2(a)–(b)
Excellent Satisfactory Unsatisfactory
(a) • clear, accurate demonstrated
knowledge of the expansion
strategy
• thorough research into concept
of best practice with
accompanying sound analysis
• logical, convincing explanation of
how actions compared to best
practice
• adheres to word limit
requirements
• some demonstrated knowledge
of the expansion strategy
• adequate research into concept
of best practice with some
analysis
• reasonable explanation of how
actions compared to best
practice
• little or no demonstrated
knowledge of the expansion
strategy
• little or no research into concept
of best practice with little or no
analysis
• inadequate explanation of how
actions compared to best
practice
 not attempted
(Range: 10 marks) (Range: 7.5–10 marks) (Range: 5–7 marks) (Range: 0–4.5 marks)
(b) • logical and comprehensive
discussion on why DSG failed
with evidence of facts and figures
• adheres to word limit
requirements
• reasonable discussion on why
DSG failed with evidence of facts
and figures
• inadequate discussion on why
DSG failed with little evidence of
facts and figures
 not attempted
(Range: 20 marks) (Range: 15–20 marks) (Range: 10–14.5 marks) (Range: 0–9.5 marks)
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 9 © Kaplan Higher Education

Insert your answers to Question 2(a)–(b) below this line
2(a)
DSG’s core activity was operating consumer electronics retail stores in New Zealand and Australia.
These brick-and-mortar stores were complemented by an online retail store. In 2013 DSG got listed
at the Australian Securities Exchange (Anchorage Capital Partners, 2013). Post this IPO listing the
company embarked on an expansion plan. The expansion strategy was mainly organic in nature.
Organic means that it involves opening new stores of the company for expansion. Inorganic route is
where a company acquires other companies for achieving expansion. So DSG started a new chain of
retail stores under the Move brand. It entered into a partnership with David Jones to run and
operate retail stores under the David Jones brand. “Move by Dick Smith,” stores opened up in duty
free locations at airports. It also showed some inorganic expansion, when it purchased the Mac 1
stores in September 2014. Mac 1 stores were resellers of Apple products (McGrathNicol, 2016).
To finance this expansion strategy, DSG used both internal cash reserves and also borrowed. Use of
internal cash reserves ultimately led to decline in cash balances. Due to this decline in cash
balances it was later on unable to pay its suppliers in a timely manner. It also found it difficult to
pay back the obligations on its debt.
One of the objectives behind this expansion strategy was to enable DSG to target different market
segments. This in turn would increase its sales.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 10 © Kaplan Higher Education

2(b)
DSG failed because a number of reasons. The main reasons were:
1. Market related factors: Market related factors played an important role in this failure. High
competition in the consumer electronics retail industry in Australia and New Zealand resulted
in erosion of profit margins of DSG (Blanchard, 2017). It was unable to control its overhead
expenses. Its overhead expenses were on average, 9% higher than those of its competitors.
Among the nine key competitors in the consumer electronics retail market DSG had maximal
number of stores at 394 stores. But it was only the sixth largest player with just 9% of the
market share. JB Hi-Fi, the market leader, had 26% market share with just 187 stores. DSG’s
store network expansion strategy did not translate into proportionate increase in sales.
Competition also intensified because of the coming of online retailers. These retailers were
able to sell products at lower prices to customers because of their lower cost base and more
flexible inventory management capabilities. Increase in life cycle of personal computers (PCs)
also contributed to the troubles of DSG. They lowered demands for PCs for office use. Office
sales were important as they contributed to 40% of the total sales of DSG.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 11 © Kaplan Higher Education

2. Failure of the expansion strategy: Another reason of failure was aggressive expansion using
internal cash reserves and external debt. This resulted in deterioration of the financial health of
the company. It continued to open new stores while same store sales continued to decline. This
expansion strategy resulted in reduction of returns on invested capital of DSG. At the same
time it considerably increased the debt burden or leverage of the company, thereby increasing
its financial risk. The company’ total debt increased to $ 127 million from $ 71 million in the six
month period between June 2015 and December 2015 (McGrathNicol, 2016). These borrowings
were raised as the company was unable to raise enough cash to pay its suppliers; meet its
capital expenditure requirements. While it was facing this cash crunch it also paid dividends to
its shareholders. This worsened its slide.
3. Purchasing decisions: The management of DSG bought stocks for the stores on the basis of
rebates given by suppliers, and not on the basis of customer demand. This ultimately resulted
in the company having items in its stock that did not have much customer demand.
4. Inventory management: The Company built huge inventory. Due to rapid technological
innovation and changing customer preferences because of this innovation, the inventory of the
company soon became obsolete. Ultimately it had to dispose a large part of this inventory at
heavily discounted prices. It also had to take a $ 60 million write-down on its inventory
(McGrathNicol, 2016). The obsolescence of items in the inventory of DSG can be assessed from
the fact that even during the peak Christmas shopping season of 2014, the company was not
able to reduce its inventory by a significant amount.
For office use only
# 1 2a 2b 3a 3b 3c 3d 3e 3f TOTAL
Max 20 10 20 5 12 12 8 8 5
** Expression is
faulty **
Awarded x x x x x x x x x
** Expression is
faulty **
PersonalID_FIN342_AS2_v3A2 12 © Kaplan Higher Education