13 Aug 2013

Economic signs align for boom

Dick Smith_109

The fastest retail turnaround ever started when the enormous Woolworths group lost their marbles and decided to take on Bunnings Hardware. So far they have burned massive sums and appear to need a miracle to ever make money from their big Masters stores. The CEO admitted recently they didn’t know what they were doing, little things like ‘what does the store manager do with the keys at the end of the day?’

To get the hardware war going, they did what big public companies do and held a ‘review’, which indicated their Dick Smith chain was in slow growth, and ‘not providing adequate return’. So they shut a bunch of stores, and flagged a trade sale. Eventually they took just $20 million for the whole chain, which was at that time making $25 million profit.

New owners Achorage Capital spent $1m training staff, and another $6m in marketing. They reasoned that their buying power of about $1.2 billion meant the key to profit lay at the purchase end of stock. The Australian Financial Review reports today that the chief executive of Dick Smith, Nick Abboud, likes the quote attributed to the late billionaire Kerry Packer thus: ‘You make your money when you buy something, not when you sell it’.

So it is clearly very easy to make a lot of money when you’ve been almost given an asset that should be worth at least 4 times profit, which would have been $100m plus stock. Woolworths took $20 million, albeit with an ‘earn out’ provision that has led Anchorage to happily pay another $74 million recently. Total outlay: $94 million plus improvements to date. Total risk? $20 million. Woolworths wrote down Dick Smith by $267 million.

But if Dick is doing well, how about JB Hifi? Despite lackluster share performance the group has growth of at least 6% this year, and is looking good.

The other hopeful indicators of a boom are the Sydney housing market, which is on the boil again as auction clearance rates hit 80%, and the quiet easing of bank requirements for commercial property purchases, with equity ratios heading back to boom days. Once the election is done and dusted, consumer confidence should bounce.

Let us hope.


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