Game over for Dick Smith Holdings Ltd with shares in administration

Shares in Dick Smith Holdings Ltd (ASX: DSH) were placed into voluntary administration today after management admitted defeat to its bankers with too little cash generation and too much debt.

The company attributed much of the blame for the electronic retailer’s failure on weak sales over the quarter between October 1 2015 and December 31 2015, with the ‘mass sale’ and all-important Christmas period failing to reverse the retailer’s slide into oblivion.

It also implied in a release to the ASX that its bankers had pulled the plug on the business in refusing to extend more credit, despite the retailer’s belief that it still had potential to operate as a going concern.

In November the business announced a non-cash write-down of $60 million on inventory and effective profit downgrade, which followed a prior profit downgrade in October.

Given the warning signs many investors headed for the exits over the final quarter of 2016, with shares down around 75% since the bad news started to leak out until yesterday’s implementation of a trading halt.

It seems the company accelerated downhill over December into insolvency, unable to pay its debts, or obtain further credit for inventory, which is required to keep the business trading as a going concern.

Although it looks like Dick Smith’s problems can be traced back much further than one weak quarter, with questions raised all the way back to the true quality of the company’s financials when it was palmed off to the public by private equity operator Anchorage Capital.

Primary rivals in the electronics and home entertainment space like JB Hi-Fi Limited (ASX: JBH) or Harvey Norman Holdings Limited (ASX: HVN) appear to have suffered no such problems and over the long term may be net beneficiaries of a less competitive market.

It looks unlikely that ordinary shareholders will be able to claim any of their investment back, with creditors taking priority as the liquidator considers what course of action may be in the creditors’ best interests.

Any shareholders though will likely be able to realise a capital loss in what will be small consolation if this is the end for Dick Smith.

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

You can find Tom on Twitter @tommyr345

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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