Dick Smith Holdings Ltd investors could be in deep trouble

Credit: hnnbz

Shares in electronics retailer Dick Smith Holdings Ltd (ASX: DSH) are in a trading halt this morning pending an announcement “to be made in respect of the company’s funding position and debt financing covenants.”

Dick Smith shocked the market twice in two months over October and November 2015 after issuing a significant profit downgrade for FY16 in October and then announcing in November it was unable to re-affirm profit guidance given just one month previously.

As a consequence the share price has fallen even faster than management’s credibility with the shares last closing at 35.5 cents, down around 73% in just two months, with potentially further bad news to come just after the all-important Christmas shopping season.

The company also announced at the end of November that it would write down $60 million worth of inventory with a potential further write down “depending on Christmas trading”.

Investors then can likely expect another write down and potentially worse news regarding debt financing covenants if the company is approaching or has breached a maximum debt to equity ratio or any other debt related covenants agreed with bankers, other creditors or suppliers for example.

If this is the case it could mean a capital raising, or potentially worse if the retailer is unable to negotiate some breathing room with its creditors.

Shares are likely to come under more selling pressure if the news is bad and investors tempted to snare a bargain should steer clear.

The company has only recently come out of the hands of private equity and management’s habit of providing shock updates is not one any intelligent investor would want exposure to.

Investors keen on the retail space going forward could consider JB Hi-Fi Limited (ASX: JBH). Its shares are up 1.4% today as investors shrug off any concerns about the overall health of the electronics goods sector and it looks to remain a far better bet for investors looking to capitalise on media reports of generally strong retail sales over the Christmas shopping festival.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned. 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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