How Apple helped sink Dick Smith’s share price

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Sydney Morning Herald Reports  ~  Dick Smith chief executive Nick Abboud has insisted he will continue to discount Apple products despite stepping back from one of the key strategies that has helped drive a 164 per cent rebound in earnings since it was sold by Woolworths three years ago.

Once known for the geeky visage of founder Dick Smith, the 47-year-old retailer has been transformed under new management by aggressively discounting Apple products to drive foot traffic while slashing costs, striking better deals with suppliers, building profitable online and private label businesses and expanding into “fashtronics” with a new brand, Move.

After delivering his third consecutive year of earnings growth, Dick Smith managing director Nick Abboud stunned investors on Tuesday by revealing that the retailer was paring back discounts on Apple products.After delivering his third consecutive year of earnings growth, Dick Smith managing director Nick Abboud stunned investors on Tuesday by revealing that the retailer was paring back discounts on Apple products. Photo: Louise Kennerley

After delivering his third consecutive year of earnings growth, Dick Smith managing director Nick Abboud stunned investors on Tuesday by revealing that the retailer was paring back discounts on Apple products to ensure future profit growth was sustainable.

“A year ago we were accused of leading prices down by discounting Apple every week or every second week. That was done for very good reasons, to drive foot traffic,” Mr  Abboud told Fairfax Media.

“We are now seeing recurring foot traffic coming into the store,” he said. “We’re not backing off on discounting … but we’re just not going to be as aggressive.

“We are just tweaking our business slightly because we make more profitability out of that.”

The change in tack spooked shareholders and analysts, who suspect the reduction in discounting cost the retailer market share in the June quarter and could crimp sales growth in 2015.

Record low

Dick Smith shares fell to a record low of $1.65, before closing down 16.5 per cent at $1.67, well below their December 2013 issue price of $2.20.

While consumer electronics sales have risen 8.6 per cent over the past 12 months, Dick Smith’s comparable store sales rose 2.4 per cent in Australia and only 1 per cent across the group, while total sales rose 7.5 per cent to $1.32 billion, falling short of guidance.

Same-store sales are estimated to have fallen more than 3 per cent in Australia in the June quarter despite an industry-wide surge in demand for computers, laptops, printers and phones fuelled by small-business tax incentives in the federal budget.

In comparison, JB Hi-Fi’s same-store sales soared 8.12 per cent in the June quarter, lifting same-store sales for the year by 2.9 per cent.

“At the time they walked away from heavily discounted Apple you’ve had sales momentum deteriorate markedly in the fourth quarter,” Merrill Lynch analyst Silvea Spadea said.

“I don’t think walking away from discounted Apple sales is the right  strategy. If you’re not getting sales growth you can’t have sustainable profit growth longer term.”

Margins are thin

Apple is one of Dick Smith’s biggest brands, accounting for more than 10 per cent of sales, but margins are thin – about  10 to 15 per cent – and the global technology giant typically does not fund discounts, forcing retailers to bear the cost of promotions.

“When Nick took over [discounting Apple] was a big part of trying to reposition where the brand stood and build up their credibility with a younger crowd,” Platypus Asset Management retail analyst Jelena Stevanovic said.

“This seems to be like a big shift and the question is what it will do for sales growth going forward if they’re not going to be discounting to the extent they have been,” she said.

Dick Smith’s outlook looked weaker than that of JB Hi-Fi, with same-store sales rising just 0.1 per cent in July compared with 5.7 per cent at its larger rival, she said.

Dick Smith reported a 3.1 per cent increase in underlying net profit to $43.4 million in 2015 – towards the lower end of its 3 to 5 per cent guidance range – and Mr Abboud expects another year of growth in 2016, with net profit expected to be between $45 million and $48 million.

Strong operating leverage

Mr Abboud defended the company’s performance, pointing to strong operating leverage in the second half, when EBITDA rose 7.4 per cent on sales growth of 6 per cent.

Dick Smith had not benefited from the government’s small-business stimulus package, he said, because its commercial business was relatively small.

“We’ve had this business for two years and we’ll continue to pull different levers as we evolve,” he said. “We are wanting to make sure the business continues to grow its profits as much as anything else.”

Dick Smith’s earnings have risen 164 per cent since it was sold by Woolworths for $94 million in 2012 and floated for $520 million 15 months later.

Investors believe further growth might be more difficult, but Mr Abboud remains confident his original targets for 5 to 10 per cent annual earnings growth are achievable.

Online sales have risen from about 2 per cent of sales to 8 per cent and are heading towards a target of 10 per cent, and the company is entering the $1.7 billion small-appliances market, adding products such as coffee makers, toasters and vacuum cleaners to 100 stores before Christmas.

Dick Smith plans to open 15 to 20 stores a year over the next two years, although it is closing some stores as expensive leases come up for renewal and its 2017 target is  430 stores.

The chain is also developing a database of two million customers to whom it can communicate directly through email and text messages.

“We have taken the business into a more sustainable long-term position,” Mr Abboud said.

Dick Smith declared a final dividend of 5¢ a share, payable on September 30, taking the full-year payout to 12¢, or 65 per cent of earnings.

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