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Dick Smith’s suicide sale

Credit: hnnbz

Dick Smith Holdings Ltd (ASX: DSH) could see the volatility in its share price soar after the consumer electronics retailer announced plans for a stock clearance sale.

Following a $60 million writedown on inventory, the retailer is expected to sell millions of dollars of goods at below cost prices, with expectations of discounts of up to 70% on some stock. But it’s not quite “Christmas comes early” for consumers.

For a start, many of Dick Smith’s products are way overpriced to begin with. Even with discounted prices, competitors such as Kogan, JB Hi-Fi Limited (ASX: JBH), Harvey Norman Holdings Ltd (ASX: HVN), Bing Lee, The Good Guys, not to mention a host of retailers on Ebay, already offer products at prices below Dick Smith.

As an example, Dick Smith is offering a Phillips Sound Bar with Wireless Sub for $239 – a saving of $60. Kogan offers the exact same product for $189 with free shipping.

5 online stores offer the GoPro Hero 4 Session Action Camera at a cheaper price than Dick Smith’s “Hot Price” of $429, with prices ranging from $390 to $409.

A number of stores stock the Nutribullet 900W blender at cheaper prices than Dick Smith’s discounted price of $169.

I could go on, but you get the point.

Still, a 70% sale on everything, including big-name brand products, to get rid of excess stock could force its rivals to lower their prices too in response. A similar thing happened in 2012, when Woolworths Limited (ASX: WOW) closed 70 Dick Smith stores  and WOW Sight and Sound collapsed – flooding the market with cheap products, hurting the earnings of both JB Hi-Fi and Harvey Norman.

The Australian also reports that Harvey Norman’s chairman Gerry Harvey has also ridiculed Dick Smith’s plan for a fire sale, suggesting the move would be suicidal and arguing that shoppers have no interest in picking up ‘crook stock’ – even at bargain prices.

They can’t do that — they are in dire trouble now,” Mr Harvey told The Australian yesterday.

That will only make it so much worse for them. They are not making any money if they sell everything in a fire sale. They will lose a lot of money. Why would they do that — that’s committing suicide.

Dick Smith sells a lot of private label products – much of which can be bought online cheaply – but it’s not exactly regarded as quality gear, hence the reason Mr Harvey thinks shoppers might not be picking up the bargains they expect.

The inventory writedown for $60 million and now this fire sale suggests there are deep structural issues in the Dick Smith business. No wonder Woolworths was happy to offload Dick Smith for whatever price it could get – and $115 million now seems like a dream price.

Foolish takeaway

It wouldn’t surprise me to see more writedowns and more profit downgrades in the year ahead. Investors buying into Dick Smith now need to be aware of the huge risks they are taking, with one fund manager even questioning whether the business will survive.

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Motley Fool writer/analyst Mike King owns shares in Woolworths. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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