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Is Dick Smith Holdings Ltd a bargain buy?

Ok, I admit that I got it wrong.

I wrote off the prospects of Dick Smith Holdings Ltd (ASX: DSH) in this article last year, on the basis that it had no competitive advantage against the likes of JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Ltd (ASX: HVN) and a slew of pure online consumer electronics retailers.

But some shrewd strategies and great management have turned around the company’s prospects, so much so that Dick Smith is set to beat its prospectus forecasts this financial year. The company announced today that it expects to report sales of $1,228 million in 2014, with fourth quarter sales rising 15% overall, and like-for-like sales growing 4%. That’s despite tough trading conditions and deterioration in consumer sentiment.

Dick Smith says it expects to report a pro forma net profit of $40 million for the 2014 financial year. At current prices, that implies a price to earnings ratio of around 11.4 – cheap compared to JB Hi-Fi on 14.6 and Harvey Norman on 17.3.

Those strategies positively impacting on the financial results include a wide range of private label products, four different sales channels, including normal Dick Smith stores, stores-within-a-store in David Jones Limited (ASX: DJS) department stores, online and a new concept store called Move, that caters to affluent, younger women and men, which Dick Smith says is a new concept calling it ‘fashtronics’.

The DJs stores have seen a massive improvement, with average weekly sales up 80% in April this year, compared to October 2013. Private label product sales are growing and generally have higher margins. As a result gross margins are much improved, and the cost of doing business (CODB) has fallen from above 23% to a JB Hi-Fi-like 19%.

If Dick Smith can maintain these trends, the future certainly looks bright.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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