Dick Smith set to expand

Can private equity expand this struggling business?

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published November 9, 2012 4:40 pm AEDT

Consumers could soon see more Dick Smith Electronics stores, if new owner Anchorage Capital has its way.

Anchorage bought the Dick Smith Electronic stores from Woolworths Limited (ASX: WOW) for $20 million earlier this year, as the supermarket retailer looked to get out of the struggling consumer electronics space.

Competition in the sector is fierce, with JB Hi-Fi Limited (ASX: JBH), Harvey Norman Holdings (ASX: HVN) and Dick Smith battling not just amongst themselves, but a multitude of online retailers, both in Australia and offshore. To make matters worse, the industry is experiencing a structural change with music, DVDs and games moving online. Combined with global price differentiation – where suppliers and manufacturers charge different retailers a range of prices – and the high Australian dollar – which makes it more attractive for consumers to shop offshore, and you can see why the industry is struggling.

Anchorage Capital chairman Phil Cave has told the Australian Financial Review (AFR) that the group plans to adjust Dick Smith's range and open new stores, despite no sign of an improvement for the consumer electronics store. Mr Cave told the AFR that "It's like any industry – we have interests in steel, but our steel business is doing very well".

Woolworths closed up to 100 stores and restructured others as part of plans to turn around the struggling business, out of a total of 390. The company also wrote down the total value of Dick Smith in its books and took a $300 million provision in the first half of 2012, and a $120 million in the second half.

Foolish takeaway

Whether Anchorage can turn Dick Smith around, whilst also expanding the business and keep it profitable remains to be seen. Still, private equity groups specialise in turning around failing or fallen businesses, and we may yet see a revitalised Dick Smith taking it to Harvey Norman and JB Hi-Fi, as well as Officeworks – owned by Wesfarmers Limited (ASX: WES).

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Motley Fool writer/analyst Mike King owns shares in JB Hi-Fi and Woolworths. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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