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Woolworths: Bye bye Dick Smith

What: On 31st Jan 2012, Woolworths Limited (ASX:  WOW) announced that it is accelerating the restructure of its specialty consumer electronics, Dick Smith, with a view to divesting the business. The company stated that a strategic review concluded that the Dick Smith business could be better realised through new ownership. Woolworths has received a number of unsolicited offers in relation to Dick Smith and Woolworths is now exploring these and all other potential options to optimise shareholder value.

The company plans to close up to 100 stores within the next two years, and have taken a restructuring provision of $300m in the first half of FY 2012.

Consumer electronics still remains an important category for Woolworths, but will be delivered through Big W and its expanding multichannel offer.

Now what: We can expect to see Big W selling more and more consumer electronics as well as its normal suite of products such as clothing, household products, toys etc. Dick Smith stores have been struggling against competitors such as JB Hi-Fi Limited (ASX: JBH), which is the market leader in consumer electronics in Australia, and others such as Harvey Norman Holdings Limited (ASX: HVN), The Good Guys (unlisted) and pure online electronics retailers. The market liked the news with JB Hi-Fi shares up 6.6% to $12.60, and Woolworths’ shares up 1.4% to $24.79.

Expect to see Dick Smith stores in major shopping centres close, where Woolworths already have a presence through a Big W store. Prospective buyers are most likely to be private equity groups.

So what: This is good news for Woolworths’ shareholders. The sale of this non-core business will allow Woolworths to focus on its core businesses and free up management and capital. While Woolworths may incur some costs initially, these should be recouped when the business is finally sold.

As mentioned above, this is very good news for JB Hi-Fi. With the demise of 100 Dick Smith stores and the rest of the business being divested, JB Hi-Fi has an opportunity to further entrench its market leading position in consumer electronics.

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Motley Fool contributor Mike King owns shares in Woolworths and JB Hi-Fi.  The Motley Fool ’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.  Click here  to be enlightened by The Motley Fool’s disclosure policy.

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