Who Should Take The Blame For The Dick Smith Debacle?
The Dick Smith administrators report written by Joe Hayes from McGrathNicol, reveals a tyranny of mistakes, it’s is a blueprint for what can go wrong when desperation takes over and common sense goes out the door.
It’s also a report that should be read by anyone contemplating a move to take over The Good Guys.
The big question now, is who is to blame and whether senior management and the directors who ran the Company, including several senior ex Myer executives should ever be allowed to run a business again.
People are hurting and distributors and vendors who lost over $260M are cutting back staff as they try to reel in the losses. Some small distributors are facing the real prospect of bankruptcy.
Mates appear to have looked after, with the administrators now chasing Macquarie Bank for $11 million in preferential payments that were made in haste, despite the Company being insolvent during the peak 2015 Xmas New Year period.
A great deal of the wheeling and dealing done by Dick Smith CEO Nick Aboud, who is now facing some serious questions about the running of Dick Smith were done in a small beachside café at Balmoral Court.
Called La Repubblica this is where Aboud met with his banker mates, it’s also the spot where Aboud summonsed senior staff for breakfast meetings.
This is also the same café that is frequented by Macquarie Bank executives.
Dick Smith’s decision to repay $10m of a loan to Macquarie as the business was collapsing has come under scrutiny by McGrathNicol.
According to the report, Dick Smith Directors have cited the bank’s decision to issue a breach notice on its loan agreement following the repayment of a trade loan to Macquarie, used to fund the purchase of popular Apple products, as the chief reason for the company’s swift demise.
While the directors insisted the repayment should not have been classified as such, McGrathNicol claimed this disputed breach of the loan facility caused Dick Smith to slip into insolvency.
Mr Hayes said “Dick Smith failed because the company did not have enough cash resources available to meet its current and future commitments. The appointment of the administrators on 4 January 2016 was the only step available to the board and management”.
According to sources the problems at Dick Smith started after Phil Cave from Anchorage Capital stepped down from the Chairman’s role, it’s also the period when Nick Aboud was given more freedom to call the shots at the struggling retailer.
The report seems to exonerate Anchorage Capital, the private equity firm that floated the retailer for $520m in 2013 after paying close to $20m in cash to extricate it from Woolworths.
While suppliers are owed $260million there is little chance of that money being recovered. On the other hand, the bankers, National Australia Bank and HSBC, will probably recover about half of the $140 million they were owed.
Dick Smith was a time bomb who through poor management of inventory and stock suddenly imploded. The blame has to be sheeted back to not only the day to day management team but the directors running the Company including Chairman Rob Murray.
Then there is the scandal surrounding the jacking up of rebates in an effort to prop up the profits.
The AFR said today that ‘Rebates for Dick Smith were like a drug. It needed the rebates from suppliers to generate cash flow which is the lifeblood of any company. But as the performance of the company declined in terms of like-for-like sales, the rebates became the easy way to solve the low levels of profitability.
Being hooked on rebates had some serious side effects, according to Hayes. He said management appeared to make “decisions on what stock to buy [and at what volumes] based on the rebate attached to the stock, rather than customer demand”.
“Rebate-driven buying contributed to a build-up in inventory and encouraged poor product mix decisions,” Hayes said in his report.
Rebates provided management with a short-term incentive to prefer a certain supplier and product, because the rebate increased profit in the month of purchase, rather than when the product was sold (as would ordinarily be the case).
The reliance on rebates ultimately led to slowing of inventory turnover rates because the products were generally less popular with customers.
“Eventually, in the case of Dick Smith, heavy discounts were needed to sell the rebated stock, destroying the margin uplift that the rebate sought to achieve and in some cases the stock could not be sold at all and became obsolete,” Hayes said.
McGrathNicol’s report highlighted that “purchasing decisions increasingly based on rebates ultimately leads to a slowing of inventory turnover rates, as the products are generally less popular with customers. Eventually, in the case of (Dick Smith), heavy discounts were needed to sell the rebated stock, destroying the margin uplift that the rebate sought to achieve.”
It stressed that “in some cases, the stock could not be sold at all and became obsolete”.
As all this was going on staff started to bail on Aboud. Rod Orrick who joined Dick Smith from a senior role at Harvey Norman and was tipped as a future CEO at the troubled retailer quit. So did several buyers and middle management.
As one senior executive said to ChannelNews “We could see the writing on the wall and it wasn’t Nick Aboud’s rebate tally that stood out. It was the poor way that the Company was being run”.
The final six months in the life of Dick Smith to December 2015 included an average month-on-month decline in comparable store sales of 8.8 per cent.
In other words, the company could not respond to competitive pressures. It got itself into a bind because the strategy approved by the board included growth targets that simply made the inventory problem worse which, in turn, encouraged more rebate-driven product acquisition.
At the same time the likes of JB Hi Fi were squeezing life out of Dick Smith by rolling out promotions that hurt Dick Smith sales.
Then in desperation the Company tried to get into the high margin appliance business a move that was doomed from the moment that it was conceived.
The brainchild of former Marketing Director Neil Merola Dick Smith management was desperate to take on Harvey Norman, The Good Guys and in particular arch enemy JB Hi Fi, retailers who are now reaping the benefits of Dick Smith’s demise.
Dick Smith had a store network that was double the size of the market leader, JB Hi-Fi, which had twice the amount of sales.
Abboud was desperate to take on JB Hi Fi and would often brag to ChannelNews about his “growth” struggled to cope with the fast changing nature of the consumer electronics industry.
His marketing executives also struggled with changing market conditions. PC sales were slowing along with smartphone demand. Consumers were dumping Windows and Microsoft Office products which made up 40 per cent of Dick Smith’s sales in fiscal 2015.
He also punted on house brand stock and after initially telling journalists that house brand stock would only make up between 12 and 15 percent of overall stock it in the end it made up over 24% of all stock.
This is the same stock that failed to sell even after a 70% liquidation sale.
Hayes told the, AFR that the board packs handed to directors included plenty of information about the latest broker reports and various sell side recommendations for investors in Dick Smith shares. There was less information about the company’s inventory problems, which culminated in a $60 million impairment in November 2015.
One of the issues that went against creditors in the final months was the decision to declare a dividend, which delivered over $860,000.
Now Nick Aboud, and chairman, Rob Murray, are set to be questioned in the NSW Supreme Court in September. The examination will run until October as Ferrier Hodgson assesses whether it can sue the 10 directors and executives, who will be covered by Dick Smith’s D&O insurance policy.
Anchorage chairman Phil Cave said last night that while he had not had an opportunity to review the administrator’s full report, the focus of its summary was clearly on events and actions taken by Dick Smith long after Anchorage’s involvement had ended.
“When we sold our majority interest in Dick Smith in late 2013, it had no net debt and around $100m in cash and it was in a similarly strong financial position as at December 2014 which is when it was announced that I would step down from the board because Anchorage was no longer a shareholder,” Mr Cave said.
McGrathNicol has now urged creditors to vote on July 25 to tip the once venerable retailer into liquidation.