The Distillery: Dick Smith's electronic ambush

David Jones has tapped the recently trashed Dick Smith to help solve its own consumer electronics revenue problems. As yesterday’s JB Hi-Fi’s results attest, there are great riches to be won in the industry and this morning the commentators look at how it all fits together.

Meanwhile, the Newcrest numbers have also got a look with one commentator delivering perhaps the best introduction to a piece that The Distillery has ever seen.

Fairfax’s Elizabeth Knight explains how a concession in retail land is a store within a store and is a “nifty solution” for Davd Jones.

“The department store gets a set percentage of sales, which Dick Smith underwrites up to a certain, unspecified, amount. Dick Smith gets a couple of things out of this deal. It bulks up sales and gets a better cost price from suppliers, and it probably gets a good deal on the floor space rental. It also gets a boost in sales – an outcome that works well for a group now owned by private equity but which will be looking to float on the stock exchange within the next five years (coincidentally this covers the length of the deal with David Jones).”

The Australian’s John Durie thinks that David Jones and Dick Smith look like an odd fit together, but defers to the wisdom of the retailers on how to conduct their business.

“Terry Smart at JB Hi-Fi just keeps getting better, as shown by yesterday’s numbers coming at the top of guidance. He says the answer is focus, which is partly right, but he is also well positioned for this sort of market given that he runs a value brand and today’s consumer is very value-focused. The bears say that when a rival brand like Dick Smith jumps into the arms of David Jones chief executive Paul Zahra, that could spell problems for JB Hi-Fi’s Terry Smart, particularly if Harvey Norman also reacts and starts slashing prices. But maybe Zahra is being a little too clever and risks trashing his own brand with the Dick Smith deal.”

Fairfax’s Eli Greenblat writes that the David Jones trick is out of the playbook of Britain’s HG Selfridge, one of the inventors of what we now experience as the modern department store. He’s currently the subject of the Anglo-American TV drama Mr Selfridge.

The Australian Financial Review’s Chanticleer columnist Tony Boyd notes that Woolworths might be cursing its decision to sell Dick Smith Electronics for the price that it did because the turnaround chairman Phil Cave and chief Nick Abboud have mounted is phenomenal.

“They are already on track to more than double the earnings before interest and tax from $25 million under the ownership of Woolworths to $50 million under the ownership of Anchorage Capital Partners. It is distinctly possible that the run rate of profits will be closer to $90 million by the time Dick Smith Electronics hits the initial public offering market next year. Fund managers are already sounding warnings about Dick Smith Electronics, even though the company has done nothing more than talk to a few bankers about a possible IPO.”

Indeed, Business Spectator’s Stephen Bartholomeusz says Dick Smith’s restructuring is one of the factors contributing to the pressure in consumer electronics, along with the decline of a number of retailers, the Australian dollar and discounting… Yeah, it’s a bit rough out there.

“Since Anchorage acquired the Dick Smith business at a fire-sale price (originally $20 million, and a profit share that was cashed out last month for another $74 million), the sector appears to have behaved quite rationally. The destabilising and unsustainable discounting that previously characterised it appears to have abated, although the market remains intensely competitive. The benefits of JB Hi-Fi’s own brave strategy and the more stable sector settings were reflected in the results Smart unveiled today. Comparable store sales, which had gone backwards to the tune of 3.5 per cent in the first half, rebounded in the second by 3.2 per cent.”

The Australian Financial Review’s Matthew Stevens begins his hilarious opening to Newcrest with lyrics from a famous musician that really deserves a good bashing.

“I never made promises lightly/ And there have been some that I’ve broken/ But I swear in the days still left/ We’ll walk in fields of gold.” – Sting, Fields of Gold

“Whether deliberate or not, the addition of Sting’s too-familiar warbling about love lost to the muzak playlist that preceded Newcrest’s results call was wryly apposite. The intersecting themes of a relentlessly irritating song and a slightly humbled miner would seem to be that pledges of the past have not been fulfilled and that blunt recognition of failure might be platform enough for trust in the new promises on offer.” 

Spectacular work!

The Australian’s Barry Fitzgerald observes that there was a telling omission from the Newcrest boss’s speech at the company’s annual results.

“Newcrest chief executive Greg Robinson skipped the very last line of his 40-minute presentation to analysts and investors for the gold producer’s annual result. It was in the must-do in 2014 summary section and read: ‘Regain Newcrest reputation’. That Robinson skipped the last of his must-do bullet points, and that analysts and investors on the earnings call also let it pass through to the keeper, was no surprise.”

While Newcrest might have embarrassed itself royally because of its Lihir Gold merger, Business Spectator’s Stephen Bartholomeusz points out that the global gold industry has been hit by lower profitability due to the surprising speed of the end of the bull run that lasted more than a decade.

“The writedowns, while massive – the major miners have now written off about $US20 billion ($21.7 billion) of value – are somewhat misleading. There has been a considerable amount of consolidation activity within the sector over the past decade and more as the bigger miners pursued the premium investors seeking scale and liquidity and deployed the premium share prices generated by the bullmarket for the metal, which rose nearly 400 per cent between 2000 and its peak last year. They issued scrip (gold sector acquisitions are, as Newcrest’s acquisition of Lihir Gold was, almost always predominantly done in scrip) that in hindsight could be said was issued at inflated prices and the writedowns merely reflect the deflation that has occurred. Because of the gold premium there wasn’t an opportunity cost because they weren’t going to use their scrip to acquire anything other than gold assets.”

In other news, The Australian’s economics correspondent Adam Creighton reports on the importance of today’s pre-election economic and fiscal outlook – the election costings of both parties will hinge on the results.

The Australian’s Judith Sloan explores the accepted wisdom that it’s harder to cost policies when you’re in opposition. Sloan points out that both sides of politics have to be, well, political and while it might be easier to cost your policies in government thanks to access to the Treasury, if you spend too much you’ve still got to make the sums appealing. That’s hard.

And finally, Fairfax’s Adele Ferguson observes that National Australia Bank’s $1000 cash-back offer for customers is timed to perfection, as any bank-bashing from the federal election will just make them look better.

Great thinking, NAB.