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Dick Smith optimistic ahead of IPO

Electronics retailer Dick Smith is preparing to float on the ASX as early as December, and Chief Executive Nick Abboud is out spruiking the company’s strategy to drum up support from investors.

Dick Smith was bought by private equity company Anchorage Capital from Woolworths for $94 million in November 2012, and may net its new owners in excess of $400 million in profit if the IPO is successful. At the time of purchase, Dick Smith was delivering earnings before interest, tax, depreciation and amortisation (EBITDA) of $60 million, which Mr Abboud reports has been increased to $80 million.

The turnaround has come from the closure of unprofitable stores and refinement of the company’s strategy into three streams and three types of customers. The streams are based around the three points of sale: standard Dick Smith stores, hybrid stores within David Jones, and the new brand, ‘Move’.

Mr Abboud describes the three customers as the “Dick Smith customer, the David Jones customer and the Move customer.” These represent the average consumers, more affluent customers and the younger, more fashionable crowd respectively.

For investors, it’s the Move stores which hold the most intrigue. The small-scale stores will target a younger demographic and focus on mid- to high-end products that customers will be able to customise. An example of this was a limited edition iPhone cover unveiled at the first Move store in Sydney that retailed for $169. Mr Abboud believes the format can work in 20 to 30 locations around Australia, however not many more. These stores should deliver higher profit margins and aim to be a point of difference from rivals competing for the lowest price.

It is believed that the Dick Smith will be priced on similar metrics to key rival JB Hi-Fi (ASX: JHX) and is attempting to list in 2013 in order to take advantage of the rise in retail stock prices over the past 12 months. JB Hi-Fi is up over 100%, while Myer (ASX: MYR) is up over 20% after being up over 80% earlier in the year, and David Jones (ASX: DJS) is up a similar amount.

This would value the company at around $600 million, however some investors are sceptical, pointing to the Myer private equity float, which debuted at $4.10 in 2009 and has never reached the same heights. Others have questioned why Woolworths, an adept retailer, would have thrown away up to $500 million in value if changes could be made so simply and quickly to turn the business around.

Foolish takeaway

‘Tis season for IPOs and Dick Smith will most likely be one of the next to join the race for investment funds. The negative reaction in the investment press following the iSelect (ASX: ISU) IPO will have turned some retail investors away from new listings, however as the OzForex (ASX: OFX) float showed, investors can be handsomely rewarded in the short term by diving in.

A downside to IPOs is that many newly listed stocks do not initially pay a dividend. Those looking for a stock paying a big dividend should discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

Motley Fool writer Andrew Mudie does not own shares in any of the companies mentioned.

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