Dick Smith Holdings Ltd (ASX: DSH) last month released a set of encouraging results in its first full quarter operating as a listed company. Australian like-for-like (or same-store) sales grew 2.4% from the first quarter in calendar 2013 and online sales rose by 47% to now account for around 4% of total sales.
Dick Smith’s 61 New Zealand stores were less impressive, returning a 5.8% reduction in same-store sales, however this was 12.4% better than in the previous quarter (-18.8%). The company expects the New Zealand operations to continue recovering as part of a transformation program to reduce costs by transferring back office functions to Australia and outsourcing other parts of the business. The program is on track to deliver sales growth in financial year 2015, albeit off a lower base.
Woolworths Limited (ASX: WOW) purchased Dick Smith in 2007 and managed to reduce operating earnings from $71 million in FY07 to $24 million in FY12. Store numbers fell from around 400 to a low of 325 as the company lost relevance in the fast-moving consumer electronics business.
Mismanagement by Woolworths allowed private equity group Anchorage Capital to buy the remaining 325 stores for $94 million in 2012 and then float the business in late 2013 with a market cap of around $500 million.
Since floating, the share price has not moved far from the IPO price of $2.20. This is despite the positive deal with David Jones Limited (ASX: DJS) to provide “David Jones Electronics Powered by Dick Smith” stores, the revival of the New Zealand business, and the opening of between 45 and 55 new stores by June 2014.
Supply chain optimisation will continue to boost earnings, while Dick Smith is expected to boost sales of private label products from the current 11% of sales to 15%. Private label sales provide higher margins and are a key reason why Dick Smith continues to deliver higher gross margins than larger peer JB Hi-Fi Limited (ASX: JBH). Analysts note that Dick Smith branded televisions have been a key driver of growth in recent years and are taking significant market share from larger rivals.
The main negatives are the lack of listed company history and the relatively poor brand awareness compared to rival JB Hi-Fi.
Dick Smith appears to be improving almost every component of the business. Management are in the unique position of having a long list of improvements to make which will meaningfully add to the company’s bottom line. The transition may take some time but investors may see the rewards over the next 12 to 24 months if management can execute the turnaround successfully.