Dick Smith's discounting has limited risk for rivals: analyst

Dick Smith Holdings, which is preparing to slash prices in the run-up to Christmas to clear inventory, may ultimately do more harm to itself than rivals such as JB Hi-Fi and Harvey Norman because of its level of house brands and the risk of losing market share.

ASX-listed Dick Smith last week said it would take a $A60 million ($65m) non-cash impairment, before tax, on inventory across Australia and New Zealand as part of an ongoing review. The retailer brought in external consultants after disappointing trading in October and November, and is underway with "significant marketing activity" to stimulate sales ahead of Christmas. Managing director Nick Abboud said Dick Smith would maintain "flexibility on gross margin to reduce inventory and improve our debt position," a signal that more discounting is likely.

UBS analyst Ben Gilbert said JB Hi-Fi may be most exposed to discounting by Dick Smith but "we believe the impact will be more muted, given our view a large proportion of discounted and impaired stock is lower quality and unique private label product."

Gilbert said in a note that discounting at Dick Smith "appears to be selective" and doesn't extend to Apple products or telecommunications products, and so far discounts are about 30%, "below the 70% reported in the press." He upgraded JB Hi-Fi's ASX-listed shares to 'buy' from 'neutral' and maintained Harvey Norman at 'buy'.

Dick Smith shares have tumbled 82% on the ASX in the past 12 months and last traded at A39c. In the same period, JB Hi-Fi gained 11% to trade recently at $A18.03. Harvey Norman gained 13% this year to trade at $A3.98.

JB Hi-Fi, which has 187 stores including 14 in New Zealand, reported record profit of $A137 million in its 2015 year, as it lifted sales to $A3.65 billion and widened its gross margin by 16 basis points to 21.9%. In August it forecast 2016 sales growth of 5.5% to $A3.85 billion. Financial statements for its JB Hi-Fi NZ unit for the year ended June 30, show sales were little changed at about $211 million, while profit fell to $1.25 million from $2.23 million on a slight rise in expenses.

Dick Smith, which had 393 stores across the region as at June 28, lifted full-year sales by 7.5% to $A1.3 billion, although gross margin shrank to 24.8% from 25.1%, while profit fell about 10%, including one-time items, to $A37.9 million, it announced in August.

New Zealand sales fell 6.9%, which the company attributed to "aggressive competitive pricing and a deterioration in consumer sentiment." Last month, Dick Smith abandoned its guidance for 2016 profit of $A45 million to $A48 million. It said a further impairment on inventory may be needed, dependent on Christmas trading.

UBS's Gilbert said "an irrational competitor" creates earnings risk to its rivals in the short term. Still, "we think the issues facing Dick Smith highlight the strength of the JB Hi-Fi and Harvey Norman brands, which suggests to UBS that over time a significant opportunity exists to take share from Dick Smith," he said.

(BusinessDesk)