Analysts are tipping that Woolworths who are set to report their sales figures for the last quarter on January 31st is set to close 189 of the 386 Dick Smith stores with the retailer refusing to invest anymore money expanding the chain.The move will be a blow to several distributors and vendors who are sellings goods via the struggling retail chain that is losing business to the likes of JB Hi Fi and Woolworths discount store Big W who is also selling discounted Apple products.
According to broker CLSA a “shrink and trim” option is the most likely outcome after a recent review of the Dick Smith operation. In recent weeks ChannelNews became aware that the chain had been offered to an overseas consumer electronics retailer.
The CLSA report says “It would be very tempting for Woolworths to make a clean exit out of Dick Smith” as it generated only $22m in earnings before interest and tax in Australia and New Zealand last financial year. The broking Company claims that there is a “massive gap” between Dick Smith and JB Hi-Fi in terms of sales generated per store – $3.9m versus $18.8m. JB Hi-Fi’s business has grown 25.6 per cent a year since 2006 while Dick Smith has grown by only 5.6 per cent.
“This is virtually irrelevant in the context of group EBIT north of $3bn. “We believe that Woolworths will close up to 189 stores (out of 386) that are deemed unviable and invest significant effort in pursuing an online strategy to support the ‘bricks and mortar’ presence,” says the report by analysts David Thomas and Richard Barwick, entitled “Off With Dick’s Head”.
“While some may see this as a band-aid measure, we believe it will give Woolworths an ability to improve profitability, continue to be a relevant player in consumer electronics and allow it to minimise the initial liability-writedown.
“If Woolies follows this strategy, it can nearly double Dick Smith profitability in the short term to $40 million.”
“Whilst this strategy is certainly possible, we struggle to find a buyer (certainly none of the current players) and don’t think Woolworths would consider biting such a big liability bullet.”
The report says the prospect of Woolworths spending more capital to increase its footprint in consumer electronics is highly unlikely.
“It has its hands full bedding down a new management team, dealing with a resurgent Coles and managing the rollout of (new hardware chain) Masters,” it says.
