Woolworths to slash Dick Smith by up to 189 stores

Phil Ayling
The Australian
January 23, 2012

WOOLWORTHS is likely to close up to 189 Dick Smith stores and increase efforts to develop an online strategy, broker CLSA predicts.

As Woolies continues a strategic review of the consumer electronics chain, CLSA analysts say a “shrink and trim” option is the most likely outcome.

“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.”

The 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.

“This is virtually irrelevant in the context of group EBIT north of $3bn,” the report says.

“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.

The Dick Smith brand has been owned by Woolies since 1982.

It was expanded in 2001 via the acquisition of the 224-store Tandy chain, but the Tandy brand has all but disappeared over the past few years as stores have been closed or rebadged as Dick Smith.

After a period of restructuring, which has seen an extensive refurbishment and store closure program, Dick Smith operates 320 stores in Australia and a further 66 in New Zealand.

The CLSA report says 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 Australian and New Zealand business has grown total sales by 25.6 per cent a year since 2006 while Dick Smith has grown by only 5.6 per cent.

CLSA expects Woolworths’ overall sales figures for the second quarter, due on January 31, to continue to show it is underperforming against Coles.