The pounding Dick Smith (DSH) shares received yesterday (down around 34% in a day) from nervy investors once again underlines the old adage – don’t shock the market as the retailer did with its earnings downgrade.
Given that Harvey Norman had reported very solid first quarter sales and earnings figures the day before (especially same store sales in Australia up more than 7% in the quarter) and other retailers such as Fantastic Furniture, Kmart (even Target) and Coles have reported solid growth in sales, Dick Smith’s performance is a one-off and not a reflection of the sector.
Investors will be focusing their attention on the first quarter update from Woolworths this morning – they will be looking at the black hole known as the Masters hardware business and on the underperforming Big W mid-range department store chain.
So Dick Smith’s warning of a sharp fall in earnings came like a shot out of the blue.
The shares plunged 30% after the consumer electronics retailer cut its full-year profit guidance by around 15% following weaker than expected first quarter trading, which has continued into October.
DSH 1Y – Dick Smith underdelivers
Dick Smith managing director Nick Abboud said that while total sales rose 6.9% and same-store sales by 1.3% in the three months to September, the company’s gross profit margins were squeezed by discounting and unfavourable product and channel mix.
Dick Smith now expects 2016 net profit to be $5 million to $8 million below its previous guidance of $45 million to $48 million and analyst forecasts around $45.3 million (they didn’t see that coming, did they?).
Dick Smith shares ended down nearly 34% at 84 cents (a fall of 43 cents), taking losses so far this year to more than 50%. The shares are now trading at less than half their December 2013 issue price of $2.20 (shades of Myer).
Mr Abboud said strong sales growth in unlocked phones and fitness products was offset by disappointing sales in tablets, gaming and accessories.
The retailer’s channel mix was also negative, with strong online sales growth offsetting softer retail store sales, impacting gross margins (goods sold online have smaller margins than those sold in bricks and mortar stores).
"Heightened promotional activity and unfavourable product and channel mix intensified to adversely impact gross margin in October, as we undertook promotional activity to stimulate sales and protect market share,” Mr Abboud said.
"Even with this promotional activity, October sales were disappointing with growth well below the level achieved in the first quarter.
"Given the October performance and expectations of challenging and variable market conditions, we are cautious about the outlook for the all important Christmas trading period," he said.
Dick Smith has revived its "daily deals" campaign on television and radio this week and has completed the rollout of small appliances into about 100 larger format stores.
The earnings downgrade may be the outcome from management’s decision to stop discounting Apple products, a decision that sent the stock sharply lower when it was announced at the company’s full year results in August.
