Dick Smith Takes A Bath, Comes Out Nice and Clean

The Financial Review reported today that, prior to Christmas, consumer electronics chain Dick Smith is likely to be listed on the stockmarket  for $550 to $620 million.

Something is wrong here. Anchorage Capital purchased Dick Smith for $20m less than a year ago. They can’t have done much to turn around the business; they’ll have barely met their management team. Either Woolworths should be embarrassed at selling Dick Smith’s for an absolute pittance or investors are about to find they have purchased a dressed-up lemon. Or perhaps a bit of both.

The oldest trick in the retail-turnaround book is to write your inventory down to zero one year, sell it for 50 cents in the dollar the next and report yourself some handsome profits (the amazing thing about Billabong was that they got part 1 right and still couldn't manage a profit). Presumptuous of us, yes - we haven't even seen a balance sheet - but our bet is that this is exactly what has happened with Dick Smith

A low purchase price would have given Anchorage ample room to write the inventory values down to close to nothing. Probably took a few provisions for onerous leases too. Sell the inventory for any price at all and, hey presto, you've got yourself some accounting profits.

Can they actually buy inventory at cost and sell it at a profit? The answer to that can wait until after the float.

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