Dick Smith shareholders and unsecured creditors are unlikely to get anything from the failed electronics chain, according to the creditors report from administrators McGrathNicol, released yesterday.
The report reveals there is a shortfall of more than $260 million following the company’s collapse in early January.
And Dick Smith’s banks, National Australia Bank and HSBC (who have appointed receivers to the company), are expected to lose much of their $140 million exposure to the failed retailer.
The McGrathNicol investigation into the collapse of the retailer has sheeted home blame on the rapid expansion of Dick Smith’s retail network, plus a deterioration in the relationship with the operation’s banking syndicate (the latter was also played a major part in the failure of steelmaker Arrium earlier this year).
Administrator Joe Hayes said the reasons for Dick Smith’s failure were complex, inter-related and dated back to its $520 million float in late 2013, but it was too early to discuss any likely claims.
“The business had achieved strong growth and results pre-float, which were underpinned by an expansion plan,” Mr Hayes said in a statement.
"In that environment, management was very focused on increasing revenue and increasing profitability. This ultimately came at the expense of sustainable growth and the business struggled to maintain performance."
He said expansion plans “went unchecked" in early to mid 2015, and major inventory purchasing decisions meant Dick Smith "was carrying too much stock that was not saleable and was overvalued".
"By December 2015 a rapid clearance sale was needed at a time the business should have been achieving strong margins," Mr Hayes said.
"Dick Smith failed because the company did not have enough cash to resources available to meet its current and future commitments.
"While the report goes into some depth on these causes of failure, it does not draw conclusions regarding the nature of claims that could be brought. The administrators have determined it is too early for those conclusions.”
That conclusion is very different to allegations in the Financial Review this week from a letter sent to former executives and directors by lawyers acting for the receivers.
In that letter it was claimed that rebates and stock were used to inflate profits.
McGrathNicol said Dick Smith’s accounts to December 2015 indicate losses in the six months to December 31 of $116.7 million.
“Those losses are attributable to poorer than expected sales and margins, inventory write downs, lease provisions and other asset impairments,” the report said.
When Dick Smith collapsed in January it had debts of around $390 million.
McGrathNicol said total losses to creditors will be in excess of $260 million.
The “substantial difference” between this shortfall and the $170 million book value of Dick Smith’s assets as at June 30 2015 would require “fuller investigation and reconciliation”.
“However, it is largely attributable to significant trading losses in 1HFY16, losses on the wind down of inventory during the receivership, and the very significant supplier and bank commitments,” the report said.
Around $2.1 million in historical staff underpayments remains outstanding but will be paid this calendar year. Dick Smith’s lenders will receive some of what they are owed but are likely to suffer a “significant shortfall”, according to the report.
McGrathNicol said there was “no expectation” that unsecured creditors including gift card holders would receive any return “unless very significant recoveries are made in the liquidation process”. Shareholders get nothing.
