Electronics retailer Dick Smith Holdings Ltd (ASX: DSH) shocked the market today after confessing that it expects financial year (FY) 2016's profits to be $5 million to $8 million below previous guidance for full year profit between $45 million to $48 million.
Using the mid-point of the guidance adjustments equates to a 14 per cent profit downgrade blamed on weak October sales which may be an ominous omen travelling into the all-important Christmas shopping season.
The big downgrade is a blow to the credibility of management and unsurprisingly the market is mad – marking down the stock down 27% to 92 cents in morning trade.
It was just over two months ago that the company issued previous guidance and blaming falling margins and a weak few weeks in October is not going to wash with investors already nervous about the retailer's outlook.
Is it too cheap to ignore?
Prior to listing in late 2013, Dick Smith was part owned by Anchorage Capital an Australian-based turnaround and special situations private equity firm that sold its holdings for $2.20 per share.
At today's knocked-down price of 92 cents Dick Smith is either a screaming bargain or falling knife depending on whether it can turnaround its fortunes as a public company.
The market appears to think not given it's now valuing the business at around $300 million, on just 7 to 8x Dick Smith's forecast profit of at least $40 million for the year ahead.
Assuming Dick Smith meets the bottom end of its new guidance then profit will only be marginally lower than FY15's profit of $43.1 million, which suggests small improvements would lead to a return to a growth.
The business also now offers a huge trailing yield around 13%, which is likely to decline marginally, but still be attractive in the year ahead at whatever the adjusted level.
However, turnarounds seldom turn and the fact that margins and profits are falling despite same store sales being up 1.3% in Q1 2016 is another worrying sign as to the underlying health of the business.
The business is likely feeling competitive heat from rivals JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN). Yesterday Harvey Norman posted a strong quarterly sales update which suggests it's winning the battle in the electronic goods space.
Foolish takeaway
Dick Smith looks a gamble, although a tempting one at today's prices for contrarian investors prepared to look out to FY17 and beyond.
Although if it's tempting you it might be worth taking a cold shower and forgetting about taking a punt on Dick Smith!
Especially when you could be shopping for some of our favourite dividend ideas –for FREE
