by Adam Lysle

Whilst the final figures for the Christmas trade aren't out just yet, early indications are that Australian retailers suffered a sluggish start to the peak season but have come home with a bang with fantastic Boxing Day trades. What’s got everyone talking though is the collapse of yet another major Australian Retailer – Dick Smith Electronics (“DSE”). It is noted that over the last 18 months, Australian Retailers have enjoyed some steady improvement in sales growth. 

2015 saw over 20 Australian operations collapse. Some well-known brands in this list include Homeart, Hooters, Koko Black and My Baby Warehouse. Whilst it may be the case that the trading performance of the electronics retailing giant was poor it appears that it was the strategic direction and the structure of DSE caused the appointment of Receivers and Administrators.

The question as to why another major retailer with over 300 stores in Australia succumbed to external administration is yet to be fully answered. It is public knowledge that Woolworths Limited who owned DSE sold the retailer to private equity firm Anchorage in November 2012. The prospectus that was published in November 2013 indicated that DSE was turning over $1.2 Billion. The market estimates are that Anchorage paid Woolworths $94 Million for DSE and that Anchorage received $344 Million in the sale of its stake in DSE. Not a bad return on the investment in just over 18 months. For investors, it’s fair to say that such a massive growth of DSE’s value in such a short period of time would surely be seen to be unrealistic and unsustainable.

Unfortunately, the real effect with collapses such as this settles upon the Employees of the Company and the Australian Taxpayer. The Department of Employment reported that almost 20,000 Australian workers lost their jobs last year due to financial collapses and over $300 Million dollars in employee entitlements were paid in the 2014-2015 financial year under the Fair Entitlement Guarantee Scheme. Utilising these figures, it could be estimated that the 3,300 employees of DSE may be owed $50 Million.

On the positive, Australian Retailers are quite resilient overall. They are enjoying some growth at present ($22.5 - $24.6 Billion from December 2013 to October 2015) but with that growth should come caution and a resistance to embarking on any massive strategic changes in relatively short periods of time. While the jury will be out for some time as to the reasons for DSE’s collapse, the facts remain that within 3 years, the Company was pushed through major strategic changes by its owners all with the idea of the float and sale during an aggressive sales period buoyed almost entirely by the value of the Australian dollar. Early indicators suggest that such major changes appear to have caused its demise but time will only tell. The other high profile issue is why did the DSE Board and Management promote the issue of gift vouchers in the financial and sales environment they likely knew they were operating in ?

Australia’s thirst for innovation and productivity may produce another long list of collapses in the retailing sector in 2016.

Veritas Advisory provides confidential advice to:-

  • Lenders on their security and likely exposure;
  • retailers who want to grow their business;
  • directors who could be exposed due to personal guarantees;
  • retailers who, like DSE, have stretched their ability to meet obligations with existing turnover; and
  • representatives of employees that routinely become the real sufferers of collapses such as these. 

 

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