The collapse of Dick Smith is likely to mean a shortfall to creditors of more than $260 million.
The administrators of the failed electronic retailer say the banks will get some money back but there’s little prospect of anything for unsecured creditors including shareholders and those with Dick Smith gift cards.
McGrathNicol says Dick Smith failed because the company was carrying too much stock it couldn’t sell and did not have enough cash to fund rapid expansion.
The NAB and HSBC are believed to be owed $140 million. The banks will be repaid a proportion of what they are owed but are likely to suffer a “significant shortfall”.
The administrators today released a report ahead of meetings of creditors on Monday, July 25, in Sydney.
Administrator Joe Hayes of McGrathNicol says the failure of Dick Smith represents an unfortunate end for one of Australia’s iconic retailers.
“The collapse was made all the more significant given its speed and scale, just a couple of years after the successful public ASX listing of Dick Smith, as well as the time of year, just following the Christmas period,” he says.
The business, started in the 1980s by entrepreneur and adventurer Dick Smith, could not be sold and was wound down and closed. Employee entitlements have been paid in full for the 3,300 staff.
“The secured banks would receive a partial return on their exposure, but there is little prospect of any return to unsecured creditors,” he says.
Mr Hayes says time will be needed to determine the real causes of Dick Smith’s rapid demise.
According to the report, the reasons for the failure of Dick Smith are complex.
The business floated in late 2013 with owner Anchorage Capital Partners doing well out of the oversubscribed IPO. It had bought the business for about $94 million and then listed it on the ASX a year later for $520 million.
Forager Funds Management’s Matt Ryan let rip in a celebrated blog post calling the IPO “one of the great heists of all time, using all the tricks in the book, to turn Dick Smith from a $10 million piece of mutton into a $520 million lamb”.
The business had achieved strong growth and results pre-float, which were underpinned by an expansion plan and exciting new lines of business.
“In that environment, management were very focused on increasing revenue and generating profitability,” says Hayes.
“This ultimately came at the expense of sustainable growth and the business struggled to maintain performance.”
The report suggests that Dick Smith struggled to compete in the fast-moving office sector and began to lose market share.
Its expansion plans and store growth used all its surplus earnings and needed significant borrowing.
“These expansion plans went unchecked during early to mid-2015, and major inventory purchasing decisions meant Dick Smith was carrying too much stock that was not saleable and was overvalued,” says Hayes.
“By December 2015, a rapid clearance sale was needed at a time the business should have been achieving strong margins.
“However, cash receipts were simply insufficient to meet commitments.
“Dick Smith failed because the company did not have enough cash resources available to meet its current and future commitments.”
The only part of Dick Smith still operating is an online store now owned by Ruslan Kogan’s ASX-listed Kogan.com.
Administrators were appointed on January 4 and the last day of trading was May 3.