A company that was debt free in June 2014 had fallen into administration earlier this month. So how did things go wrong so quickly? How does a retail company that released a positive annual report in August 2015 go into receivership on 4th January 2016? Here is my analysis:

1. Inventory liquidations
Anchorage Capital
Woolworths sold the business
(Dick Smith) to the private
equity firm Anchorage Capital
for AUD110m in 2012.
Woolworths
In 1982, Australian retail giant
Woolworths acquired a
majority stake in the business
in 1980.
Dick Smith
Dick Smith (the entrepreneur)
started the electronics
company on Sydney's North
Shore back in 1968.
IPO
On the 14th of November 2013
Anchorage Capital announced
that Dick Smith was to be sold
to the public via an IPO at a
price of AUD520M.
Inventory and Debt problem
Anchorage’s strategy of
funding the purchase of Dick
Smith through Dick Smith’s
own balance sheet meant that
the new shareholders would
share the bill for repurchasing
inventory.
The “End”
On the 4th of January 2016, Dick
Smith had fallen into
administration. Even on the day
when Dick Smith suspended
trading, the company was still
valued at around AUD84M on the
ASX.
Dick Smith started
with a philosophy
of being the store
for the electronic
hobbyists.
Dick Smith had been a
consistent
underperformer for
Woolworths for a
number of years.
The IPO was
successful at
Anchorage’s quoted
price.
On 4th of December, Dick Smith
kicked off a massive clearance
sale, discounting large portions of
stock (an all or nothing strategy).
Anchorage Capital paid only
AUD20M for the acquisition.
Write down the value
of your inventory
E.g. Take the example
of a TV. If it is on the
books for AUD 200.
Write it down to AUD
100.
E.g. The same TV
gets sold for, say,
AUD80. That goes
down as AUD 80
profit.
Inventories fell from over
AUD300 M to AUD170M in
2012-2013 when
Anchorage bought Dick
Smith.
At the end of the June 2013,
Anchorage projected Dick Smith as
company with limited inventory,
sales growth and profits.
Anchorage made
about AUD500M in
the span of two
years.
Increasing both debt
and inventory rapidly
for an electronic retail
company is always
going to be risky
considering the shelf
life of electronic
products are
dangerously short.
In order to bolster
its inventory, the
company was
forced to increase
debt and
payables.
National Australia Bank and HSBC
made available to Dick Smith a
AUD135M secured lending facility in
June 2015. That entire amount was
drawn down by December 2015.
Dick Smith Failure: How the game got over for an
Australian Retailing Stalwart?
Sources: New.com.au MoneyMorning
Foragerfunds.com ABC News
Newmatilda.com
Australian Financial Review
The Sydney Morning Herald
Business Insider Australia