Why the Dick Smith Holdings Ltd share price just plunged 50%

Credit: hnnbz

What: Well-known electronics retailer Dick Smith Holdings Ltd (ASX: DSH) has found itself under renewed selling pressure on Monday morning after the company announced a non-cash adjustment following an inventory review.

So What: By mid-morning trade the share price of Dick Smith had slumped 50% to 33 cents. At one stage the stock was down around 60% when it touched an all-time low of just 20 cents!

The cause of the dramatic plunge was an announcement by the retailer which noted that October’s trading performance was disappointing, that November’s trading performance was below expectations and that stock holdings remain above management’s preferred levels.

Furthermore, Managing Director Mr Nick Abboud noted that “we remain cautious on the outlook for the Christmas trading period.” Mr Abboud also announced that the Board had determined it necessary to take a $60 million (pre-tax) non-cash impairment against inventory.

Now What: Dick Smith’s management also stated that due to the inventory issue and the uncertainty surrounding the outlook for Christmas trading, it was unable to re-affirm profit guidance previously given. This prior guidance was for FY 2016 net profit after tax to be between $5 million and $8 million below the $45 million to $48 million range.

Investors have responded to the lack of clarity on the group’s outlook by indiscriminately selling the stock. At 33 cents per share the company has a market capitalisation of under $80 million which could mean it’s a bargain. However many investors looking for exposure to the retail sector will prefer to own the market leader JB Hi-Fi Limited (ASX: JBH) rather than take on the risk of owning this potential turnaround situation.

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