The impact of weak November sales has tipped an already fragile Dick Smith into a spiral with shares plunging more than 50% to 32¢ shortly after trading opened on today’s ASX. The trigger was the alert by managing director Nick Abboud that the company had revised down its October profit guidance while warning of more write downs.
After a 4 -5% slump in same-store sales in October, an inventory review was launched resulting in the value of inventories being slashed by at least $60 million. But the stock is now down 85% since the start of the year and its market capitalisation has fallen to $74.5million. This compares to its closest competitor JB Hi Fi, which is capitalised at $1.92billion.
According to Abboud, along with soft November trading, stock holdings remained too high and the company was “unable to re-affirm the profit guidance previously provided”. He said that the inventory review was still underway, but Dick Smith’s board had decided to book a non-cash impairment charge of $60 million before tax and further impairment may be required, depending on Christmas trading.
Last month, Abboud forecast a 2016 net profit between $37 million and $43 million, compared with earlier guidance between $45 million and $48 million and last year’s net profit of $43.4 million.
“We remain cautious on the outlook for the Christmas trading period. We will continue to drive sales, maintaining flexibility on gross margin to reduce inventory and improve our net debt position.”
Massive advertising increase to drive sales
Mysteriously, Dick Smith’s advertising isn’t gaining traction according to management, prompting the retailer to revive its ‘daily deals’ campaign on television and radio along with plans to lift television advertising by 300-400%.
The industry can also expect to see deep discounting across big sellers Apple and Fitbit and Abboud has told the media he also planned to “dial up” discounts on Apple to lure customers back after conceding that its mid-year decision to curtail discounts on Apple to protect margins had contributed to weak sales and foot traffic.
The business is also stalling only months after Abboud revealed a new direction into small appliances. Suppliers in this industry are traditionally cautious in backing new ventures and those which Appliance Retailer contacted said they were taking a “wait and see” approach, which seems to be echoed by consumers.
Meanwhile, Dick Smith’s inventory review is being conducted with the assistance of external consultants and is aimed at determining the appropriate size of various categories, improving the depth and breadth of inventories, and identifying the level of marketing support to achieve inventory cover targets.
Australia’s third-largest consumer electronics retailer is taking to the airwaves to boost its “share of voice” and has flagged deeper discounts on brands such as Apple and Fitbit, and products such as big-screen televisions to boost foot traffic and sales after the disappointing sales in October.
This story first appeared in Appliance Retailer.