Retail shock: Australian Electronic retailer Dick Smith’s shares plunge 69% after inventory write off

The shares of Australian electronic retailer Dick Smith plunged more than 69 per cent on Nov 30, Monday following the company’s disclosure of earnings impairment worth $60 million after it wrote off inventories.

The company also backed off from its October profit guidance and indicated more write offs are on the anvil. Dick Smith is the third-largest consumer electronics retailer in Australia.

Sliding profits

In October, managing director Nick Abboud forecast a 2016 net profit between $37 million and $43 million in contrast to the earlier guidance between $45 million-- $48 million and a net profit of $43.4 million of 2015.

However, in the latest statement to ASX, Abboud said, “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."

The CEO said the company is unable to abide by its earlier profit guidance, reports ABC News . At the core is Dick Smith writing off inventories worth $60 million. Reacting to the developments, Forager Fund Management chief investment officer Steve Johnson said the retail company is looking problematic.

“You would look at it and say it doesn't have a lot of debt but it does have commitments to pay a lot of rent and that can be a very big problem," he said. The retailer's stock is down by 85 per cent since early 2015 and the market capitalisation is at a low of $74.5 million.

Management change

The current market capitalisation value of Dick Smith is way down the $94 million benchmark at which parent Woolworths sold the struggling retailer to private equity firm Anchorage Capital in 2012, reports The Sydney Morning Herald.

Within a year, Anchorage made a net profit of $370 million, several times the investment it made, by floating the acquired business for $520 million in 2013 and then selling the whole stake at the rate of $2.22 a share in September 2014.

Inventory review

Dick Smith kicked off an inventory review in October and managing director Nick Abboud directed more discounts to the shoppers. The inventory review is being undertaken in conjunction with external consultants.

Despite the inventory review, Dick Smith's board decided to book a non-cash impairment charge of $60 million before tax, indicating further impairment ahead, based on the response seen in Christmas trading.

It also revived daily deals campaign and has been mulling hiking of television and radio advertising budget by 300 percent as the previous marketing blitz was not effective and not "resonating" well with customers.

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